What Is a Subordinated Debenture?

Subordinated bonds refer to a form of debt with a repayment order that is superior to the company's equity interests but lower than the company's general debt. The term "subordinated" in the subordinated debt is completely different from the term "subordinated" in the "subprime loan" in the five-tier classification of bank loans (normal, concerned, subordinated, suspicious, and loss). The term "subordinated" in a subordinated bond only refers to its "subordinated" claim, and does not mean that its credit rating is necessarily "subordinated"; the "subordinated" in the five-tier classification is related to "suspect" "Loss" is also classified as a non-performing loan.

Subordinated bonds

Secondary

Secondary

International secondary

As

Secondary

(A) secondary

The China Banking Regulatory Commission issued the "Notice on Counting Subordinated Term Debts into Subsidiary Capital" and decided to supplement the capital composition of China's commercial banks, which will meet the subordinated term debts that meet the required conditions (the guarantee cannot be provided by the bank or a third party and must not exceed 50% of the bank's core capital), included in the bank's subsidiary capital. Due to the limitation of capital financing channels, the capital adequacy ratio of Chinese commercial banks is generally low, especially in the case of poor stock market financing channels. Opening the subordinated bond market to commercial banks is helpful to alleviate the lack of capital and capital replenishment channels of Chinese commercial banks. A single situation is significant.

But it is also worthy of our attention that in addition to helping the banking industry increase capital adequacy ratio, it also has obvious market restraint functions.

Market restraint is one of the three pillars of the new capital framework proposed by the New Basel Accord. It mainly means that stakeholders such as depositors, creditors, bank shareholders and bank counterparties will always pay attention to the operation of the bank where their interests are And take certain measures when it deems it necessary to affect the interest rates and asset prices associated with the bank, thereby restricting the bank's operations through the financial market.

We know that in the bankruptcy and liquidation of banks, the order of repayment is quite late, only before the bank's equity, and the risk is very high; as a bond, its holders can only obtain the conditions of issuance Although the interest rate of the fixed interest and the principal amount may be higher than that of senior bonds with the same issuance conditions, it is relatively fixed after all. In other words, it is impossible for the holders of subordinated bonds to share the excess returns of the bank, but they bear a greater risk of default.

The characteristics of the subordinated bonds determine that its holders will become relatively firm bank caregivers, pay close attention to the bank's risk profile, and restrict market operations through market mechanisms.

First, subordinated bonds can encourage banks to control risks through the primary market. The pricing of the issuance of subordinated bonds is directly related to the risk of the bank. If investors in the bond market believe that the bank is in a high-risk state, the risk compensation required for the issuance of the subordinated bond will also increase, and the issuance conditions will be harsh. Higher interest rates must be paid on subordinated bonds in order to be sufficiently attractive to investors, which is detrimental to the bank's overall cost of debt.

Second, the performance of subordinated bonds in the secondary market objectively has a restrictive effect on banks. Holders of subordinated bonds have the strongest motivation to monitor the bank's risk profile at all times during the life of the bond. Once their holders believe that the bank's risk exceeds their acceptable level, they will sell the holding without hesitation Bonds, the subordinated bonds perform poorly in the market, which will cause the loss of the bank's reputation, making it difficult for the bank to be recognized by investors in the market in the future. This also objectively played a restrictive role on banks.

It can be seen that under the current situation that the supervision of commercial banks needs to be strengthened urgently, the market restraint role of subordinated bonds will form a powerful supplement to the supervision of commercial banks in China. However, due to the low transparency of the Chinese banking industry and the irregular disclosure of information; the development of the bond market is immature, and neither the issue volume nor the transaction volume has formed; in addition, wholly state-owned banks lack effective corporate governance mechanisms and the bank's managerial industry Effective constraints and incentives, these aspects may weaken the market restraint role of subordinated bonds.