Three significant offshore bonds with a combined value of USD700 million issued under standby letters of credit (SBLC) this year caught people’s attention, with pundits waiting to see whether they signal a new dawn in sector financing.
In the first four months of this year, Greentown China Holdings, Excellent Business Management and Sino-Ocean Land Treasure IV issued three-year SBLC bonds.
Greentown China, 24.1% owned by major shareholder and state-owned enterprise CCCG Holdings, took the lead with its USD400 million SBLC bond issue in January this year.
Two industry peers followed suit. Excellent Business Management, a wholly-owned subsidiary of Excellence Group, issued SBLC bonds valued at USD100 million. Even though the coupon rate was as low as 2.91%, investors showed keen interest and was oversubscribed by 1.7 times.
The most recent SBLC bond issue was the USD200 million 3.8% credit-enhancing green notes due 2025 for Sino-Ocean Land Treasure IV, a subsidiary of property developer Sino-Ocean Group.
An SBLC is a legal document where a bank guarantees the payment when issuing bonds. Paul Hastings advised Sino-Ocean Land Treasure IV on English and Hong Kong laws, with corporate partner Vivian Lam leading the team.
Lam agreed that Chinese property companies were more likely to use SBLC-backed trades as a credit-enhanced method to raise funds due to its simple recourse and clear drawdown conditions.
“In the case of an issuer default, this [SBLC] gives a high degree of certainty to bondholders that they will be able to directly demand payment in accordance with the stipulated conditions in the SBLC from the issuing bank that has undertaken the obligations,” Lam said.
However, the three SBLC bonds were all supported by Zheshang Bank, which is less well known compared with state-owned banks or larger joint-stock commercial banks.
Zhang Shuncheng, an associate director in China corporate research at Fitch Ratings, believed that only real estate companies with less debt and high-quality mortgage assets would use this issuance model. Instead of determining whether overseas SBLC bonds will augment financing or not, he was more optimistic about domestic issuances by real estate companies in the short term.
Zhang said that sudden default of some real estate companies’ US debts had seriously dented investors’ confidence. Overseas bond issuances from such sectors had been low from the fourth quarter of last year to the first quarter of this year. With the RMB weakening as opposed to overseas yields, investment vehicle real estate companies have turned their backs on issuing bonds at home.
“Due to the moderately loose market policy since the beginning of the year, the coupon rate of domestic bonds issued by state-owned real estate enterprises has generally fallen compared with last year. Therefore, we believe that the issuance of domestic bonds may continually increase in the short term,” he said.
In the first four months of this year, the overall issuance of domestic securities showed an upward trend, reaching a peak in the third month.
Chen Jun, a managing partner of City Development Law Firm, said enquiries and bidding for new business among real estate enterprises and the resumption of existing business had been active recently.
He has suggested that law firms should ensure the real estate company’s credit rating is sufficient and its finances are stable before advising, as well as avoiding high-risk projects such as the most expensive bid, third-tier and fourth-tier projects, affordable housing and shantytown reform projects.
Given that real estate companies are in a credit restoration stage, Chen said: “We can pay appropriate attention to green bonds and dedicate the proceeds to replacing the high-cost debts generated by green projects under construction.”
Although in response to the sluggish real estate market, the regulator has released several positive signals this year and optimised property market regulation policy, slightly indirectly promoting domestic bond issuances.
However, Zhang disagreed with a substantial reversal in investor confidence as most domestic issuers so far were state-owned real estate enterprises, which were less dependent on the bond market with stable finances and diversified financing channels.
Since some private real estate enterprises were still blocked from accessing bond financing, he anticipated no significant increase among Chinese property companies to get deals done.