Trust and Leasing

Author: Zuo Yuxiu, Shi Jianping / Country: Mainland China
Publisher:
Publishing Date: 2001-07-01
Features: Trust funds primarily come from idle funds of individuals, agencies, groups, and funds. The application of trust funds emphasizes centralization, low risk, and controllability. Currently, in China, infrastructure, large transportation equipment, and large high-quality enterprises are most suitable for the application of trust funds. When leasing companies develop such leasing projects, they can entrust trust companies to issue special trust plans to create trust leasing. Leasing companies can also use existing leasing contracts as the basis for issuing trust plans to transfer relevant rights and create leasing trust. Additionally, leasing companies must vigorously develop trust leasing business. On the premise of strengthening themselves, they should widely accept social idle funds, allowing them to share the financial management functions of leasing while expanding the sources of leasing funds. This book is a systematic study of the modern financial industry, another pillar of the financial sector besides banking, securities, and insurance—trust business. It specifically includes the origin and development of trust business, an introduction to foreign trust business, problems and countermeasures in the development of China's trust industry, and trust business that China should focus on. It also covers the origin and development of leasing, the main types of modern leasing, leasing business that China should focus on currently, rent calculation, leasing investment decision analysis, leasing contracts, and problems and development prospects in China's leasing industry. This book was published in 1998. Due to the significant changes in the trust and leasing industries in recent years, many contents of the original book need to be revised. This revision extensively solicited opinions from experts and scholars in the Non-Bank Department of the People's Bank of China, trust and leasing industries, striving to closely align with the actual situation of China's trust and leasing industries, highlight the characteristics of trust and leasing business, and make substantial modifications to the textbook structure and content. Some chapters were merged or deleted, while others were supplemented, thereby providing a more comprehensive reflection of the operational practices and institutional management of the trust and leasing industries.
Corporate bonds come in many varieties, which requires trust institutions to treat them differently when handling corporate bond trust. For example, open mortgage bonds allow issuing companies to issue bonds multiple times on the same mortgage, while closed mortgage bonds can only be issued once on the same mortgage. Different types of corporate bonds directly affect the application of corporate bond trust. Based on different mortgage methods, mortgage items, the order of repayment rights on the mortgage, and the issuance and repayment methods of bonds, corporate bonds can be classified in various ways.
1. Classification Based on Mortgage Methods:
- Open Mortgage Bonds: These bonds are created when the issuing company and the trust institution establish a trust contract, first determining the total issuance amount of corporate bonds and setting up a corporate bond trust with the same asset as collateral. The issuing company has the right to issue corporate bonds with the same sequence of mortgage rights multiple times within the predetermined total issuance amount. For example, if a total bond issuance quota of 100 billion yuan is set, and an equivalent collateral is provided, the company can issue 10 billion or 20 billion yuan in bonds in subsequent rounds as needed. Under this arrangement, it is beneficial for holders of later-term bonds because open mortgage bonds grant the same sequence of mortgage rights to all bondholders, regardless of the issuance date. Thus, holders of second-term bonds are in the same position as those of subsequent terms, with equal claims on the same collateral. For the issuing company, it is also beneficial. Open mortgage bonds allow the company to avoid the cumbersome process of signing trust contracts for each bond issuance and provide flexibility in fundraising based on capital needs, without over-closing mortgage bonds.
- Closed Mortgage Bonds: These bonds require the issuing company to issue the entire total amount of mortgage bonds as specified in the trust contract between the issuing company and the trust company in one go. The collateral provided can only be used for this specific bond issuance and cannot be used for future bond issuances with the same collateral. For example, if a company issues bonds with assets worth 100 billion yuan as collateral, even if the amount issued this time is less than 100 billion yuan, it cannot use the same assets for future bond issuances. This system is disadvantageous for bond-issuing companies because they can only obtain financing once from the same asset, forcing them to borrow as much as possible regardless of their capital needs. Excessive funding sources may lead to blind expansion of production and reduced efficiency in capital utilization. At the same time, it greatly increases the difficulty of future financing for the company, making flexible financial management less favorable. Therefore, closed mortgage bonds are rarely used today.
2. Classification Based on Collateral:
- Corporate Bonds Secured by Real Property: These bonds use real estate property rights or tangible assets such as large machinery and equipment as collateral, with trust institutions assisting in the issuance of corporate bonds.
- Corporate Bonds Secured by Securities: These bonds use other companies' bonds or stocks, especially government bonds, as collateral and are issued through trust institutions. Government bonds are preferred as collateral due to their high creditworthiness, liquidity, and low risk.
3. Classification Based on the Order of Priority of Security Interests:
- First-Order Priority Bonds: These bonds have the first right to repayment.
- Second-Order and Third-Order Priority Bonds: Also known as subordinated priority bonds, they have repayment rights after first-order priority bonds. When the value of the collateral exceeds the value of the first issuance of bonds, and subsequent bonds are issued using the same asset as collateral, bonds with repayment rights after the first issuance are classified as subordinated priority bonds.
4. Classification Based on Repayment and Interest Payment Methods:
(1) Callable Bonds: These bonds specify a borrowing term but allow the issuing company to redeem them early based on its financial strength and changes in market financing costs. This is beneficial for the borrowing company, especially when market interest rates decline significantly. Early repayment reduces the company's existing debt burden and allows it to raise funds at a lower cost.
(2) Bonds with a Debt Repayment Fund: These bonds require the issuing company to set aside a certain proportion of operating surpluses annually as a debt repayment fund, which is accumulated over time and paid off in full upon the debt's maturity. This method is favorable for creditors, as it ensures a stable source of repayment and is highly attractive to investors.
