Credit-supported transactions and how to value them Global Research Credit Alert |

Transcription

l Global Research l
Credit Alert | 03:15 GMT 12 April 2013
Credit-supported transactions and how to value them
 Rating arbitrage for issuers and investors’ clamour for spread pick-up to drive further issuance
 Investors should demand a reasonable spread multiple due to untested structures, lack of trading history
 Our top picks are ICBC 21, DAEHIM 16 and CHRESO 17; our top pans are ACIRC 17 and DAEHIM 42

There has been a flurry of bond issuance (11 deals with a total size of USD
6.6bn), with credit support from banks either through guarantees or standby
letters of credit (SBLC). Given the tight yield environment and investors‟ clamour
for spread pick-up, we believe there will be more such deals in the next 6-12
months. Issuance may be dominated by Chinese banks that are subject to loan
quotas and loan-to-deposit limits, and that use these transactions to help clients
obtain financing without breaching regulatory restrictions.

From an issuer‟s point of view, rating arbitrage is the primary driver of these
types of transactions. For investors, the main attraction is the incremental
spread pick-up over what they could get by investing in senior bonds issued by
the same bank. However, given the untested nature of some of these structures
and the lack of trading history in times of market stress, we believe investors
should demand a reasonable spread multiple over senior bank debt.


Bonds with guarantees to a (leasing) subsidiary should trade tight to the
underlying bank senior debt due to strong business linkages. We believe 1.01.2x is a fair spread multiple for these transactions as long as the guarantee is
irrevocable and unconditional. Based on this, we see the ICBC 21 as trading
cheap, since it quotes 1.33x over the underlying ICBC 17 senior bonds. The
ACIRC 17 is quoting a bit rich while the ACIRC 22 is trading at fair levels.
Guarantees to a third-party corporate should trade at a higher multiple of 1.31.5x, since they are pure commercial transactions. However, they should trade
tighter than SBLCs given the relative scarcity to date of these types of deals.
We see the DAEHIM 16 as trading slightly cheap while the DAEHIM 42 is rich
given its much weaker structure.

Bharat Shettigar, +65 6596 8251
[email protected]
Victor Lohle, +65 6596 8263
[email protected]
Benchmark bond
Spread
multiple
(x)
Guarantee to bank subsidiary
ICBC 21
ICBC 17 (+20bps)
ACIRC 17
SINOPE 17 (-10bps)
ACIRC 22
SINOPE 22 (-10bps)
BOCOM 23
ICBC 17 (+50bps)
Guarantee to corporate
DAEHIM 16
KDB 16N
Proportional credit commitment
DAEHIM 42
HANABK 17N (+10bps)
SBLC to corporate
ZIJMIN 16
BCHINA 16 (+10bps)
CHRESO 17 DBSSP 17
COSHOL 22 BCHINA 16 (+40bps)
HAIAIR 20
BCHINA 16 (+30bps)
SUELIN 18
SBIIN 17 (+10bps)
Top picks
ICBC 21
DAEHIM 16
CHRESO 17
1.33
0.93
1.00
1.03
1.54
1.47
1.64
1.68
1.65
1.64
1.59
Top pans
ACIRC 17
DAEHIM 42
A properly structured SBLC should provide investors broadly the same
protection as a guarantee, in our view. However, some investors perceive
SBLCs as riskier given the incremental legal, documentation and enforceability
issues in these transactions. Also, an SBLC-backed bond is not a deliverable
obligation for CDS. Finally, SBLCs have heterogeneous structures and
differences such as the type of issuer, the financial profile of the
issuer/guarantor, the coverage amount of the SBLC, currency conversion risks,
pre-funding arrangements and cross-default language with respect to the bank
offering the SBLC need to be factored into bond spreads.

