Greenland Holdings sold a $500 million three-year bond on Thursday — its second debt offering in about a month — raising funds for the development of domestic projects, to repay existing onshore debt and for general corporate purposes.
The Chinese property developer's Reg-S offering priced at 4.625%, which is 37.5bp tighter than its initial price guidance of around 5%, according to a term sheet seen by FinanceAsia.
Unlike the state-owned Chinese developer’s previous bond, which was raised under China’s new guarantee policy whereby onshore companies can back the offshore debt of subsidiaries, this offering is backed by a traditional keepwell agreement.
This is because there are limitations to the State Administration of Foreign Exchange’s (Safe) recent relaxation on cross-border guarantees.
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 for an offshore entity without the need to obtain any approval or quota from Safe.
However, there is a caveat: the usage of proceeds must be used for offshore purposes and cannot be repatriated back onshore.
“The proceeds of the offshore bond sold needs to be applied in an offshore project that has already [been] identified and approved,” Cindy Lo, partner at Allen & Overy told FinanceAsia. “This is consistent with the general Safe regulations, where there is still some sort of restrictions repatriating the loan or bond proceeds onshore whether indirectly or directly.”
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.
Prior to the new Safe rules, Chinese companies needed approval and quota from the regulator — and typically only large state-owned enterprises such as Cnooc had such access. The lack of onshore security and subordination risk is a key concern among investors.
Because of this, the new issue rating is one notch lower (Ba1/BB+/BBB-) than the long-term corporate credit rating (Baa3/BBB/BBB-) on Greenland Hong Kong to reflect the structural subordination risk.
Along with a keepwell deed, the issuer has also pledged a deed of equity interest purchase undertaking to ensure that its subsidiary has sufficient assets and liquidity to meet its debt obligations.
Despite scepticism towards the usage of keepwell agreements by most Chinese high-yield names, investors take comfort on the fact that Greenland — a regular issuer in the international debt space — possesses an SOE-linkage and is majority owned by Shanghai’s local government.
“Due to its SOE linkage, it has access to government-led strategic projects and strong access to domestic bank funding,” said Andy Chang, primary analyst for Greenland at Fitch.
“This is illustrated by its cheaper funding costs compared with its peers and its landmark buildings in major cities.”
The nearest comparables for Greenland’s new bond were its existing dollar-denominated notes that are maturing in 2016 and were trading at a yield of 4.03% area prior to announcement, according to a source familiar with the matter.
Greenland's note received a $4.3 billion orderbook, with Asian investors accounting for 78% of the bond, while the rest went to European investors, added the source. Fund managers subscribed to 42% of the notes, followed by private banks 34%, financial institutions 16%, corporates 7% and insurers 1%.
The company’s new bond falls under its recently established $2 billion medium-term note programme and will be issued by its wholly owned subsidiary Greenland Hong Kong Holdings.
Credit Suisse and HSBC were the joint global coordinators and bookrunners of Greenland's note. Other bookrunners include Bank of China International, JPMorgan and Morgan Stanley.