Study On Legal Issues Of Restrictive Covenants In Corporate Bonds

Currently,the bond market in China has entered an era that witnesses the coexistence of risk and profit.Practice has amply demonstrated that the traditional credit enhancement methods including establishing security interests can no longer a hundred percent guarantee the security of bonds.Besides,the disclosure system of bond market information is difficult to prevent risks brought about by the credit changes of the issuer.Consequently,regulators began to reference developed countries for their experience in bond market,and then switched their focus to the restrictive covenants,one that the issuer stipulates to restrict his own risk behavior,one that constitutes the internal credit enhancement methods of corporate bonds,and one that is used as a tool to balance profits before risk.Through the analysis of sample and the comparative study of bond markets in Europe and the U.S.,this paper proposes that the basic principles of both civil law and commercial law can provide constraint and guidance for the restriction covenants.The common boundary of such clauses is the stipulation of the establishment and validity of contracts,while the special one is limited to guaranteeing the repayment order of investors,capital maintenance and investor protection.Regulating the restrictive covenants of corporate bonds in the Company Law and Securities Law will hinder the freedom of contract and the positive impact by the market mechanism.Logically,this paper can be divided into four parts:The first part focuses on theoretical research.Firstly,it refines the concept and definition of restrictive covenants of corporate debt(simplified as Covenant)on the basis of previous studies.Then the passage clarifies the characteristic,property,effectiveness and the practical significance of the Covenant.Next,it untangles the complex relationship between the Covenant and internal credit enhancement measures of corporate bonds.Finally,by summarizing the previous research on categorizing clauses,a classification method based on restrictive mode is proposed.In the second part,we reveal the obstacles confronted in legislation and practice of the Covenant.Such conclusion is based on the law and frequency of using different types of clauses in more than three hundred prospectuses of Chinese company in 2017.With the assistance of comparative approach,the third section introduces the legislative overview and practical experience of the Covenant in the United States and European Union.Through comparison,it unveils their advantages and deficiencies and introduces the experience of foreignlegislation that can be referenced.Based on what we have discussed above,our text provides value guidelines for the legislation of Covenant from the perspective of macro legislation in the fourth part.In addition,we put forward feasible legislative suggestions,such as enacting standardized model of bond contracts,regulating the content of clauses strictly,specifying types of clauses,clarifying the legal effectiveness,improving the supervision and perfecting breach remedies.