We believe, the existing SBLC-backed transactions should trade at a spread
multiple of 1.5-1.8x over bank senior debt. Based on this assumption, we see
the CHRESO 17 as attractive given its high ratings and decent financial profile.
The other SBLC-backed bonds are trading at broadly fair levels.
Important disclosures can be found in the Disclosures Appendix
All rights reserved. Standard Chartered Bank 2013
research.standardchartered.com
Credit Alert
Valuation summary
Figure 1: Benchmarks for credit support transactions
Benchmark bond
Current
spread diff.
(bps)
Historical
spread diff.
(bps)
Current
spread multiple
(x)
Historical
spread multiple
(x)
ICBC 17 (+20bps)
SINOPE 17 (-10bps)
SINOPE 22 (-10bps)
ICBC 17 (+50bps)
42
(7)
0
5
25 - 68
(12) - 11
(3) - 39
5 - 37
1.33
0.93
1.00
1.03
1.16 - 1.53
0.86 - 1.13
0.98 - 1.35
1.03 - 1.26
KDB 16N
59
(4) - 81
1.54
0.98 -2.20
HANABK 17N (+10bps)
68
46 - 123
1.47
1.30 - 2.07
BCHINA 16 (+10bps)
DBSSP 17
BCHINA 16 (+40bps)
BCHINA 16 (+30bps)
SBIIN 17 (+10bps)
60
58
81
73
146
42 - 106
49 - 94
41 - 108
63 - 130
140 - 189
1.64
1.68
1.65
1.64
1.59
1.26 - 1.93
1.53 - 2.18
1.28 - 1.93
1.51 - 2.13
1.53 - 1.75
Current
Z-spread (bps)
ICBC 21
170
ACIRC 17
94
ACIRC 22
131
BOCOM 23
163
DAEHIM 16
169
DAEHIM 42
214
SBLC to corporate
ZIJMIN 16
154
CHRESO 17
143
COSHOL 22
205
HAIAIR 20
187
SUELIN 18
394
Source: Standard Chartered Research
Figure 2: Valuation view
View
ICBC 21
Cheap
ACIRC 17
Rich
ACIRC 22
Fair
Valuation rationale
We take the ICBC 17 and add 20bps for the extension in maturity. Currently, the ICBC 21 is trading at a spread
multiple of 1.31x, which makes it look cheap.
We see the SINOPE 17/22 as the best comparable, since the Sinopec bonds are also included in the EMBI. While
bank senior paper could trade tighter to a comparable corporate, we believe the ACIRC 17/22 should trade
broadly flat to SINOPE 17/22 due to its slightly longer duration and its leasing-subsidiary status. Currently, the
ACIRC 17 is trading a bit rich versus the SINOPE 17 while the ACIRC 22 is trading fair.
Cheap
The DAEHIM 16 is the only transaction where a bank has provided an unconditional and irrevocable guarantee to
a corporate. Given the high ratings on the bond and the scarcity value, we believe it should trade 1.3-1.5x over
the KDB 16N. At current levels, we see the bond as trading slightly cheap.
DAEHIM 42
Rich
The DAEHIM 42 has a complicated structure, since it has multiple credit-support providers (who are not jointly
and severally liable), deferrable coupon payments (cumulative) and an investor put if the deal is not called in five
years. Its ratings are capped at the ratings of the weakest support provider (i.e., Woori Bank). Hence, it should
trade at a wider multiple versus the DAEHIM 16. Currently, the bond trades slightly rich.
ZIJMIN 16
Fair
Zijin Mining has a moderate financial profile, and the ZIJMIN 16 is the only Chinese transaction whose SBLC is
backed by an offshore bank branch. Hence, it should trade at a tighter multiple compared with the COSHOL 22
and the HAIAIR 20 bonds. Currently, it trades at fair levels.
CHRESO 17
Cheap
The bond is issued directly by a corporate, whose financial profile is moderate. However, the SBLC covers only
one interest payment, and the bond does not have a pre-funding arrangement. Also, while the bond does not
enjoy a cross-default clause on the bank, the high rating on the bond is a major comforting factor. Hence, in terms
of multiples, it should trade broadly in line with the ZIJMIN 16. At current levels, the bond is slightly cheap.
COSHOL 22
Fair
The issuer of the COSHOL 22 has a weak financial profile and is backed by an SBLC from an onshore branch of
Bank of China. Hence, we believe it should trade at a wider multiple than the ZIJMIN 16 and the CHRESO 17
bonds. Currently, the bond trades at fair levels.
HAIAIR 20
Fair
The issuer of the HAIAIR 20 has a weak financial profile and is backed by an SBLC from an onshore branch of
Bank of China. Hence, we believe it should trade at a wider multiple than the ZIJMIN 16 and the CHRESO 17.
Currently, the bond trades at fair levels.
Fair
We believe the SUELIN 18 bond should trade at a wider multiple than other SBLC-backed bonds due to the
distressed nature of the credit and the SBLC covering only one coupon payment. While the current spread
differential over the SBIIN 17 is in the lower end of the 1.5-1.8x range, the high absolute spread/yield on the bond
and the relative cheapness of the SBIIN 17 should keep the bond supported, in our view.
DAEHIM 16
SUELIN 18
GR13AP | 12 April 2013
2
Credit Alert
The emergence of a new asset class?
In Asia, there has been a flurry of bond issuance, with credit support from banks
either through guarantees or SBLCs. In 2012, there were four deals totalling USD
3.4bn, versus three deals in 2011 totalling USD 1.6bn. This year, we have already
seen three transactions with a total issuance volume of USD 1.65bn. Our expectation
is that over the course of 2013, there will be more deals with credit support,
particularly from Chinese banks. Figures 3 and 4 provide a summary of all the
transactions in Asia, while Appendix 1 explains in detail the difference in structures.
Figure 3: Bond details
Issue
Type
Support provider
Issue date
Size
(USD mn)
Issue rating
(M/S&P/F)
Bank subsidiary
ICBC - HK branch
Nov-11
750
A1/A/NR
Bank subsidiary
CDB - HK branch
Nov-12
500
Aa3/AA-/NR
Bank subsidiary
CDB - HK branch
Nov-12
1,000
Aa3/AA-/NR
Bank subsidiary
Bank of Comm. - HK
branch
Feb-13
500
A3/A-/NR
Corporate
KDB
Nov-11
350
NR/A/NR
Corporate
KDB (40%), Woori
(40%), Hana (20%)
Sep-12
500
NR/NR/A-
Finance subsidiary
of corporate
Bank of China - Paris
branch
Jun-11
480
A1/NR/NR
Corporate
DBS Bank - HK branch
Sep-12
400
Aa1/NR/NR
Finance subsidiary
of corporate
Finance subsidiary
of corporate
Bank of China - Beijing
branch
Bank of China - Hainan
branch
Nov-12
1,000
A1/NR/NR
Feb-13
500
A1/A/NR
Corporate
State Bank of India
Mar-13
647
Baa2/NR/NR
Issuer
Skysea
ICBC 21
International
Amber Circle
ACIRC 17
Funding
Amber Circle
ACIRC 22
Funding
Azure Orbit Intl.
BOCOM 23
Finance Ltd.
Doosan Infracore
DAEHIM 16
Co. Ltd.
Doosan Infracore
DAEHIM 42
Co. Ltd.
SBLC to corporate
Zijin International
ZIJMIN 16
Finance Co. Ltd.
CR Cement
CHRESO 17
Holdings. Ltd.
Cosco Finance
COSHOL 22
(2011) Ltd.
Hainan Airlines
HAIAIR 20
(HK) Co. Ltd.
AE-Rotor Holding
SUELIN 18
B.V.
Figure 4: Structural differences
Support
currency
Issue
ICBC 21
NA
ACIRC 17
NA
ACIRC 22
NA
BOCOM 23
NA
DAEHIM 16
NA
DAEHIM 42
NA
SBLC to corporate
Cross
default
Keep well
trigger for
agreement
SBLC bank *
Support
amount
Support
coverage
Prefunding
date
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
USD 30mn
USD 50mn
USD 50mn
USD 25mn
NA
NA
NA
NA
NA
ZIJMIN 16
USD
USD 600mn
CHRESO 17
USD
USD 405.8mn
COSHOL 22
CNY
CNY equiv.
HAIAIR 20
CNY
CNY equiv.
SUELIN 18
USD
USD 655.04mn
All coupon +
principal
1 coupon +
principal
All coupon +
principal
All coupon +
principal
1 coupon +
principal
Index
inclusion
Governing
law
No
No
No
No
CEMBI, JACI
EMBI, JACI
EMBI, JACI
CEMBI, JACI
English
English
English
English
USD 10mn
No
No
English
NA
NA
No
CEMBI
NY, HK
8 days
USD 25mn
Yes
No
English
NA
NA
No
No
English, HK
8 days
USD 25mn
Yes
No
English
12 days
USD 25mn
Yes
No
English
12 days
USD 25mn
No
No
English
* If a bank defaults on an SBLC it may not necessarily trigger a cross default on its other obligations (further details on pages 8 and 9);
3
Credit Alert
Drivers of the asset class
The use of credit support has been seen in other jurisdictions. For example, in the
US public finance sector, the use of financial guarantees from monoline insurance
providers or letters of credit (LCs) from banks dates as far back as the 1980s. In the
US and European structured finance market, the use of financial guarantors was also
very popular in the early 2000s. In Asia, deals with credit support from banks (mostly
Korean banks) were in use prior to the 1997 Asian crisis. However, these deals
became rare in the aftermath of the Asian financial crisis. The recent increase in
issuance appears to be driven by regulatory and accounting arbitrage.
The bank’s perspective as a credit support provider
There are multiple incentives for
banks to undertake credit support
transactions
To date, the four jurisdictions from where we have seen these types of transactions
are Korea, Singapore, China and India. Our understanding is that in all jurisdictions,
everything else being equal, the capital charge for any bank is the same for (1)
providing a loan to a borrower as it for (2) providing credit support through an SBLC
or a guarantee for a bond issued by a borrower. There is also no difference in the
capital charge between an SBLC and a guarantee (although the capital charge
treatment in China appears a bit unclear at this stage). One reason these
transactions are attractive for banks is that they receive a fee for providing credit
support without having to fund the transaction upfront. The amount of fees charged
by a bank for providing a guarantee to its own subsidiary is unclear. In the case of an
SBLC or a guarantee to a third-party corporate, our market checks indicate that
banks typically charge fees in line with their net interest margins or up to 50% of the
standalone funding cost of the corporate. Another attractive reason, which was
evident in the recent SUELIN 18 deal, is the banks‟ need to refinance a stressed loan
of a corporate by providing credit support.
Typically SBLCs have been used for
third-party entities, while
guarantees have been used for
captive subsidiaries
It is not entirely clear why a bank would choose to provide an SBLC over a
guarantee. Some claim that is driven by the particular bank‟s working habits. An
alternative explanation is that the main driver is regulatory (i.e., it is challenging for
banks to obtain approval to provide guarantees for third-party corporate entities) and
therefore SBLCs are used for third-party transactions, while guarantees are used for
(leasing) subsidiaries of banks.
To date, guarantees and SBLCs issued by Asian banks have been irrevocable and
unconditional. Also, some of these transactions have an „event of default‟ clause in
case the credit support-providing bank defaults on its other obligations (above a
certain limit). However, if a bank defaults on an SBLC (when it is invoked), it may not
necessarily trigger a cross-default on its other bonds. That said, we see major
reputational risks if a bank defaults on an SBLC under normal circumstances (that is,
if the bank itself is not close to distress).
In Korea, lower capital charges were
a driver, but this is no longer the
case
In Korea, we understand that until late 2012, banks had a regulatory capital incentive
to provide a guarantee over funding an outright loan. However, since then, this
incentive has been eliminated by the banking regulators. We therefore believe further
transactions (like the DAEHIM 16 and the DAEHIM 42) by Korean banks are unlikely.
The sole transaction where the
provider was a Singaporean bank
was opportunistic in nature
The CHRESO 17 is the only transaction to date where the support provider was a
Singaporean bank (through its Hong Kong branch). Our understanding is that at the
time, it was more cost-effective for the issuer to tap the bond markets with credit
support from DBS than to obtain a loan from DBS. Further transactions with credit
