China Shipping Group’s US$500m 4.25% five-year bonds priced last Tuesday at 99.546 to yield 4.352%, or 270bp over US Treasuries, after drawing a US$2.3bn order book.
At just 10bp inside initial guidance and a big spread over SBLC provider Bank of China, however, the deal drew a more measured response to the format than many bankers had expected.
Comparable SBLC-backed bonds of similar tenors include the 3.95% Haitong International’s Bank of China Singapore-backed October 2018s, which were quoted to yield 244bp over Treasuries, Citic Securities’ 2.5% May 2018s at 203bp over Treasuries and ZhengTong Auto’s 4.5% June 2018s at 242bp over.
BOC’s own 3.125% 2019s were quoted to yield 182bp over Treasuries in the secondary market.
At the final yield, the new paper provided a pick-up of around 90bp over the BOC curve, compared to around 62bp and 60bp for Haitong and ZhengTong at the time the new issue priced – a premium even after adding 5bp–10bp for the longer maturity.
“People still liked the SBLC structure, but the overall market sentiment was weak yesterday, which hurt all bonds in the primary market,” said a banker close to the deal a day after it priced on January 21.
Investors also expect more deals to come in the US dollar market from China’s banks, potentially putting pressure on spreads linked to the sector. Many PRC lenders plan to tap the debt markets this year for their own financing needs.
While the supply of SBLC deals is expected to fall this year, a number of deals are already in the works and remain in the pipeline. China Shipping’s experience suggests investors have their limits.
Bankers argue that investors are comfortable with the SBLC structure, seeing it as the next best thing to a straight bank guarantee. Bank guarantees are difficult to obtain as China’s State Administration of Foreign Exchange restricts the use of direct guarantees for offshore liabilities.
There are, however, many alternative formats of credit enhancement.
“Banks will evaluate the costs and the benefits of raising money themselves for lending to borrowers versus getting a SBLC fee and an underwriting fee,” said a banker familiar with the situation. “Meanwhile, banks do not want too much SBLC supply to jeopardise their own issues.”
Keepwell agreements from PRC parents have become the most common form of credit enhancement, while a bond late last year from Bao-Trans Enterprises included a liquidity support covenant from Baoshan Iron & Steel, the issuers’ parent, in addition to a keepwell deed. Another issue from Hebei Iron & Steel relied on a quasi-securitisation structure, which included a Chinese export credit agency guarantee. Other issuers have used renminbi standby facilities from their parent companies.