(3) Convertible Bonds: These bonds can be converted into company stock under certain conditions. Bondholders have the right to convert bonds into stock based on their judgment at the right time. For example, if investors expect the company's stock yield to rise above the bond yield, they can convert the bonds into stock under the specified conditions. If the company's stock yield is lower than the bond yield, investors can hold the bonds to receive stable interest income. The essence of these bonds is to give bondholders a choice, allowing them to convert bonds into stock when it is favorable. Investors face minimal risk while having the opportunity for higher returns. For issuing companies, convertible bonds are also profitable, as they can issue bonds at a lower cost than market financing rates and reduce the burden of repayment and interest at maturity, as a certain proportion of bonds are converted into stock, increasing equity and reducing debt, thereby optimizing the company's debt structure.
(4) Fixed-Interest Bonds and Dividend Bonds: Fixed-interest bonds pay a fixed interest rate as specified, and this type of bond is common. Investors' returns are not affected by changes in the company's operating or financial conditions. The issuing company pays interest to investors at regular intervals. Dividend bonds also have fixed interest, but they allow investors to benefit from additional returns when the company's profits increase significantly. In addition to fixed bond interest, investors can participate in profit distribution proportionally, which is highly attractive to investors.
### I. Nature of Trust Institutions
A trust institution refers to a legal entity engaged in trust business and acting as a trustee. It has the following characteristics:
(1) Trust institutions are financial institutions engaged in trust business. Since the main business scope of trust institutions includes property trust, capital mediation, agency for asset custody, financial leasing, economic consulting, securities issuance, and investment, most countries generally classify trust institutions as financial institutions, supervised and managed by the central bank. Compared to other financial institutions, the primary business of trust institutions is trust business. With approval from the central bank and relevant management departments, trust institutions may also engage in other financial businesses, but these are generally secondary.
(2) Trust institutions are legal entities that act as trustees in trust business. In trust business, there are three parties: the settlor, the beneficiary, and the trustee. Trust institutions typically act as trustees, strictly adhering to the trust conditions agreed upon with the settlor and the trust purpose, managing or disposing of trust assets with a high sense of responsibility to the beneficiary. Due to the greater reliability, security, and efficiency of legal entities in handling trust business experience, information resources, and ensuring the timely achievement of the settlor's objectives compared to individuals, most countries generally require operational trust institutions to be legal entities to ensure the healthy development of the trust industry.
### II. Characteristics of Trust Institutions
Trust institutions generally have the following characteristics:
(1) Engaged in Trust Business, Acting as Trustees: In trust business, trust institutions accept trust and manage or dispose of trust assets according to the agreed trust conditions. Therefore, they are the trustees in the trust legal relationship. As trustees, they must serve the interests of the settlor and beneficiary and must not use trust assets for their own benefit. They must properly manage and use trust assets in accordance with the trust contract, maximize the benefits of trust assets, and be liable for compensation if they violate laws or contracts, causing property losses. They must also separate the management of trust assets from their own assets, otherwise, they may face legal liability for mixing them.
(2) Primarily Perform Property Management Functions: Property management functions refer to the function of trust institutions, under the settlor's entrustment, to manage or handle trust assets for the settlor's business operations. It is the basic function of trust. Through diversified trust business, trust institutions provide effective services to the settlor, widely performing the role of managing, utilizing, and operating property for property owners.
(3) Main Source of Profit is Trust Fees: Since trust institutions primarily engage in trust business, and the income from trust business should belong to the beneficiary, the profit of trust institutions can only mainly rely on commission income, i.e., trust fees.
(4) Follow Basic Trust Requirements in Business Operations: The basic requirement is the independence of trust assets. This means the trustee must separately manage trust assets and treat them differently. Trust assets must not only be separate from the trustee's own assets but also separate from each other for different settlors or different trust assets of the same settlor. Additionally, trust assets must be separate from the settlor's other assets.
The following compares several economic contracts that are easily confused with lease contracts to help us understand lease contracts correctly.
(1) Difference Between Lease Contracts and Sales Contracts:
A sales contract is an agreement where the seller transfers the ownership of the subject matter to the buyer, and the buyer pays. The core of the contract is the transfer of ownership. In contrast, a lease contract only stipulates that the lessee has the right to occupy, use, and derive benefits from the subject matter, but the core of ownership—disposal rights—remains with the lessor, meaning ownership still belongs to the lessor. Due to this fundamental difference, the following points are distinct:
(1) A sales contract transfers ownership of the subject matter, while a lease contract transfers the right of occupation, use, and derivation of benefits, not ownership.
(2) The subject matter is not entirely the same. Lease contracts must involve tangible, specific, non-consumable items, while any tangible property legally allowed to circulate can be the subject matter of a sales contract.
(3) The rights and obligations of the parties are not entirely the same. Since leasing is not a simple one-time transaction and involves a longer term with more intermediaries, the likelihood of disputes is higher. Therefore, lease contracts specify the rights and obligations of the parties more complexly and elaborately than general sales contracts.
(2) Difference Between Lease Contracts and Installment Payment Contracts:
Leasing and installment purchase may seem similar in terms of repayment forms, but from a legal perspective, they are two distinct concepts. Therefore, lease contracts and installment payment contracts also have fundamental differences. There are two basic forms of installment purchase:
(1) Non-credit Installment Purchase: This form is essentially a cash transaction where payments are made in installments. For example, a deposit is paid upon contract signing, followed by partial payments after lending and upon acceptance.