IFR Asia - 13.10.2018

Shimao struggles in weak market

„ Bonds Weak macro backdrop, heavy issuance pipeline dent investor appetite

BY CAROL CHAN, FRANCES YOON

Investor concerns over rising

interest rates led SHIMAO

PROPERTY HOLDINGS, rated Ba2/

BB+/BBB–, to scrap a plan to

issue a long five-year non-call

three bond last Monday as

market players are seeking

shorter tenors.

The Hong Kong-listed

Chinese real estate company

did price a US$250m three-

year non-call two bond at

par to yield 6.375%, flat from

initial 6.375% area guidance.

The Reg S notes have an

expected BBB– rating from

Fitch.

But it had initially marketed

the US dollar senior notes

in two tranches on Monday

morning, before dropping the

long five-year non-call three

tranche in the evening. It had

pitched the long five-year non-

call three tranche at initial

price guidance of 7.125% area.

CreditSights said the issue

offered some yield pick-up and

that it saw the fair value of the

two tranches at 6.125% and

6.9%, respectively.

But Nomura’s trading desk

said that although it liked

the issuer’s fundamentals,

“it should have a decent new

issue premium amid a weak

macro market and the heavy

issuance pipeline in the near

term”. It saw fair value for the

three-year non-call two bond

at 6.1%–6.2% but saw the IPG

for the long five-year non-call

three as unattractive.

The new three-year non-

call two came at an estimated

62.5bp new issue concession,

but the timing of the deal was

bad because of ongoing US-

China trade tensions and the

sell-off in emerging markets.

There are also expectations of

a heavy supply of bonds from

the property sector for the rest

of this year as companies use

up their offshore debt issuance

quotas.

Shimao’s bonds plunged last

Monday because of new supply.

Its 5.20% 2025s fell around two

points in bid price to 90.529,

while its 4.75% 2022s were

down 0.75 points at 95.00,

according to Tradeweb.

“Investors were still not

fully participating. The market

tone was also very weak,” an

investor said.

LUNCHTIME CALL

A banker said the joint

bookrunners were contacted

around lunchtime by the issuer

because the book was slow and

the issuer wanted additional

support.

A source on the deal said the

JBRs ended up with almost 30%

of the deal, and blamed the

joint global coordinators for

not allowing the JBRs to help

with the marketing.

Another source said it is

a difficult time for property

companies because of the

concerns about the number

of bonds in the pipeline,

including a potentially big deal

SMBC readies covered bond first

„ Bonds Unusual structure due to lack of Japanese legal framework may deter European investors

BY DANIEL STANTON

SUMITOMO MITSUI BANKING

CORPORATION is readying the

first Japanese covered bond

issue, but it will use an unusual

structure since Japan does

not have legislation for such

securities.

While a successful deal could

open up a huge new market

for covered bond issuance, the

structural differences could

have an impact on demand

from European investors.

The potential for Japanese

covered bond issuance has been

discussed for years. Shinsei

Bank attempted a transaction

during the global financial

crisis in 2008, but the deal was

postponed and ultimately failed

to materialise.

SMBC said last Thursday that

it has mandated Barclays, BNP

Paribas, Credit Agricole, Goldman

Sachs, SMBC Nikko and UBS for

the five-year euro benchmark.

Meetings will start on

Wednesday October 18 and

end on Wednesday October

24, though bankers at the

leads said the deal should

not be expected immediately

afterwards, since investors will

need time to set up lines.

Japan does not have covered

bond legislation in place, so the

€20bn (US$23bn) covered bond

programme is structured on a

contractual basis. The bonds

are expected to be rated Aaa by

Moody’s.

“New Zealand started in

a very similar way, with

structured covered bonds

before there was legislation,”

said Claire Heaton, senior

director, covered bonds product

specialist Asia Pacific, at Fitch

Ratings.

“Prior to New Zealand having

a covered bond legislation, the

investor base was quite limited.

As soon as the market became

regulated under specific

legislation, it absolutely opened

up the number of investors that

could look at it.”

The bonds will be secured

against a portfolio of residential

mortgage-backed securities

originated by the bank, offering

dual recourse. SMBC will issue

RMBS and then retain the

Triple A paper for use in the

covered bond portfolio. The

assets will stay on the bank’s

balance sheet but will be

segregated in a trust.

A banker who worked on

the structuring of SMBC’s

programme said it also includes

key features of traditional

covered bonds such as a

minimum overcollateralisation

requirement, of 25%, and an

LTV threshold, of 75%.

“Investors would have to

look at the asset segregation

method used in this covered

bond programme out of

Japan and decide whether the

ringfencing of those assets

is legally sound, and if the

bank ran into trouble whether

those assets would be safe and

available for bondholders as

when required,” said Fitch’s

Heaton.

SMBC said that, in the

event of bankruptcy, it was

possible an administrator

could try to take over the trust

or reclassify the total return

swap transaction used in the

News

“New Zealand started in a very similar way,

with structured covered bonds before there

was legislation. Prior to New Zealand having a

covered bond legislation, the investor base was

quite limited. As soon as the market became

regulated under specific legislation, it absolutely

opened up the number of investors that could

look at it.”