Chinese state-backed Sino-Ocean Group Holding last week raised a $200m three year bond backed by a standby letter of credit from a regional bank — building hopes that the cash-starved property sector may have finally found a constant liquidity channel.
Think again. Such expectations will only end up as pipedreams for two main reasons: Chinese banks will not be able to lift the sector’s massive financial crunch, and credit enhancements come with caveats that may not be palatable for every developer in distress.
There are some advantages, of course. SBLCs lower pricing and reduce refinancing risk. Sino-Ocean, as an example, will use the proceeds to partially redeem its $500m bonds due on April 30.
On the flip side, it is also true that the absolute cost for developers may go up after a credit-enhanced deal. Additionally, only quality developers would have access to such support as banks have a cap on taking on this kind of risk.
In January, GlobalCapital Asia highlighted the growing love among Chinese issuers for SBLCs. It was evident even then that borrowers not only end up paying hefty fees on SBLCs, but may also have to provide extra collateral and other benefits in lieu.
Such invisible costs may further skim profits at already stressed builders, worsening their financial situation.
With the SBLC’s support, Sino-Ocean could raise funds at a 3.8% yield compared to the 8.5% to 38% yield reflected on its outstanding bonds.
But pricing well inside the secondary curve may look like a steal but in reality, it may not be the case.
Dual roles
Leaving aside pricing, credit enhancement didn’t make sense as both Sino-Ocean (Baa3/—/BBB) and the SBLC provider, China Zheshang Bank Co, (Baa3/BBB-/—) have similar ratings.
Rather, the deal indicated how Sino-Ocean — despite having state-run China Life Insurance as the largest shareholder with an around 30% stake — was still struggling to access the market at a palatable cost. As is the case with many Chinese deals, investor details and deal statistics weren’t disclosed, raising further doubts over the distribution of the deal.
Even though the SBLC structure is well tested in the market, and offers investors a juicy premium over bonds issued by the SBLC provider directly, global investors have not warmed up to this structure.
It doesn’t help that Sino-Ocean’s SBLC provider Zheshang Bank is a relatively smaller bank and has been actively providing SBLC support. Often, the lender also doubles up as the bookrunner on these deals, pocketing additional investment banking income.
Zheshang was SBLC provider and a global co-ordinator on Sino-Ocean’s bond, and an SBLC provider and bookrunner in Greentown China Holdings’ $400m three year green offering in January.
In March, it provided support to Shenzhen Excellence Commercial Properties’ $100m three year deal priced at 2.91%. Earlier this month, the lender also played similar roles in Foshan Gaoming Construction Investment Group’s $200m three year sustainability transaction.
Permanent fix
Sitting on a pile of cash, investors are waiting to deploy their funds and are said to be eyeing opportunities in the property sector.
However, they are yearning for more concrete measures from Beijing to support the industry as the policy measures announced so far don’t go far enough.
The China property sector is huge and requires more proactive, bigger and consistent measures.
The latest directive of the People’s Bank of China to major banks and asset management firms to loosen restrictions on loans for developers, including extending maturities and lending for acquisitions of properties, is being closely watched. At least a dozen developers, including Sunac China, Shimao Group and Aoyuan Group, had been identified.
The initial list was apparently drawn in late December. It remains to be seen how seriously these proposals will get implemented.
In the interim, SBLCs can provide a much-needed lifeline to distressed developers — but they shouldn’t be mistaken as a permanent solution.