Chinese property developer Greenland Holdings sold a $1 billion dual-tranche bond on Wednesday, making use of the recent relaxation of rules governing cross-border guarantees in China.
The rules — part of China’s attempts to loosen capital controls — became effective on June 1 and allow onshore companies to merely register cross-border payment guarantees with Safe rather than seek the regulator’s approval.
Previously the regulator rarely approved offshore funding using explicit guarantees — deemed much safer than keepwell deeds — and when it did grant approval it was mostly to large state-owned entities deemed economically strategic such as steel, oil and gas, credit analysts said.
Keepwell deeds, similar to guarantees, are essentially contracts between a parent company and its subsidiary to maintain solvency and financial backing throughout the term set in agreement. This typically involves an offshore group company issuing debt, with credit support provided by the onshore group or third-party.
Although keepwell agreements were arguably constructed to circumvent the regulatory restrictions that prevented onshore Chinese entities from providing guarantees to offshore subsidiaries, these instruments are not regulated, thereby making them less credible.
The lack of regulatory oversight in enforcing the keepwell could impede the timeliness of payment unlike a guarantee registered with Safe, which provides more certainty of timely payment, a credit analyst said.
Thanks to the new Safe rules, Greenland is able provide an unconditional and irrevocable guarantee on senior unsecured notes issued by Greenland Global Investment, an unrated and wholly owned offshore subsidiary.
“We expect other Chinese companies, particularly those that are incorporated onshore and have substantial offshore investments, will follow Greenland’s move,” Franco Leung, Moody’s analyst said. “Increased use of these guarantees will be credit positive for debt issuers because it will help them raise offshore funds and subsequently support their overseas operations and expansions.”
“More offshore bond issuance should also advance the development of offshore bond markets,” he added.
Cost savings
Greenland was able to price a $400 million five-year bond and a $600 million 10-year note at much cheaper levels than where it would have been able to under a keepwell deed structure. Both offerings were Reg S-registered transactions.
A source close to the transaction told FinanceAsia that the new five-year offering would have been priced at levels of around high-5% to low-6% under the old keepwell agreement structure. Under Safe’s new rules, the five-year tranche priced at a yield of 4.481% or Treasuries plus 285bp — 15bp tighter than the initial price guidance and at least a 100bp savings for the borrower.
“Under the keepwell structure, the rating agency actually notches them down, making them a sub-investment grade company,” the source said. “With the new rules, they moved from essentially being high-yield under the keepwell structure to investment grade, resulting in very substantial savings.”
Greenland’s previous $700 million five-year note sold last November was rated Ba1/BB+/BBB- by Moody’s, Standard & Poor’s and Fitch respectively, one notch down from the developer’s actual standalone ratings of Baa3/BBB/BBB-.
Today, the expected ratings of the Chinese property company’s new notes match its standalone credit ratings.
Cross-border guarantees
Under the new policy, Safe will review the cross-border guarantees during the registration process. The regulator can reject registered guarantees if it finds problems with their authenticity, commercial reasonability or compliance with regulations.
The regulator can also impose penalties for breaches of the cross-border guarantee policy.
In a recent note published by Moody’s, the credit rating agency said Greenland could fulfill the regulatory conditions for the use of proceeds because the developer will use the funds offshore, mainly for its overseas projects in the UK, US, Korea and Australia.
Additionally, the group’s overseas projects are primarily related to property development, meaning that the proceeds will be used for business purposes and not for speculative transactions or arbitrage trades, the rating agency added.
Despite this, Moody’s still advises investors to exercise caution.
“As more companies use guarantees, it will be important for offshore bond investors to assess how the companies will use the bond proceeds, when the onshore parent has registered the cross-border guarantee and whether the companies have a track record of complying with China’s foreign exchange regulations,” Leung said.
Comparables
Chinese state-owned developer Poly Real Estate’s recently issued $500 million five-year bond was used as a comparable. During market close on Wednesday, the company’s notes were trading at a G-spread of 294bp, indicating that Greenland’s bond priced inside Poly’s.
For Greenland’s 10-year tranche, the developer replicated the five-to-10-year curves of other Chinese real estate issuers, including China Overseas Land and Investment and Wanda Group’s, which have curve extensions of 60bp to 70bp respectively, a source familiar with the matter said.
Greenland ended up pricing its 10-year offering at Treasuries plus 341.2bp, nearly 9bp tighter than its initial price guidance of Treasuries plus 350bp, according to a term sheet seen by FinanceAsia. This indicates a curve extension of around 56bp.
In secondary market, both tranches are trading around reoffer — a cash price of 99.53 for the five-year tranche and 99.44 for the 10-year.
Greenland’s bond obtained a total order book of $4 billion from more than 250 accounts, of which more than half came from large institutional investors for both tranches.
Bank of China International, HSBC, JPMorgan and Deutsche Bank were the joint bookrunners of the deal.
