Shandong Shipping prices SBLC-backed deal

Shandong Shipping takes advantage of secondary market momentum with a debut bond, credit-enhanced by Agricultural Bank of China.

Shandong Shipping Corporation made its debut in the international bond markets on Wednesday with a credit-enhanced deal guaranteed by Agricultural Bank of China. A capped $200 million five-year fixed-rate bullet deal was issued in the name of subsidiary SDSC International Finance.

Pricing came at 99.539% on a coupon of 3.625% to yield 3.727% or 207.5bp over Treasuries. This was 27.5bp tighter than initial guidance around the 235bp level and led to a slight drop off in the order book, which had topped $1.7 billion by lunchtime in Asia.

The final order book closed at the $1.5 billion level, with participation from 82 accounts. More than 90% of the paper was placed in Asia by lead managers ABC International and HSBC.

The principal and coupon were guaranteed by an irrevokable standby letter of credit (SBLC) in renminbi issued by Agricultural Bank of China's Shandong branch. This gave the deal an A1/A/A rating in line with all recent deals from the sector.

Bankers say the transaction benefited from having its size capped at the outset and being somewhat smaller than recent issues such as Hebei Iron & Steel's $500 million SBCL issue on October 20. This latter deal has traded well since launch, providing Shandong Shipping with good momentum in a heavy week for China-related bond issuance.

Having been placed out on an issue price of 99.774% and yield of 2.829%, Hebei's three-year deal had traded in to the 2.79% level on Wednesday. 

Shandong Shipping's nearest comparables are the existing A1-rated SBLC backed deals with 2019 maturities. These include Haitong Securities and China Shipping, which are both guaranteed by Bank of China. 

Haitong Securities 3.625% October 2019 deal was trading Wednesday on a Treasury and G spread of 200bp over. China Shipping's 4.25% January 2019 deal, meanwhile, was trading at 172bp over Treasuries and 197bp over on a G-spread basis. 

This means that SASAC-owned Shandong Shipping has provided a very slight new issue premium to Haitong Securities, which analysts consider a slightly better credit on a stand-alone basis.

However, the main reference points for all SBLC deals are the guarantor's senior debt. In this case, Agricultural Bank of China's benchmark comparable is the 2.875% December 2018 bond issued by its Hong Kong branch.

This was trading on a bid/offer spread 97bp to 82bp over five-year Treasuries on Wednesday, equating to a yield of about 2.52%. Shandong Shipping has offered a roughly 120bp pick-up over ABC's senior debt, without accounting for the additional 11 months on the yield curve.

Some analysts have been advocating that investors switch from ABC's senior debt to its cheaper SBLC debt in the wake of its recent third quarter results. These showed that while net profit rose 6.1% year-on-year to Rmb48.4 billion, results were slightly below expectations.

Like all its peers, ABC has had to deal with higher credit costs, which rose from 0.7% in the second quarter to 0.81% in the third. The bank's net interest margin also declined six basis points to 2.86% from 2.92% from the quarter before. 

Its capital position strengthened slightly, with the bank recording a CET 1 capital adequacy ratio (CAR) of 9.8% and total CAR of 12.4%.

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