support from a Singaporean bank are likely to be opportunistic in nature, in our view.
4
Credit Alert
In China, the main drivers are
administrative loan quotas and
loan-to-deposit caps
In China, the main driver for banks appears to be explicit regulations on loan-todeposit ratios and implicit loan quotas. This incentivises banks to use off-balance
sheet transactions when their loan-to-deposit ratios or quotas are close to the limits.
Hence, we are likely to see further transactions with credit support by Chinese banks.
On the other hand, it appears that the China Banking Regulatory Commission‟s
(CBRC) guidance is slightly unclear on the credit conversion factor (CCF) to be
applied to convert SBCLs to on-balance sheet exposure for the calculation of riskweighted assets.
In India, the only deal to have taken
place involved the ever-greening of
a non-performing loan
In India, the only transaction we have seen (SUELIN 18) involved a corporate that
was in distress and needed to refinance an upcoming loan maturity (and therefore
used the State Bank of India as an SBLC provider). We believe that this type of
issuance from India (and elsewhere) will be opportunistic in nature. We have also
seen SBLC-backed loans being done by Indian corporates. Hence, we do not rule
out further credit-supported bond transactions from India in the next 12-18 months.
The issuer’s perspective
For the issuers, the main attraction
is a lower cost of funding
The main reason issuers use these types of transactions is rating arbitrage. The
issuers have lower standalone ratings (if they were rated) than the support providers.
Hence, these transactions allow the issuers to substitute their rating and credit
fundamentals for those of the support providers and obtain cheaper funding from the
markets than they would get in their own name (even after taking into account the
fees paid for the guarantee or SBLC). In effect, the credit risk of the issuer is
substituted for the credit risk of the bank providing the support. Finally, for some
issuers, another factor is the ability to tap the market in their own name and become
known to investors, even if the transaction is with credit support.
It is worth highlighting that the use of credit support from banks is also prevalent in
the loan market. For example, a few Indian corporates (e.g., Videocon Group and
Bharat Petroleum) have issued USD loans with SBLCs provided by Indian banks.
The investor’s perspective
For investors, these transactions
provide a spread pick-up over
senior unsecured bank debt
For investors, the main attraction of these transactions is that they can get a spread
pick-up over senior unsecured bonds issued by the same bank. The main reasons
investors demand an incremental spread pick-up are (1) the underlying issuers
typically being a lower-rated corporate and (2) the additional layer of operational
complexity compared with senior unsecured bank debt. Also, since the underlying
issuers tend to be weaker credits on a standalone basis, there is a higher probability
of issuer default, even if the expected loss given default is lower due to the credit
support provided by the bank.
Also, some investors might book these exposures not under the bank providing the
credit support, but rather, under the name of the underlying issuers. This would
enable them to get exposure to new names without technically increasing their
exposure to the banks. That said, if investors have too many bonds with credit
support from the same bank, the concentration risk in the portfolio increases
significantly (for example, there are currently three bonds backed by SBLCs from the
Bank of China).
5
Credit Alert
Dissecting the differences
The ultimate goal for these types of transactions is to substitute the (higher) credit
risk of the issuer with the (lower) credit risk of a bank as a credit support provider.
Compared with senior unsecured bank deals, third-party credit-supported
transactions are more complex because of the incremental legal, documentation and
enforceability risks.
There are a number of considerations for investors in these transactions. First, the
performance of some of these transactions in the event of a substantial weakening in
the credit profile or default by the issuer remains untested. Second, the enforceability
of the credit support, particularly where the credit support has been provided by an
onshore branch of a Chinese bank remains untested. Finally, the ratings of the
transaction will track those of the support provider (for example, in the late 2000s, US
and European structured finance transactions with financial guarantees from
monolines were downgraded sharply following the downgrade of the monolines).
SBLCs versus guarantees – Almost the same but not the same
If properly structured, an SBLC
should provide the same protection
as a guarantee
If properly structured, an SBLC should provide investors broadly the same protection
However, some investors perceive
guarantees as being safer than
SBLCs
However, some investors perceive guarantees as being safer than SBLCs, as there
as a guarantee. To date, SBLC structures in Asia have been adequate to cover bond
obligations and have an expiry date after the maturity of the bonds. They also require
the issuer to pre-fund the coupon and principal payments (except the CHRESO 17
bonds), which ensures payment by the bank in case the issuer defaults. Also, in
cases where the SBLC is not denominated in USD, the method of conversion and the
process to deal with the shortfall have been clearly detailed. Finally, the
intermediaries handling the payments have a high credit rating.
are fewer moving parts. In the case of a guarantee there is clear and explicit
language that ranks the guaranteed obligations pari passu with other unsecured
obligations of the guarantor. In the case of an SBLC, even if there is a promise to
pay, the sequence of events to achieve payment may be longer and might involve
more parties. Also, some investors‟ view on SBLCs is clouded by trade-related LC
where payment under the LC is dependent upon satisfactory performance/delivery of
goods. Lastly, investors are concerned that in some jurisdictions there might be a
need to exhaust legal recourse and/or a need to prove that the liability of the credit
support provider has actually crystallised. For these reasons, some investors believe
that there should be extra compensation when they invest in deals that include an
SBLC as compared to a guarantee.
Bonds with an SBLC may not be
deliverable obligations for CDS;
hence, investors cannot hedge the
credit risk
Another key difference is that bonds with an SBLC are not a deliverable obligation for
CDS, while bonds with a guarantee appear to be (although we note that the market
for CDS is currently not very active for most of these credits). While at first glance it
would seem that SBLC-backed bonds meet the deliverable obligation characteristics,
we believe that in the event of an auction, the ISDA Determination Committee may
have issues accepting bonds where the credit support is via an SBLC. This is
because it will be difficult to deliver the SBLC together with the bond, as it will require
the consent of the bond‟s trustee and the issuing bank. In the context of physical
delivery, the definition of „qualifying guarantee‟ specifically excludes SBLCs. Hence,
an investor looking to hedge the credit risk in an SBLC-backed bond will not be able
to do so through buying CDS protection on the underlying bank.
6
Credit Alert
Onshore versus offshore support in the case of Chinese transactions
The enforceability of Chinese
transactions is untested
For transactions where credit support is provided by a Chinese bank, a further
consideration is whether support is provided by an onshore or an offshore entity.
Among the transactions to date, credit support has been provided by an onshore
entity in the case of China COSCO and Hainan Airlines SBLCs, while in the case of
the Zijin Mining SBLC and bank leasing subsidiaries, credit support has been
provided by the offshore branches of the banks.
Some investors feel that credit support provided by the offshore branch of a Chinese
bank is preferable, as it would be easier to obtain a judgement in the event of default
by the issuer. We note, however, that all current transactions out of China are
governed by English/Hong Kong law; theoretically, therefore, there is little difference
between credit support from an onshore branch versus that from an offshore branch.
Lack of clarity on regulatory
approval for remittance of funds in
China
For transactions where credit support is provided by an onshore branch of the bank,
the support is denominated in CNY rather than USD (China COSCO, Hainan
Airlines). However, to eliminate the FX risk due to currency volatility, the
guarantee/SBLC addresses the potential shortfalls. Our understanding is that
Chinese banks have an annual limit for LCs; hence at inception, a CNY-denominated
SBLC does not require regulatory approval as long as it falls within the overall limit.
However, there is some ambiguity as to whether regulatory approval will be required
for the remittance of funds overseas in the event the need for support crystallises
(i.e., the guarantee/SBLC is invoked).
Regulatory risks appear lower for
credit support by an offshore
branch
For transactions where support is provided by an offshore branch, no regulatory
approval is required at inception, as the transaction would not fall under the foreign
guarantee quota of the support provider. Also, technically, there are no foreign
currency restrictions for the credit support provider to make payments if the issuer
fails to fulfil its obligation. That said, approval may be required if funds are moving
from onshore to the offshore branches. However, since onshore entities typically
have pre-approved limits for transferring funds to offshore branches, we do not see a
high regulatory risk from capital controls for satisfying the guarantee/SBLC.
Keep-well agreements for Chinese transactions
An onshore Chinese entity guaranteeing an offshore bond requires regulatory
approval; this is typically time-consuming and often difficult to obtain. The approval
process affects corporates issuing bonds through their offshore finance subsidiaries,
but does not impact the banks‟ leasing subsidiary bonds, which are guaranteed by
the offshore branches of the banks.
Zijin Mining, China Cosco and
Hainan Airlines have keep-well
agreements in their bonds
Hence, some corporate issuers (Zijin Mining, China COSCO and Hainan Airlines)
have used keep-well agreements between the parent (the onshore operating entity)
and the bond-issuing finance subsidiary (the offshore entity); this provides additional
comfort to bondholders. These agreements require that the parent maintain the
solvency of the offshore entity and also provide financial support in order to ensure
payments on the bonds (Figure 5). Since the finance subsidiary typically does not
have its own operating cash flow, we believe that SBLC-providing banks insist on
these keep-well agreements in order to demonstrate the parent entity‟s support to the
issuing entity (and thereby lower the risk of the SBLC being invoked).
7
Credit Alert
Keep-well agreements, although
weaker than a guarantee, provide
