IFR-China corporate bonds hop on the fast track

(The following story was in IFR Asia magazine, a Thomson Reuters publication, on April 2.)

By Carrie Hong and Steve Garton

HONG KONG, April 2 (IFR) - Shanghai International Port Group, China's biggest port operator, set a landmark in the country's corporate bond market last week with the first deal under a new fast-track system.

SIPG sold a Rmb5bn (US$750m) five-year non-put three corporate bond at 4.69%, towards the middle of guidance of 4.50%-5.0%, last Wednesday. The deal has an AAA rating and Guotai Junan as lead.

It is the first deal to be approved via a new China Securities Regulatory Commission "green channel" taking only a week to secure the nod from the regulator - far less than the period of at least one to two months it took in the past.

Besides the notable improvement in efficiency, SIPG's deal offers an encouraging sign that the reforms are helping reduce pricing for corporate issuers. The 4.69% coupon turned out to be much lower than many had expected, coming in almost 20bp lower than the NAFMII guidance for Triple A rated three-year MTNs issued in the same week.

"Given the fact that the deal is unsecured and not sold via auction, thus massive insurance capitals can't participate, I would say it is a bit surprising it got such high demand," said an analyst from Shenyin Wanguo, who had given a 4.77%-4.82% estimate on the deal before pricing.

"I thought the coupon would at least step up like 5bp-7bp. After all, we are shut out of the door and many banks do not have Exchange Market trading accounts," an insurance company asset manager commented.

The "green channel" is one of a number of innovations the CSRC introduced in late 2010 to stimulate the corporate bonds market. It aims to shorten the approval process for issuers with net capital above Rmb10bn and a AAA rating.

According to Guotai Junan, the buyers were mainly funds and securities houses. "I guess the fact that the market is currently lacking unsecured, high-rated and qualified short-tenor corporate bonds may have helped." said Xia Yang, a debt capital markets banker at Guotai Junan. According to Xia, Guotai's own estimate had been set around 4.70%-4.75%, and the strong response to the deal made their day.

HUGE POTENTIAL

Bankers believe SIPG's deal shows the enormous potential for growth of unsecured corporate bonds.

According to domestic financial data provider Wind, a total of Rmb359.7bn was issued through enterprise bonds in 2010, while corporate bonds raised a mere Rmb51.1bn. The numbers for MTNs and CPs were higher again, at Rmb689.2bn and Rmb495.9bn, respectively.

CSRC, at the end of last year, finally agreed to let commercial banks resume investing in bonds listed on the stock exchanges after a 13-year absence. Last Tuesday, the Shanghai Stock Exchange announced commercial banks would be able to trade bonds on the bourse using the securities houses' spots, paving the way for their participation. The move has been seen as an important step in developing the corporate bond market.

The regulator's moves have raised issuers' enthusiasm for corporate bonds. At least four listed companies recently announced plans to issue.

Hong Kong- and Shanghai-listed Anhui Conch Cement intends to launch dual-tranche corporate bonds of up to Rmb9.5bn, while Hainan Airlines has received approval from shareholders to issue corporate bonds of up to Rmb5bn. Elsewhere, Liuzhou Iron & Steel and Shanghai Chaori Solar Energy Science & Technology are also planning to issue corporate bonds of Rmb2bn and Rmb1bn, respectively.

A banker said the CSRC decision to separate approvals for bond issuances from IPOs and share placements would make a big difference for the corporate bond market.

"The latter requires a very complicated verifying process, which is quite well known to be time -consuming and not necessary for bond issuers," the banker said.

The CSRC is responsible for supervising corporate bond issuances and is in charge of bonds issued on stock exchanges, while the National Development and Reform Commission and China Banking Regulatory Commission, respectively, regulate the enterprise bonds and the inter-bank market.