Greenland first with offshore guarantee
The first Chinese company to issue offshore bonds under a more liberal guarantee framework has underlined the premium attached to a simplified security package.
In a departure from the keepwell deeds and pledges of support featured on recent offshore financings, last week’s US$1bn issue from Greenland Global Investment came with an unconditional guarantee from Greenland Holding Group, its Shanghai-based parent.
It is the first overseas financing to come with a guarantee from a parent company under a fast-track programme that China’s foreign exchange regulator introduced last month.
Such a move helps allay concerns that offshore investors are effectively subordinated to mainland creditors in the event of a default, and allowed Greenland to save over 1% off its funding costs.
The guarantee structure also allowed the developer to raise a 10-year tranche, which would not have been possible otherwise, said a banker on the deal.
While the simplified guarantee procedure comes with strict conditions, the extent of Greenland’s savings means other companies are sure to be interested in following suit.
The unlisted Shanghai government-owned developer had previously tapped the offshore markets for funding, offering a keepwell deed as a pledge that it would not allow the overseas unit to run into trouble.
Greeland’s dual-tranche offering priced at a yield of 285bp over US Treasuries for the five-year tranche and 341bp over for the 10-year tranche.
Greenland’s three-year bond issued last October, with support from a keepwell deed, was indicated at 370bp over two-year US Treasuries. A five-year bond, with a keepwell deed, would have an implied spread of around 400bp over, which means an 115bp saving on the new five-year tranche.
Assuming similar savings for the 10-year tranche, the company has saved US$11.5m in annual interest costs.
Even at the far tighter spread, Greenland’s guarantee structure helped the deal attract an order book in excess of US$4bn.
Compared to the vague comfort letters, keepwell agreements or equity interest purchase undertakings ‑ which may not be legally binding ‑ an explicit parent guarantee offers much stronger credit support.
Not for everyone
Although the potential cost savings and faster execution will, undoubtedly, be attractive to other Chinese developers seeking cheaper funding offshore, not everyone is eligible to take advantage of the new policy from the State Administration of Foreign Exchange, or SAFE.
The new rule, effective as of June 1, allows onshore companies to register cross-border payment guarantees with SAFE rather than seeking prior approval. However, any proceeds from these guaranteed bonds must be invested offshore.
“There is no dramatic change in the new SAFE rule. It is primarily a change in procedure for the issuance of offshore guarantees,” said Mark Follett, managing director and head of high-grade DCM, Emerging Asia, at JP Morgan.
“If SAFE one day allows Chinese borrowers to bring the proceeds onshore, that would be a sea change, the dawn of a new age,” he added.
The new rule, just like the old one, prohibits companies from repatriating to China any cross-border guaranteed offshore borrowings via equity investments, inter-company loans or securities investments. That means Chinese developers that do not have projects offshore cannot take advantage of the looser rule.
Greenland has projects in the US, the UK, Korea and Australia. However, developers with few overseas projects, such as Poly Real Estate, Vanke, Gemdale Group and Beijing Capital Land, most likely will keep using the keepwell structure for their offshore bond issues, analysts say.
Borrowers with heavy overseas exposures, including commodity and energy firms, are likely to find the new rule helpful, according to Franco Leung, property analyst at Moody’s.
Among possible beneficiaries are companies incorporated onshore currently using the keepwell deeds, such as Baosteel, CNPC and Cofco Corp. Chinese telecommunication companies and expressway operators could also benefit from the guarantee structure, said a Hong Kong-based sell-side analyst.
“We are likely to see existing issuers use the new structure, if they have overseas projects, instead of new names,” the analyst said.
Although some state-owned enterprises had previously obtained approvals from SAFE under the old rule, the new guarantee process is faster as it only requires borrowers to register with the regulator.
Under its previous regime, SAFE rarely approved offshore funding with a guarantee. When it did grant approval, it was mostly to SOEs, Leung said. For example, companies like CNOOC, Sinopec and Bright Food have used guarantees from parents to access overseas funding.
Some analysts and investors, however, do not view the guarantee structure as providing significant value to high-grade issuers.
“The structure difference should be less significant in valuation for investment-grade credits, as they all carry light covenants anyway,” another sell-side analyst wrote in a research report on Greenland’s new offering.
Borrowers that are incorporated overseas, meanwhile, are barred from taking advantage of the fast-track guarantee rule. That means the overseas-listed property developers, responsible for a big proportion of offshore bond sales from China, can still not use onshore assets to support offshore liabilities. Agile Property, Country Garden and Shimao Property, for example, are still not allowed to provide guarantees from their onshore operations.
So, if something were to happen to the offshore entity the bondholders would basically be treated as equity holders of the offshore entity, effectively ranking at the bottom of the capital structure of the Chinese companies, according to Eugene Lee, a partner in the Hong Kong office of Latham & Watkins. Industrial names such as Texhong Textile Group and China XD Plastics also belong to this category, he added.