additional comfort to bondholders
We view keep-well agreements as being weaker than a guarantee, since
bondholders are not direct beneficiaries and do not enjoy access to the operating or
holding company‟s cash flow. Also, there is no legal precedence in China for the
enforcement of keep-well agreement, and this could lead to procedural and/or
regulatory challenges. That said, bond indentures for credit-supported transactions
typically include an event-of-default clause if a keep-well agreement is not in full
force. More importantly, since in a credit-supported transaction the final credit risk is
on the bank providing the guarantee/SBLC, we do not differentiate much between a
bond that is issued directly by a corporate and one that has a keep-well agreement.
That said, if a finance subsidiary were to issue SBLC-backed bonds without a keepwell agreement from the parent, market reception may not be as positive.
Figure 5: Key points in keep-well agreements
Parties to the agreement
ZIJMIN 16
Key points
Zijin International Finance Co. Ltd. (Issuer)
Zijin Mining Group Co. Ltd. (Parent)
-
COSHOL 22
COSCO Finance (2011) Ltd. (Issuer)
China COSCO Holdings Co. Ltd. (Parent)
-
HAIAIR 20
Hainan Airlines (HK) Co. Ltd. (Issuer)
Hainan Airlines Co. Ltd. (Parent)
-
To hold 100% of issuer
To maintain issuer net worth of at least HKD 1 and sufficient liquidity
to ensure timely payments on the bond
To use proceeds only for offshore purposes
To maintain issuer net worth of at least HKD 1 and sufficient liquidity
to ensure timely payments on the bond
To use proceeds only for offshore purposes
To maintain the solvency of the issuer and sufficient liquidity to
ensure timely payments on the bond
Pre-funding and final maturity of the bond
Most SBLC-backed bonds (except the CHRESO 17) require the issuer to pre-fund
the coupon and principal payments a few days in advance. This ensures that if the
issuer defaults on the coupon or principal payment, the SBLC bank is notified and will
step in to pay the required amount on the due date. In the case of guaranteed
transactions (of the leasing subsidiaries and third-party entities), no such pre-funding
arrangement exists.
The CHRESO 17 and the SUELIN 18
have acceleration clauses in case a
coupon payment is missed
Separately, the maturity date of the bonds may vary depending on the acceleration
clause in the bond. In the case of the CHRESO 17 and the SUELIN 18, if the issuer
fails to make a coupon payment, the bonds are accelerated and the bank pays off the
missed coupon and principal amount immediately. As the final maturity date of these
instruments could be variable, it creates re-investment risks for investors. In the case
of other SBLC-backed bonds like the ZIJMIN 16, COSHOL 17 and HAIAIR 20, if the
issuer defaults on a coupon, the bank will pay only the defaulted coupon and the
bonds continue until the original maturity date.
Ranking and cross default language
The bank guaranteed transactions (for leasing subsidiaries) clearly rank pari passu
with the guarantee providing a bank‟s other obligations. Hence, a number of market
participants assume that SBLC-backed bonds would rank equally with the other
obligations of the underlying bank. However, none of the SBLC-backed bonds have
clear and explicit language which ranks the SBLC obligation pari passu with other
unsecured obligations of the bank.
8
Credit Alert
Also, cross default language in the SBLC-backed bond can be unclear and open to
interpretation (both in the actual documentation for the credit supported deals and in
the credit support providers‟ own MTN program documents). For most of the bonds
(except the CHRESO 17), a default by the bank on its other debt (above a certain
limit) would trigger a default on the credit-supported bonds. However, a default on an
SBLC may not automatically trigger a cross default on the bank‟s other debt.
Investors should not assume that a
default on the SBLC will trigger a
cross default on the bank’s other
obligations
In the case of DBS, the bond documents explicitly state that it does not have a cross
default clause. In the case of KDB and the Bank of China, while there is a cross
default clause, we do not think it can be interpreted to cover SBLC obligations
(Figure 6). In the case of State Bank of India‟s bond documents, the clause is unclear
on whether it includes SBLCs and is therefore open to interpretation.
Given the untested nature of SBLC-backed transactions, we do not recommend that
investors assume that a default on the SBLC-backed bond will trigger a cross default
on the bank‟s other obligations.
Figure 6: Cross-default clauses in the bank’s bond documents
Cross default clause
Details
DBS
No cross default clause
Korea Development
Bank
“default on any External Indebtedness, and, as a result,
become obligated to pay an amount equal to or greater
than USD 10,000,000 in aggregate principal amount
prior to its due date”
Bank of China
State Bank of India
--
“External Indebtedness means any obligation for the
payment or repayment of money borrowed that is
denominated in a currency other than the currency of the
Republic.”
“Public External Indebtedness means any indebtedness of
the Bank, or any guarantee or indemnity by the Bank of
indebtedness, for money borrowed which, (i) is in the form of
“Any other present or future Public External
or represented by any bond, note, debenture, debenture
Indebtedness of the Bank or any of its Subsidiaries
stock, loan stock, certificate or other instrument which is, or
becomes due and payable prior to its stated maturity by
is capable of being listed, quoted or traded on any stock
reason of any default, event of default or the like”
exchange or in any securities market outside the People‟s
Republic of China; and (ii) has an original maturity of more
than 365 days”
“Indebtedness for Borrowed Money means (i) any
“any other present or future indebtedness for borrowed
indebtedness for or in respect of any notes, bonds,
money of the issuer becomes due and payable prior to
debentures, debenture stock, loan stock or other securities
its stated maturity otherwise than at the option of the
or (ii) any borrowed money or (iii) any liability under or in
issuer”
respect of any acceptance or acceptance credit”
Figure 7: Differences in SBLC structures
ZIJMIN 16
CHRESO 17
COSHOL 22
HAIAIR 20
SUELIN 18
Type of issuer
Financial
profile of
parent
Keep-well
agreement
Support
currency
SBLC
amount
SBLC
coverage
Pre-funding
date
Crossdefault
Governing
law
Finance
subsidiary of
corporate
Moderate
Yes
USD
USD
600mn
All coupon
+ principal
8 days
USD
25mn
English
Corporate
Moderate
No
USD
USD
405.8mn
1 coupon +
principal
Not
applicable
None
English, HK
Marginally
weak
Yes
CNY
CNY
equiv.
All coupon
+ principal
8 days
USD
25mn
English
Marginally
weak
Yes
CNY
CNY
equiv.
All coupon
+ principal
12 days
USD
25mn
English
Very weak
No
USD
USD
655mn
1 coupon +
principal
12 days
USD
25mn
English
Finance
subsidiary of
corporate
Finance
subsidiary of
corporate
Intermediate
holding
company
9
Credit Alert
Standalone financials of the issuer/guarantor
If the standalone financial profile of
an issuer is very weak, investors
demand a higher spread premium
A contentious issue in analysing these transactions is how much the underlying credit
quality of the issuer matters when determining spreads. Some market participants
believe that the standalone credit profile of the issuer is immaterial, since the ultimate
credit risk is that of the bank providing the guarantee or SBLC. However, we believe
that if the credit quality of an issuer is very weak or deteriorates significantly, spreads
could widen materially against the underlying bank.
While we do not officially cover the individual corporates, based on publicly available
financial information, we see the financial profile of Zijin Mining and China Resources
Cement as moderate and that of Doosan Infracore, China COSCO and Hainan
Airlines as marginally weak. On the other hand, Suzlon is in distress, having recently
defaulted on its convertible bonds. Hence, it trades much wider (in absolute spread
terms) than the bank providing the SBLC.
In the case of bank leasing subsidiaries, we do not believe the standalone financial
profile of the issuer is a major consideration given the strong business linkages
between the parent and the subsidiary.
Rating-agency treatment
Rating agencies make no
distinction between guarantees and
SBLC as long as the language is
strong
To date, all Asian credit-supported transactions have been rated on par with the
ratings of the bank providing the guarantee or SBLC. In order to achieve full credit
substitution for guaranteed transactions, the key factors that rating agencies consider
include the irrevocable and unconditional nature of the guarantee, the promise of full
and timely payment and the enforceability of the guarantee. In the case of SBLCs,
the support limit needs to be adequate to cover bond payments, the SBLC should
allow for drawdown well in time for the scheduled payments and the SBLC should be
enforceable.
To date, the deals where the credit support is provided by an SBLC have mostly
been rated by Moody‟s (except the HAIAIR 20, which is also rated by S&P). We
suspect that this was partly driven by the fact that Moody‟s assigns higher ratings to
the banks (that provide the credit support) compared with the other agencies. Based
on our discussions with S&P and Fitch, assuming the wording of the SBLC is robust,
the agencies will likely see limited differences between transactions in which credit
enhancement is provided through a guarantee and an SBLC. Hence, the ratings of
the transactions will typically be the same as those of a credit-support provider for
both SBLCs and financial guarantees.
Index eligibility
Only the ACIRC 17 and 22 are
included in the EMBI
The EMBI, CEMBI and JACI indices are the most widely followed among
benchmarked Asian credit investors. The EMBI includes only those bonds that are
issued/guaranteed by 100% government-owned entities. Among the bonds in our list,
only the ACIRC 17 and the ACIRC 22 are EMBI-eligible, and they should trade
tighter than bonds with similar structures/ratings that are not eligible for EMBI
inclusion. This is on account of the significant investment pool, which is benchmarked
against the EMBI and the absence of a large number of Asian corporate bonds that
are eligible for inclusion in the EMBI.
10
Credit Alert
The ICBC 21 and the BOCOM 23 are
eligible for CEMBI and JACI
Other leasing subsidiary transactions (ICBC 21 and BOCOM 23) are included in the
CEMBI and JACI Indices. Our understanding is that future transactions that involve a
bank providing a guarantee/SBLC to its own subsidiary will be eligible for inclusion in
the CEMBI and the JACI (subject to meeting minimum size and tenor requirements).
SBLCs to third-party entities are not
included in any index
However, the indices do not include bonds involving credit support to a third-party
entity. Hence, the DAEHIM 16, ZIJMIN 16, CHRESO 17, COSHOL 22, HAIAIR 20
and SUELIN 18 bonds are not included in the EMBI, CEMBI or JACI Indices (only the
DAEHIM 42 is included in the CEMBI). Hence, a number of real-money and other
benchmarked investors have chosen not to participate in these issues.
Other considerations
There are a few other considerations for investors to take into account:

Expected supply: The bulk of future supply is likely to be from Chinese banks.

To date, transactions from China have amounted to USD 5.1bn, compared with
USD 850mn for Korea, USD 400mn for Singapore and USD 647mn for India.
Bank of China has been the most prolific issuer, with three transactions totalling
30% of the deals outstanding. Therefore, transactions where the credit-support
provider is the Bank of China should trade at a slight concession to other names,
everything else being equal.
Nature of the investor base: Credit-support transactions in Asia cater primarily
to Asian investors. Participation from other jurisdictions is limited (less than 20%
of book size), except for deals that are EMBI-eligible such as the ACIRC 17 and
22. In terms of investor type, leasing-subsidiary transactions had strong
participation from asset managers, banks and insurance companies. On the
other hand, the involvement of private banks has been high (20-40%) in the case
of third-party transactions, given the incremental spread pick-up on offer. We
also highlight that the last two third-party transactions saw heavy involvement of
bank desks (41% for the HAIAIR 20 and 45% for the SUELIN 18; see Appendix
2 for detailed primary allocation data).
11
Credit Alert
Valuations
Approaches to valuing the transactions
The best approach is to add an
additional spread to the spread of
the credit-support provider
The valuation of credit-supported transactions is complex given (1) the difference in
ratings of the credit-support providers, (2) the diversity of underlying issuers (3) the
heterogeneity of structures and the difference in jurisdictions, and (4) the limited
history of these structures. We highlight two broad approaches to value the
transactions.

