Step-up jolts Chinese perps
Bonds First coupon reset deals a blow to popular domestic debt structureBY INA ZHOUThe first coupon reset on a
perpetual bond in China’s
domestic market last week
gave a wake-up call to investors
who had viewed the format
as nothing more than higher-
yielding bullet bonds.
CHINA JILIN FOREST INDUSTRY GROUP
took the unprecedented step
of paying a step-up coupon on
perpetual bonds, after eschewing
the first call date on February 4.
The company decided to forgo
the call option on its Rmb1bn
(US$159m) 7.10% perpetual non-
call three bonds and, instead,
raised the coupon to 10.55%, in
line with the original prospectus,
according to a filing to the
Shanghai Clearing House.
The incident added to worries
over the issuer’s ability to service
its debt, after it delayed at least
four other offerings of onshoreperpetual bonds in the past two
weeks.
“The issuer was willing to
defer the payment of the notes
by paying as much 300bp. That
speaks a lot about the refinancing
difficulties of the company,”
said a senior credit analyst at
a Chinese securities house,
suggesting that it might have
defaulted on a three-year note
with a bullet maturity.
The perpetual notes were
issued in the interbank bond
market in February 2015 at a
7.10% coupon for the first three
years.
According to the bond
prospectus, if the notes were
not called at the end of the third
year, the coupon would reset for
the next three years to the initial
spread of 393bp over the three-
year Chinese Treasury yield, plus
300bp.
The notes were bid at a yieldof 10.59% last Friday, according to
Thomson Reuters prices.
Last November, China
Chengxin downgraded Jilin
Forest to A+ from AA–, citing
concerns over its losses, rising
debt and refinancing pressure.
In the first three quarters
of 2017, the company, based
in northeastern Jilin province,
posted losses of Rmb473m.
The State-owned Assets
Supervision and Administration
Commission of Jilin province
held a 65% stake in the company
at the end of 2014, according to
the bond prospectus.TAKEN FOR GRANTED
Perpetual bonds took off in the
onshore market in December
2013 and the format became
popular in 2015 and 2016 as
it allowed issuers to book the
securities as equity in their
accounts, thereby reducing theirgearing, and attracted investors
looking for yields in a bullish
market.
Coupon resets and step-up
clauses are common in offshore
perpetual bonds. Resets give
investors some protection against
rising rates, while steep step-ups
provide issuers with an incentive
to redeem bonds at the first
opportunity.
Jilin Forest’s coupon reset
broke an implicit rule in China
that issuers must redeem the
notes at the first call date and
prompted investors to rethink
strategies involving the format.
“The unspoken rule for perps
has been that issuers must and
will redeem bonds at the first
call date. Both investors and
underwriters have taken that for
granted,” said a Shanghai-based
syndicate banker at a Chinese
bank.
He said perps had been touted
in the past few years as illiquid
but higher-yielding bonds, with
issuers offering premiums of
40bp–50bp over bullet bonds.
A Shenzhen-based DCMLeasing firms flock to loans
Loans SMBC Aviation joins crowd as fast-growing Chinese borrowers dominateBY PRAKASH CHAKRAVARTIAircraft-leasing company SMBC
AVIATION CAPITAL has launched a
debut US$600m syndicated loan,
adding to the list of financings
from the sector in recent months.
The leasing sector holds a lot
of appeal for lenders in Asia,
thanks to the growth stories and
parentage of the borrowers, and
the opportunities they offer in a
deal-starved environment.
Since September, more than 20
leasing companies have tapped
the Asian market for loans
of almost US$6bn, including
borrowings of US$2.83bn that are
in syndication.
Among them is Amsterdam-
headquartered AERCAP HOLDINGS,
which is returning to the Asian
loan market after nearly two
years for a US$600m four-year
revolving credit facility.
Parentage and strong creditprofiles are among the most
important factors drawing
lenders to leasing companies,
several of which are units of large
financial institutions.
Sumitomo Mitsui Financial
Group owns 66% of SMBC
Aviation Capital, which is rated
A–/BBB+ (Fitch/S&P). AerCap has
ratings of BBB- from both Fitch
and S&P.
Among borrowers with loans
in syndication are ABC FINANCIAL
LEASING and PING AN INTERNATIONAL
FINANCIAL LEASING. The former is
a unit of Agricultural Bank of
China, one of the Big Four banks
on the mainland, while PAIFL is a
unit of Ping An Insurance Group,
the world’s largest insurer.
Lending to leasing companies
means taking indirect exposure
to the parents, which do not have
a history of borrowing in the
syndicated loan markets.
“The leasing units presenta good opportunity for proxy
exposure to their parents at a
decent premium,” said a senior
loans banker in Singapore.MADE IN CHINA
The majority of the leasing
company borrowers are from
China, where domestic liquidity
has been shrinking and the cost
of borrowing rising after recent
deleveraging measures in the
financial sector.
Although yields on three-
year Chinese Treasury bonds
had tightened to 3.61% last
Wednesday from 3.78% at
end-December, they were still
significantly higher than the
3.49% mark last July, according
to China Central Depository &
Clearing.
The domestic market for
Chinese leasing companies is not
entirely shut, but some of their
biggest loans have been offshore.In the past five months, they
have raised US$5.45bn, of which
US$3.03bn has been offshore.
Most of these borrowers have
met with a strong receptions
from lenders even when
returning for more than one
borrowing. FAR EAST HORIZON, a
unit of state-owned chemicals
conglomerate Sinochem Group,
is in the market for a US$800m-
equivalent three-year bullet loan,
only three months after raising a
similar-sized facility.
The new loan pays a top-level
all-in pricing of 155bp, based on
an interest margin of 130bp over
Libor/Hibor, close to the 158.33bp
all-in via the same margin on
the previous loan completed in
November.
That loan attracted 13 banks
in general syndication and had
five mandated lead arrangers and
bookrunners. Eight banks are
MLABs on the new loan. Far EastNews
10 International Financing Review Asia February 10 2018