Zhongrong International Trust became the first issuer from the Chinese trust industry to venture into the offshore bond markets on Monday with a $225 million three-year transaction.
Over the past decade trust companies have become the second largest segment of China's financial sector behind commercial banks, racking up assets of Rmb14.41 trillion ($2.32 trillion) by the end of the first quarter.
Their growth has fuelled demand for the kind of credit and returns the largely state-owned banking sector has been unable to provide. However, many believe regulation has failed to keep pace with the expansion of the shadow banking sector, which relies on short-term retail and institutional investment to fund long-term property, industrial and infrastructure projects.
Zhongrong's bond marks something of a coming of age for the industry since funds are being used to finance the group's international expansion plans. Last December, China's second largest trust company by assets gained its first $300 million QDII licence and quota, which allows it to invest in offshore securities.
And ironically much of the paper from its debut international bond issue appears to have been placed back with the very high net worth Chinese investors whose desire for a global allocation strategy prompted the deal in the first place.
Sources close to the deal say that roughly 49% of the issue was placed with private banking accounts, with the remaining 51% split fairly evenly between banks and fund managers.
The vast majority of the deal, roughly 95%, also went to Asia. Just a smattering of the 60 participating accounts came from Europe.
The final order book closed at the $570 million level, enabling indicative pricing to be pushed in from 6.25% to 6%. Pricing was fixed at par and private banking clients received a 0.25 cents rebate.
The presence of DBS, Huatai Financial Holdings and Haitong International as joint bookrunners underscored the likelihood that much of the private banking demand came from China. Barclays rounded out the syndicate as the fourth joint bookrunner.
Comps, what comps?
The BB-rated deal's novelty value means there are almost no comparables to benchmark it against. There are, for example, no senior debt issues with a sub-investment grade credit rating from the Chinese financial sector.
The nearest comparable would probably be equipment leasing company Far East Horizon, which has a BBB- rating. It's 4.625% 2017 bond is currently bid at 2.477%.
Alternatively BBB-rated Haitong International Finance's 3.99% November 2019 bond is bid at 3.636%.
Bankers say many investors looked at double-B rated industrial credits such as CAR Inc and Geely Automobile.
The former has a 6.125% 2020 bond callable in 2018. This BB+/Ba1 rated issue is currently trading on a yield-to-call of 6.623%.
The latter has a 5.25% 2019 bond callable in 2017. Its BB+/Ba2 rated deal is trading on a yield-to-call of 4.664%.
As one banker explains, "Many investors used the industrial credits as a starting point, then knocked off 50bp to 75bp to account for the fact that Zhongrong has SOE backing. They then shaved off a further few basis points because of its interest reserve account and the low debt levels of its guarantor."
The issuance vehicle, Zhongrong International Bond 2015, is guaranteed by Zhongrong International Holdings. In turn, its owner Zhongrong International Trust has set up a Keepwell Deed and Liquidity Support Deed.
The issue vehicle has also established an interest reserve account, which will retain aggregate interest covering one payment period.
Zhongrong is 37.47% owned by China's largest cotton textile producer, Jingwei Textile Machinery, which is indirectly owned by China Hi-Tec Corp, which is, in turn, 100% owned by SASAC, the state asset supervision administration which oversees the country's largest SOEs. Harbin SASAC, a provincial branch, owns a further 21.54% in the group, which was established in 1987.
Becoming an integrated asset manager
Today Zhongrong International Trust is China's second largest trust with assets of Rmb710.6 billion at the end of 2014. The group has 30,000 high net worth clients and 1,143 institutional clients, which have funded 1,789 trust products.
At the end of 2014, revenues stood at Rmb5.53 billion, up from Rmb3.8 billion in 2012, while net income amounted to Rmb2.4 billion.
About 73% of Zhongrong's revenues come from private equity, with asset management contributing 7%, wealth management products 5% and the other 15% left unspecified in the group's roadshow presentation.
Within the private equity segment, the group has 471 projects with an asset value of Rmb217.6 billion in the goods and manufacturing sector, plus a further 577 projects with an asset value of Rmb142.7 billion in public infrastructure.
In its presentation to investors, Zhongrong says it wants to become an integrated asset manager focusing on private equity, asset management and wealth management. Future plans include setting up an offshore investment fund.
Trust activity in QDII is still at its very early stages. But the regulator's growing comfort with the industry's biggest players was demonstrated last December by its decision to award three of the four new QDII licenses to trust companies.
They now account for about 8% of the Rm88.67 billion under management.
At the same time, the State Council is still trying to rein in smaller players, releasing a white paper in April advocating tougher leverage and concentration ratios.
But some worry the government has not really been very successful at clamping down on the shadow banking sector, which is simply migrating away from property and local government investments into China's booming stock markets.
Figures released by the China Trust Association show that equity allocations were up 79% in the 12 months to end April.