Spread of the credit-support provider plus additional spread: This approach
takes the spread of the credit-support provider and adds additional spread. Here,

the focus is on (1) the provider of the support, (2) the type of credit support
provided, (3) differences in structure, if any, and (4) the underlying credit quality
of the issuer (especially applicable if the issuer‟s financial profile is very weak).
Spread for the issuer minus spread for credit support: This approach takes
the spread that the issuer would achieve if it came to the market without a
guarantee, and subtracts a spread to reflect the benefit of the credit support.
However, this approach will be applicable only if investors are familiar with the
underlying credit risk or in a market where the ratings of credit-support providers
are under pressure. (For example, this is what happened in US and European
structured finance markets in the second half of the last decade, where
transactions wrapped by the same financial guarantor were trading at different
levels, depending on the type and quality of the underlying exposure.)
Given that the ratings for all existing transactions will track the ratings of the support
provider, the first approach is arguably the most suitable, in our view. We believe it is
better to analyse based on the spread multiple of the bond over the credit supportproviding bank. However, we acknowledge that a number of market participants also
look at the absolute spread differentials.
Guarantee to a bank subsidiary bond
Subsidiary-guaranteed bonds
should trade close to the parent’s,
due to the strong business linkages
Currently, there are four transactions where Chinese banks have provided
guarantees for bonds issued by their own leasing subsidiaries. We believe these
transactions are somewhat similar to corporate holding companies guaranteeing debt
issued by a subsidiary (e.g., PTTEP guaranteeing PTTEP Canada‟s bonds and
Reliance Industries guaranteeing Reliance Holding USA‟s bonds).
Since there are strong business linkages between the parent and the subsidiary, we
believe such transactions should trade very close to the parent‟s senior bonds
(similar to corporate subsidiary bonds, which are guaranteed by the parent). Hence,
even though the ICBC 21 and the ACIRC 17/22 have been issued by leasing
subsidiaries, they should trade almost like a senior bank bond. That said, since the
ACIRC 17/22 are included in the EMBI Index, their absolute spreads should probably
be tighter (and similar to a senior bond from China Development Bank).
Figure 8: Benchmarks for bank subsidiary transactions
Current
Z-spread (bps)
Benchmark senior bond
Current
spread diff.
(bps)
Historical
spread diff.
(bps)
Current
spread multiple
(x)
Historical
spread multiple
(x)
170
ICBC 17 (+20bps)
42
25 - 68
1.33
1.16 - 1.53
ACIRC 17
94
SINOPE 17 (-10bps)
(7)
(12) - 11
0.93
0.86 - 1.13
ACIRC 22
131
SINOPE 22 (-10bps)
0
(3) - 39
1.00
0.98 - 1.35
BOCOM 23
163
ICBC 17 (+50bps)
5
5 - 37
1.03
1.03 - 1.26
ICBC 21
12
Credit Alert
Leasing-subsidiary bonds should
trade 1.0-1.2x over the bank’s senior
bonds
One problem with analysing leasing-subsidiary bonds is that apart from the ICBC 17,
there is no other liquid senior Chinese bank paper. Hence, in Figure 8, we compare the
spread differentials of the individual bonds against the closest proxy. Corporate bonds
with similar structures (like Hyundai Motors and Reliance Industries) trade at close to 1x
the parent entity‟s. However, in the case of banks, leasing subsidiaries are not regulated
entities like the parent bank. This, combined with the weaker financial profiles of a bank‟s
leasing subsidiaries, makes us believe that their guaranteed bonds could trade at a
spread multiple of up to 1.2x over the underlying bank‟s senior bonds.
The ICBC 21 is our top pick
Figure 8 shows that the ICBC 21 trades at a much wider multiple of 1.31x. In fact,
currently, the ICBC 21 quotes almost flat to the longer-dated and two-notch-lowerrated BOCOM 23; we believe this is unwarranted. Hence, it is our top pick in the
space. On the other hand, we see the ACIRC 17 as trading a bit rich against the
SINOPE 17 while the ACIRC 22 is trading at fair levels.
Figure 9: Valuation argument for bank subsidiary transactions
View
ICBC 21
Cheap
ACIRC 17
Rich
ACIRC 22
Fair
Valuation rationale
We take the ICBC 17 and add 20bps for the extension in maturity. Currently, the ICBC 21 trades at a spread
multiple of 1.33x, which makes it look cheap.
We see the SINOPE 17/22 as the best comparable, since the Sinopec bonds are also included in the EMBI. While
bank senior paper could trade tighter to a comparable corporate, we believe the ACIRC 17/22 should trade
broadly flat to SINOPE 17/22 due to its slightly longer duration and its leasing-subsidiary status. Currently, the
ACIRC 17 is trading a bit rich versus the SINOPE 17 while the ACIRC 22 is trading fair.
Bank guarantee to a corporate bond
A bank guarantee to a corporate
should trade in the 1.3-1.5x range
Since guarantees to a third party are largely based on commercial considerations,
and do not necessarily have reputational or business implications, such transactions
should trade wider than parent-subsidiary guaranteed bonds. We believe 1.3-1.5x is
a fair range for these bonds, especially since these type of instruments will likely
remain scarce. The DAEHIM 16 quotes marginally wider than our fair-value range.
Transactions with proportional
credit commitment will likely remain
rare, in our view
The DAEHIM 42 is very different from the other transactions in the market. First,
there are multiple credit-support providers, but these are not jointly and severally
liable. Second, coupon payments are deferrable, albeit cumulative. Third and last,
the transaction has an investor put if the deal is not called in five years (if the put
option is not exercised, the coupon steps up by 500bps). Hence, it should trade at a
wider spread multiple of 1.5-1.8x against the underlying bank bond. Transactions of
this nature are likely to remain rare, in our view.
Figure 10: Benchmarks for guarantees to corporates and proportional credit commitment
Current
Z-spread (bps)
Benchmark bond
Current
spread diff.
(bps)
Historical
spread diff.
(bps)
Current
spread multiple
(x)
Historical
spread multiple
(x)
169
KDB 16N
59
(4) - 81
1.54
0.98 -2.20
HANABK 17N (+10bps)
68
46 - 123
1.47
1.30 - 2.07
DAEHIM 16
DAEHIM 42
214
13
Credit Alert
SBLCs to a corporate bond
In case of SBLCs, we think a further concession (over a guaranteed transaction) is
fair to address the perceived differences between guarantees and SBLCs. Also,
there are minor differences in various SBLCs that need to be factored into spreads.
Hence, we believe the spread pick-up will need to be c.1.5-1.8x, with the wider end of
the range applicable if the bank is rated lower, the issuer‟s credit profile is extremely
weak or the structure has weaknesses in terms of enforceability. As Figure 11 shows,
in the past, some of these transactions have traded at multiples of more than 2x.
However, given that all SBLCs to date have a reasonably strong structure, anything
more than 1.8x is unwarranted, in our view.
Figures 10 and 11 show that third-party credit-support transactions currently quote
c.1.5-1.7x over the comparable bank senior bond. While there appears little
differentiation, we believe investors should consider our fair-value range and the
differences in the SBLC structures (Figure 7) while analysing the space.
Taking these differences into account, we see the CHRESO 17 as slightly cheap and
the DAEHIM 42 as a bit rich and we provide the detailed rationale in Figure 12.
Figure 11: Benchmarks for SBLCs to a corporate
Current
Z-spread (bps)
Benchmark bond
Current
spread diff.
(bps)
Historical
spread diff.
(bps)
Current
spread multiple
(x)
Historical
spread multiple
(x)
ZIJMIN 16
154
BCHINA 16 (+10bps)
60
42 - 106
1.64
1.26 - 1.93
CHRESO 17
143
DBSSP 17
58
49 - 94
1.68
1.53 - 2.18
COSHOL 22
205
BCHINA 16 (+40bps)
81
41 - 108
1.65
1.28 - 1.93
HAIAIR 20
187
BCHINA 16 (+30bps)
73
63 - 130
1.64
1.51 - 2.13
SUELIN 18
394
SBIIN 17 (+10bps)
146
140 - 189
1.59
1.53 - 1.75
Figure 12: Valuation argument for third-party credit-support transactions
View
Valuation rationale
DAEHIM 16
Cheap
The DAEHIM 16 is the only transaction where a bank has provided an unconditional and irrevocable guarantee to
a corporate. Given the high ratings on the bond and the scarcity value, we believe it should trade 1.3-1.5x over
the KDB 16N. At current levels, we see the bond as trading slightly cheap.
DAEHIM 42
Rich
The DAEHIM 42 has a complicated structure, since it has multiple credit-support providers (who are not jointly
and severally liable), deferrable coupon payments (cumulative) and an investor put if the deal is not called in five
years. Its ratings are capped at the ratings of the weakest support provider (i.e., Woori Bank). Hence, it should
trade at a wider multiple versus the DAEHIM 16. Currently, the bond trades slightly rich.
ZIJMIN 16
Fair
Zijin Mining has a moderate financial profile, and the ZIJMIN 16 is the only Chinese transaction whose SBLC is
backed by an offshore bank branch. Hence, it should trade at a tighter multiple compared with the COSHOL 22
and the HAIAIR 20 bonds. Currently, it trades at fair levels.
CHRESO 17
Cheap
The bond is issued directly by a corporate, whose financial profile is moderate. However, the SBLC covers only
one interest payment, and the bond does not have a pre-funding arrangement. Also, while the bond does not
enjoy a cross-default clause on the bank, the high rating on the bond is a major comforting factor. Hence, in terms
of multiples, it should trade broadly in line with the ZIJMIN 16. At current levels, the bond is slightly cheap.
COSHOL 22
Fair
The issuer of the COSHOL 22 has a weak financial profile and is backed by an SBLC from an onshore branch of
Bank of China. Hence, we believe it should trade at a wider multiple than the ZIJMIN 16 and the CHRESO 17
bonds. Currently, the bond trades at fair levels.
HAIAIR 20
Fair
The issuer of the HAIAIR 20 has a weak financial profile and is backed by an SBLC from an onshore branch of
Bank of China. Hence, we believe it should trade at a wider multiple than the ZIJMIN 16 and the CHRESO 17.
Currently, the bond trades at fair levels.
SUELIN 18
Fair
We believe the SUELIN 18 bond should trade at a wider multiple than other SBLC-backed bonds due to the
distressed nature of the credit and the SBLC covering only one coupon payment. While the current spread
differential over the SBIIN 17 is in the lower end of the 1.5-1.8x range, the high absolute spread/yield on the bond
and the relative cheapness of the SBIIN 17 should keep the bond supported, in our view.
14
Credit Alert
Appendix 1 – Transaction summaries
Industrial and Commercial Bank of China Ltd.
ICBC 21
ICBC 21 versus ICBC 17
X-axis – Z-spread (bps), Y-axis – Multiple (x)
Issuer
Issuer country
Governing law
Size (USD mn)
Type of issuer
Primary business
Nature of support
Support provider
Bond rating
Sponsor rating
Keep well
Index eligibility
Skysea International Capital Management Ltd.
British Virgin Islands
English
750
Subsidiary
Leasing
Guarantee
ICBC - HK branch
A1/A/NR
A1/A/A
No
CEMBI, JACI
Others
- Cross-default at USD 30mn for issuer and at USD
30mn for guarantor bank
300
1.8
1.6
250
1.4
200
ICBC 21
1.2
1.0
150
0.8
100
0.6
ICBC 17
50
Multiple
0
Mar-12
0.4
0.2
0.0
May-12
Jul-12
Sep-12
Nov-12
Jan-13
Mar-13
Company profile
Industrial and Commercial Bank of China (ICBC) is China‟s largest bank, with total assets at end-September 2012 of CNY 17.4tn (USD 2.8tn) and an
estimated domestic-deposit market share of c.15%. Its strength has historically been the corporate sector (c.66% of end-June 2012 loans and 56% of H12012 revenue), although it offers a full suite of financial services. It operates through a network of over 16,500 domestic branches and outlets, and 240
overseas branches and offices in 34 countries. ICBC is primarily a domestic player, with 95% of its loans in China and domestic operations accounting for
over 95% of revenue. ICBC is 70.7% owned by the central government through Central Huijin Investment (35.4%) and the Ministry of Finance (35.3%).
China Development Bank Corp.
ACIRC 17/22
ACIRC 17/22 versus SINOPE 17/22 (Z-spread, bps)
Issuer
Issuer country
Governing law
Size (USD mn)
Type of issuer
Primary business
Nature of support
Support provider
Bond rating
Sponsor rating
Keep well
Index eligibility
Amber Circle Funding Ltd.
Cayman Islands
English
500 / 1000
Subsidiary
Leasing
Guarantee
CDB - HK branch
Aa3/AA-/NR
Aa3/AA-/A+
No
EMBI, JACI
Others
- Cross default at USD 50mn for issuer and at USD
175
ACIRC 22
150
SINOPE 22
125
SINOPE 17
100
75
30-Nov
ACIRC 17
21-Dec
11-Jan
1-Feb
22-Feb
15-Mar
5-Apr
Company profile
China Development Bank (CDB) is the largest of China‟s three policy banks and the only one to hold ministry-level status (the other two hold vice-ministry
status). CDB was set up in 1994 with the specific remit of providing long-term financing for infrastructure projects. At end-2011, CDB had total assets of
CNY 6.3tn (USD 993bn). In 2008, the bank was converted from a policy-oriented financial institution to a joint-stock company. However, the government
