Will SBLCs open up new financing avenues for real estate companies?

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From the left; Vivian Lam, Chen Jun

Three major offshore bonds issued under Standby Letters of Credit (SBLC) this year, totaling $700 million, caught people’s attention, and pundits waited to see if they signaled a fresh start in sector funding .

In the first four months of this year, Greentown China Holdings, Excellent Business Management and Sino-Ocean Land Treasure IV issued three-year SBLC bonds.

Greentown China, which is 24.1% owned by major shareholder and state-owned company CCCG Holdings, took the lead in January this year with its $400 million SBLC bond issue.

Two industry colleagues followed suit. Excellent Business Management, a wholly owned subsidiary of Excellence Group, has issued $100 million in SBLC bonds. Although the coupon was only 2.91%, investors showed great interest and it was 1.7 times oversubscribed.

The most recent SBLC bond issuance was the $200 million 3.8% credit-enhancing green debt instrument maturing in 2025 for Sino-Ocean Land Treasure IV, a subsidiary of real estate developer Sino-Ocean Group.

An SBLC is a legal document whereby a bank guarantees payment upon the issuance of bonds. Paul Hastings has advised Sino-Ocean Land Treasure IV on English and Hong Kong laws, with corporate partner Vivian Lam leading the team.

Lam agreed that Chinese real estate companies would be more likely to use SBLC-backed transactions as a credit-enhanced method of fundraising due to their ease of recourse and clear drawdown conditions.

“In the event of an issuer default, this is [SBLC] gives bondholders a high level of assurance that they can claim payment directly from the issuing bank that made the commitments, under the terms set out in the SBLC,” said Lam.

However, the three SBLC bonds were all backed by Zheshang Bank, which is less well-known compared to state-owned banks or larger equity trading banks.

Zhang Shuncheng, deputy director of corporate research in China at Fitch Ratings, believed that only real estate companies with less debt and high-quality mortgage investments would use this issuance model. Rather than determine whether or not foreign SBLC bonds will increase funding, he was more bullish on domestic issuance by real estate companies in the near term.

Zhang said the sudden default on some real estate companies’ US debt has seriously shaken investor confidence. Foreign bond issuance from such sectors was low from the fourth quarter of last year to the first quarter of this year. As the RMB weakens in contrast to overseas yields, real estate companies have turned their backs on domestic bond issuance for investment vehicles.

“Due to the moderately loose market policy since the beginning of the year, the coupon ratio of domestic bonds from state real estate companies has generally fallen compared to the previous year. Therefore, we believe domestic bond issuance will increase steadily in the short term,” he said.

In the first four months of this year, the total issuance of domestic securities showed an upward trend, reaching a peak in the third month.

Chen Jun, a managing partner at the urban development law firm, said inquiries and tenders for new business from real estate companies and the resumption of existing business have been active recently.

He has suggested that law firms should ensure that the real estate company’s credit rating is good and its finances are stable before advising, as well as avoiding high-risk projects such as the highest-priced bid, third- and fourth-level projects, affordable housing, and shantytown reform projects.

Noting that real estate companies are in a debt recovery phase, Chen said, “We can give green bonds proper attention and use the proceeds to replace the expensive debt incurred by green projects under construction.”

In response to the sluggish real estate market, the regulator has issued several positive signals this year and streamlined real estate market regulatory policies, indirectly encouraging domestic bond issuance.

However, Zhang disagreed with a significant drop in investor confidence as most domestic issuers have so far been state-owned real estate companies, which are less dependent on the bond market with stable finances and diversified funding channels.

With some private real estate companies still blocked from accessing bond financing, he doesn’t expect Chinese real estate companies to surge significantly to close deals.

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