and government-related entities remain the sole shareholders through the Ministry of Finance (MoF, 50.18%), Central Huijin Investment (Huijin, 47.63%)
and the National Council for Social Security Fund (2.19%). CDB is unlikely to launch an IPO in the near future.
15
Credit Alert
Bank of Communications Co. Ltd.
BOCOM 23
BOCOM 23 versus ICBC 17
Issuer
Issuer country
Governing law
Size (USD mn)
Type of issuer
Primary business
Nature of support
Support provider
Bond rating
Sponsor rating
Keep well
Index eligibility
Azure Orbit Intl. Finance Ltd.
Cayman Islands
English
500
Subsidiary
Leasing
Guarantee
BOCOM- HK branch
A3/A-/NR
A3/A-/NR
No
CEMBI, JACI
Others
- Cross-default at USD 25mn for issuer and at USD
200
1.3
BOCOM 23
175
150
1.2
Multiple
125
1.1
ICBC 17
100
75
28-Feb
1.2
1.1
1.0
7-Mar
14-Mar
21-Mar
28-Mar
4-Apr
Company profile
Bank of Communications is the fifth-largest commercial bank in China based on total assets. The bank is headquartered in Shanghai, and as of
December 2011, it had 155 domestic branches and 2,637 outlets in 173 cities and 112 counties nationwide. The bank‟s principal lines of business are
corporate banking, retail banking and treasury operations.
16
Credit Alert
Doosan Infracore Co. Ltd.
DAEHIM 16
DAEHIM 16 versus KDB 16N
Issuer
Issuer country
Governing law
Size (USD mn)
Type of issuer
Primary business
Nature of support
Support provider
Bond rating
Sponsor rating
Keep well
Index eligibility
Others
Doosan Infracore Co. Ltd
Korea
English
350
Corporate
Construction equipment manufacturing
Guarantee
KDB
NR/A/NR
Aa3/A/AANo
No
- CoC put if Korea ceases to own 50% of KDB
- Cross-default at USD 15mn for issuer and at
USD 10mn for guarantor
DAEHIM 42
400
2.5
350
Multiple
DAEHIM 16
2.0
300
250
200
1.5
KDB 16N
1.0
150
100
0.5
50
0
Nov-11
0.0
Feb-12
May-12
Aug-12
Nov-12
Feb-13
DAEHIM 42 versus HANABK 17N
Issuer
Issuer country
Governing law
Size (USD mn)
Type of issuer
Primary business
Nature of support
Support provider
Bond rating
Sponsor rating
Keep well
Index eligibility
Others
Doosan Infracore Co. Ltd
Korea
New York, HK
500
Corporate
Construction equipment manufacturing
Proportional lines of credit
KDB (40%), Woori (40%), Hana (20%)
NR/NR/AAa3/A/AANo
No
- Coupon deferral (cumulative) if no distribution
/buyback on junior obligations in past six months
- Coupon step-up - 5% in year 5, 7% in year 7
- Issuer call option in year 5 and every distribution
date thereafter
- Investor put in year 5, if bonds not called
Company profile
Doosan Infracore Co. Ltd. (Doosan), incorporated in Korea, is one of the
largest construction equipment and machine tool manufacturers in the world.
As of June 2012, it had a network of 22 manufacturing plants and 61
overseas branches and offices in 25 countries. Its product portfolio comprises
heavy and compact construction equipment, machine tools, engines and
materials. It began operations in 1937 as Chosun Machine Works, and
expanded overseas during the 1990s. In 2009, it acquired global companies
such as Bobcat Company from Ingersoll Rand Company Ltd., and Moxy
Engineering AS from the Thompson Group. The company was listed on the
Korea Exchange in February 2001 and changed its name to Doosan
Infracore Co. Ltd. in April 2005. It is currently 44.8% owned by Doosan
Heavy Industries & Construction Corp., which, in turn, is 41.3% owned by
Doosan Corp.
300
2.0
DAEHIM 42
1.8
250
1.6
1.4
200
1.2
150
HANABK 17N
1.0
0.8
100
0.6
0.4
50
0
Sep-12
Multiple
0.2
0.0
Oct-12
Nov-12
Dec-12
Jan-13
Feb-13
Mar-13
Financial profile
(KRW bn)
Revenue
EBITDA
Net income
Total assets
Total debt
Net debt
Net operating cash flow
Capex and investments
Free cash flow
Total debt/total capital (%)
Total debt/EBITDA (x)
EBITDA interest cover (x)
2010
3,880
614
190
4,915
2,112
2,048
830
(129)
701
59.6
3.4
4.2
2011
4,427
457
314
5,845
2,651
2,489
112
(155)
(43)
61.1
5.8
3.8
2012
4,244
161
(121)
6,764
3,546
3,403
(287)
(243)
(530)
62.3
22.0
1.1
17
Credit Alert
Zijin Mining Group Co. Ltd.
ZIJMIN 16
ZIJMIN 16 versus BCHINA 16
Issuer
Issuer country
Governing law
Size (USD mn)
Type of issuer
Primary business
Nature of support
Support provider
Bond rating
Sponsor rating
Support currency
Support limit
Keep well
Index eligibility
Others
Zijin International Finance Company Ltd.
Hong Kong
English
480
Corporate subsidiary
Gold and non-ferrous mining
SBLC
Bank of China - Paris branch
A1/NR/NR
A1/A/A
USD
USD 600mn
Yes (with parent, Zijin Mining Group Co. Ltd.)
No
- Required to maintain ratings from one agency
- Cross default at USD 10mn for issuer/parent and
at USD 25mn for LC bank
Company profile
350
2.0
ZIJMIN 16
300
Multiple
1.6
250
1.2
200
150
BCHINA 16
0.8
100
0.4
50
0
Jan-12 Mar-12 May-12
0.0
Jul-12
Sep-12 Nov-12 Jan-13 Mar-13
Financial profile
Zijin Mining Group Co. Ltd. (Zijin) is a large state-owned mining group
headquartered in the Fujian province of China. It is the largest gold
producer (9.5% share), the second-largest copper producer, and an
important producer of zinc, tungsten and iron ore in the country. In the past
few years, it has also invested in overseas assets in countries such as
Mongolia, Russia, Tajikistan, Peru and Australia. Zijin was listed in Hong
Kong in December 2003 and in Shanghai in April 2008. Currently, Zijin is
c.29.1% owned by Minxi Xinghang State-Owned Assets Investment
Company Ltd.
(HKD mn)
Revenue
EBITDA
Net income
Total assets
Total debt
Net debt
Free cash flow
Total debt/Total capital (%)
2010
28,187
8,636
4,828
38,401
7,446
3,594
5,189
(7,373)
(2,184)
22.2
0.9
27.6
2011
39,382
10,732
5,713
52,320
9,368
4,578
5,192
(9,123)
(3,930)
23.7
0.9
21.6
2012
47,874
10,659
5,211
67,354
23,413
15,939
3,641
(7,996)
(4,355)
41.1
2.2
13.8
China Resources Cement Holdings Ltd.
CHRESO 17
CHRESO 17 versus DBSSP 17
Issuer
Issuer country
Governing law
Size (USD mn)
Type of issuer
Primary business
Nature of support
Support provider
Bond rating
Sponsor rating
Support currency
Support limit
Keep well
Index eligibility
Others
China Resources Cement Holdings Ltd.
Cayman Islands
English for bonds, Hong Kong for LC
400
Corporate
Cement manufacturing
SBLC
DBS Bank - HK branch
Aa1/NR/NR
Aa1/AA-/AAUSD
USD 405.8mn
No
No
- EOD if CR Holdings ceases to be the largest
shareholder of the issuer or if the central
government ceases to own at least 50% of CR
Holdings
- Cross-acceleration at HKD 250mn for issuer
Company profile
China Resources Cement Holdings Ltd. (CR Cement) is a leading cement
and concrete producer in China. As of June 2012, it had total clinker
production capacity of 50.2mt, cement grinding capacity of 73.9mt and
concrete production capacity of 33.2mcm. CR Cement sells its cement
under the Runfeng, Hongshuihe and Haidao trademarks, and has strong
market positions in Guangdong, Guangxi, Fujian, Hainan, Shanxi, Yunnan
and Hong Kong. The company is 73.3% owned by China Resources
(Holdings) Co. Ltd. (CRH), a conglomerate that is ultimately owned by
China‟s State Council through China Resources National Corporation.
180
2.5
CHRESO 17
160
2.0
140
120
1.5
100
80
DBSSP 17
1.0
60
40
0.5
Multiple
20
0
Oct-12
0.0
Nov-12
Dec-12
Jan-13
Feb-13
Mar-13
Apr-13
Financial profile
(HKD mn)
Revenue
EBITDA
Net income
Total assets
Total debt
Net debt
Free cash flow
2010
14,142
3,308
2,041
35,328
13,243
9,128
3,194
(7,815)
(4,622)
46.5
4.0
12.3
2011
23,240
6,219
4,179
50,458
21,416
17,679
5,221
(7,381)
(2,159)
51.8
3.4
9.3
2012
25,345
5,170
2,324
52,159
22,209
18,647
NA
NA
NA
50.3
4.3
6.2
18
Credit Alert
China COSCO Holdings Co. Ltd.
COSHOL 22
COSHOL 22 versus BCHINA 16
Issuer
Issuer country
Governing law
Size (USD mn)
Type of issuer
Primary business
Nature of support
Support provider
Bond rating
Sponsor rating
Support currency
Support limit
Keep well
Index eligibility
Others
COSCO Finance (2011) Ltd.
British Virgin Islands
English
1,000
Container shipping
SBLC
Bank of China – Beijing branch
A1/NR/NR
A1/A/A
CNY
CNY equiv. of principal + coupon + expense
Yes (with China COSCO Holdings Co. Ltd.)
No
- CoC put if the SASAC ceases to own more than
50% of the company
- Cross-acceleration at USD 100mn for
issuer/parent and at USD 25mn for LC bank
Company profile
250
2.5
COSHOL 22
210
2.0
170
1.5
Multiple
130
90
1.0
0.5
BCHINA 16
50
27-Nov
0.0
18-Dec
08-Jan
29-Jan
19-Feb
12-Mar
02-Apr
Financial profile
China COSCO Holdings Co. Ltd. (China COSCO) was established in 2005
as the listed flagship subsidiary of the COSCO Group. It offers container
shipping, dry bulk shipping, logistics services and terminal and container
leasing services. As of June 2012, it had the world‟s fourth-largest
container capacity (166 vessels with a capacity of 741,687 TEUs) and the
world‟s largest bulk cargo fleet (357 vessels with a capacity of 32.4mn
DWT). It also has a 42.7% stake in COSCO Pacific, which is the world‟s
fifth-largest container terminal operator (95 berths in 19 ports). China
COSCO is headquartered in Beijing and is listed in Hong Kong and
Shanghai. It is 52.8% owned by COSCO Group, which is 100% owned by
the SASAC.
(CNY mn)
Revenue
EBITDA
Net income
Total assets
Total debt
Net debt
Free cash flow
Total debt/Total capital (%)
2010
96,488
9,956
6,785
150,982
61,628
14,945
10,535
(8,504)
2,031
49.7
6.2
7.8
2011
84,639
(8,725)
(10,495)
157,459
78,409
31,446
(5,427)
(8,565)
(13,992)
61.0
(9.0)
(5.2)
9M-12
53,376
NA
(6,403)
159,708
82,141
41,426
(5,860)
(7,738)
(13,599)
64.7
NA
NA
Hainan Airlines Co. Ltd.
HAIAIR 20
HAIAIR 20 versus BCHINA 16
Issuer
Issuer country
Governing law
Size (USD mn)
Type of issuer
Primary business
Nature of support
Support provider
Bond rating
Sponsor rating
Support currency
Support limit
Keep well
Index eligibility
Others
Hainan Airlines (HK) Co. Ltd.
Hong Kong
English
500
Airline
SBLC
Bank of China - Hainan branch
A1/A/NR
A1/A/A
CNY
CNY equiv. of principal + coupon + expense
Yes (with parent, Hainan Airlines Co. Ltd.)
No
- Cross-default at USD 20mn for issuer/parent,
cross-acceleration at USD 25mn for LC bank
Company profile
Hainan Airlines Co. Ltd. (Hainan Airlines) is a leading provider of air
passenger and air cargo services in China. In 2011, it was the fourthlargest airline in China in terms of fleet size, passengers carried and
revenue, and as of 31 October 2012, it operated a fleet of 112 aircraft. It
provides domestic, regional and international services using a hub and
spoke strategy on 562 routes to 92 cities (69 domestic and 23
international) in 17 countries. In 2011, the company carried approximately
20.5mn passengers and had revenue passenger kilometres of 35.7bn. It is
headquartered in Haikou and is 29.06% owned by Grand China Air Co.
Ltd.
250
2.5
HAIAIR 20
200
150
2.0
1.5
Multiple
100
1.0
BCHINA 16
50
0.5
0
0.0
4-Feb 11-Feb 18-Feb 25-Feb 4-Mar 11-Mar 18-Mar 25-Mar 1-Apr
Financial profile
(CNY mn)
Revenue
EBITDA
Net income
Total assets
Total debt
Net debt
Free cash flow
2010
21,079
6,511
3,014
71,553
50,250
33,570
4,373
(4,665)
(292)
78.9
7.7
3.2
2011
25,470
6,373
2,631
81,297
58,413
39,352
3,546
(7,951)
(4,405)
80.0
9.2
2.3
2012
27,992
6,425
1,928
92,719
58,236
35,924
7,014
(8,261)
(1,247)
70.9
9.1
2.0
19
Credit Alert
AE-Rotor Holding B.V.
SUELIN 18
SUELIN 18 versus SBIIN 17
X-axis – Z-spread (bps)
Issuer
Issuer country
Governing law
Size (USD mn)
Type of issuer
Primary business
Nature of support
Support provider
Bond rating
Sponsor rating
Support currency
Support limit
Keep well
Index eligibility
Others
AE-Rotor Holding B.V.
Netherlands
English
647
Intermediate holding company for a corporate
Wind turbine generators
SBLC
State Bank of India
Baa2/NR/NR
Baa2/BBB-/BBBUSD
USD 655mn
No
No
- Cross-acceleration at USD 25mn for LC bank
450
SUELIN 18
400
350
300
250
SBIIN 17
200
27-Mar 29-Mar 31-Mar
02-Apr
04-Apr
06-Apr
08-Apr
10-Apr
Company profile
AE-Rotor Holding B.V. (AE-Rotor) is an intermediate holding company of the Suzlon Energy Ltd. group and holds all its international assets. Its
key asset is REpower, which is one of the leading manufacturers of wind turbine generators (WTGs). In 2011, REpower was the third-largest
manufacturer of WTGs in Germany and the UK, and the second in France and Italy. It also has a sizeable presence in North America and
Australia. In FY12, REpower installed 435 WTGs with a total output of 1,077MW. As of February 2013, REpower‟s order backlog of 3,832MW
was valued at c.EUR 4.2bn. AE-Rotor is also the holding company of various non- Indian R&D and marketing entities of the parent company.
20
Credit Alert
Appendix 2 – Allocation profile of new issuance
New-issue allocation profile by geography
100%
Guarantee to corp.
SBLC to corporate
Others
80%
60%
40%
20%
US
Europe
DAEHIM '42
SUELIN 18
HAIAIR 20
CHRESO 17
COSHOL 22
*ZIJMIN 16
DAEHIM 16
BOCOM 23
ACIRC 22
ACIRC 17
ICBC 21
0%
Asia**
*Tap, **includes a small amount of Middle East participation; Source: Standard Chartered Research
New-issue allocation profile by investor type
100%
Guarantee to corp.
SBLC to corporate
Others
80%
60%
40%
20%
AM/HF
Banks
Insurance/Pension
DAEHIM 42
SUELIN 18
HAIAIR 20
CHRESO 17
COSHOL 22
*ZIJMIN 16
DAEHIM 16
BOCOM 23
ACIRC 22
ACIRC 17
ICBC 21
0%
Retail/PB
*Tap; Source: Standard Chartered Research
21
Credit Alert
Appendix 3 – Checklist for investors
Below is a brief list of high-level questions that investors should keep in mind when
looking at these types of transactions.
Credit-support provider



How strong is the entity that provides the credit support?
Is the credit-support provider an onshore or offshore entity? Could there be any
currency-convertibility issues?
What is the relationship between the credit-support provider and the issuer?
Credit support











What is the nature of the credit support (guarantee, SBLC)?
Is the credit support irrevocable and unconditional?
Is the credit support sufficient to cover the timely payment of the transaction‟s
interest and principal?
Does the bond accelerate in case the issuer defaults on coupon payments? (i.e.,
the SBLC bank pays the defaulted coupon and principal amounts immediately)
Does the tenor of the credit support match the maturity of the bonds? Is there an
expiration date for the credit support?
In which currency is the credit support provided, and how are the currency
mismatch issues (if any) addressed?
Is a pre-funding arrangement in place (in the case of SBLCs) for the bondholders
to receive their payments on time?
Do the bonds have a cross-default clause in case of default on other obligations
by the issuer and/or the credit-support providing bank?
What is the governing law for the transaction?
Would insolvency of the issuer affect the enforceability of the credit support?
Who are the intermediaries (such as the principal payment agent) in the
transaction, and what is their credit quality? Also, what are the obligations of the
various parties?
Issuer


What is the credit quality of the underlying issuer?
In the absence of credit support, how would the issuer be rated, and at what
level should it trade?
22
Credit Alert
Disclosures Appendix
Recommendations structure
Issuer –
Credit outlook
Standard Chartered terminology
Impact
Definition
Positive
Stable
Negative
Improve
Remain stable
Deteriorate
We expect the fundamental credit profile of the
issuer to <Impact> over the next 12 months
Standard Chartered Research offers trade ideas with outright Buy or Sell recommendations on bonds as well as pair trade recommendations
among bonds and/or CDS. In Trading Recommendations/Ideas/Notes, the time horizon is dependent on prevailing market conditions and may
or may not include price targets.
Credit trend distribution (as of 03 April 2013)
Coverage total (IB%)
Positive
Stable
Negative
Total (IB%)
Credit trend history (past 12 months)
Company
-
9 (0.0%)
189 (25.5%)
81 (30.5%)
279 (26.2%)
Date
Credit outlook
-
-
Please see the individual company reports for credit trend history
Regulatory Disclosure:
Subject companies: Industrial and Commercial Bank of China Ltd., China Development Bank Corp., Bank of Communications Co. Ltd., Doosan Infracore
Co. Ltd., Korea Development Bank, Zijin Mining Group Co. Ltd., Bank of China, China Resources Cement Holdings Ltd., DBS Bank, China COSCO
Holdings Co. Ltd., Hainan Airlines Co. Ltd., AE-Rotor Holding B.V., State Bank of India
Standard Chartered Bank and/or its affiliates have received compensation for the provision of investment banking or financial advisory services within the past one
year: Industrial and Commercial Bank of China Ltd., Korea Development Bank
SCB makes a market in securities issued by this company: Industrial and Commercial Bank of China Ltd., Zijin Mining Group Co. Ltd., Bank of China, China
COSCO Holdings Co. Ltd.
23
Credit Alert
attributed to the research analyst or analysts in the research report accurately reflect their personal opinion(s) about the subject securities and issuers and/or other
subject matter as appropriate; and, (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views
contained in this research report. On a general basis, the efficacy of recommendations is a factor in the performance appraisals of analysts.
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regarding this document or any information contained or referred to on the document. The information in this document is provided for information purposes only. It
does not constitute any offer, recommendation or solicitation to any person to enter into any transaction or adopt any hedging, trading or investment strategy, nor
does it constitute any prediction of likely future movements in rates or prices, or represent that any such future movements will not exceed those shown in any
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this price. While all reasonable care has been taken in preparing this document, no responsibility or liability is accepted for errors of fact or for any opinion expressed
herein. The contents of this document may not be suitable for all investors as it has not been prepared with regard to the specific investment objectives or financial
situation of any particular person. Any investments discussed may not be suitable for all investors. Users of this document should seek professional advice regarding
the appropriateness of investing in any securities, financial instruments or investment strategies referred to on this document and should understand that statements
regarding future prospects may not be realised. Opinions, forecasts, assumptions, estimates, derived valuations, projections and price target(s), if any, contained in
this document are as of the date indicated and are subject to change at any time without prior notice. Our recommendations are under constant review. The value
and income of any of the securities or financial instruments mentioned in this document can fall as well as rise and an investor may get back less than invested.
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on a reasonable basis the information and opinions contained herein, there may be regulatory, compliance or other reasons that prevent us from doing so.
Accordingly, information may be available to us which is not reflected in this material, and we may have acted upon or used the information prior to or immediately
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EXEMPTION UNDER THE U.S. FEDERAL AND STATE SECURITIES LAWS NOR DO WE OFFER OR SELL SECURITIES TO U.S. PERSONS UNLESS (i) WE,
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information contained herein is the property of Standard Chartered Bank and/or its affiliates, and may not be reproduced, redistributed, amended, modified, adapted,
transmitted in any way without the prior written permission of Standard Chartered Bank.
Document approved by
Data available as of
Document is released at
Kaushik Rudra
Global Head of Credit Research
03:15 GMT 12 April 2013
03:15 GMT 12 April 2013
24

Credit-supported transactions and how to value them Global Research Credit Alert |

Transcription

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