BE Commentary: New bond issues offering higher yields

• OCBC Bank announced the issuance of an AT1 SGD subordinated notes at a final price guidance of 3.90%.

• Credit Suisse found guilty of failing to prevent money-laundering relating to a Bulgarian drug ring and faced a fine of CHF 2m.

• United Overseas Bank announced that the bank will be issuing a SGD NC5.25 perpetual notes at 4.25% FPG.

• Moody's downgraded Country Garden's rating from Baa3 to Ba1, with a negative outlook.

• Shimao announced that the company has missed payment of its SHIMAO 4.750% 03Jul2022 Corp (USD) on the debt repayment date.

June saw the highest volume of issuances this year. The main bulk of the issuances are bank capital instruments including additional tier 1 (“AT1”) and tier 2 (“T2”) bonds from OCBC, UOB, HSBC, ABN AMRO and Barclays.  

There was only 1 non-bank corporate issuance coming from ESR-Logos REIT, which priced a 5.500% SGD perpetual bond with a total issue size of SGD 150m. June saw interest from investors for newly issued bonds from OCBC and UOB.

Table 1: Top traded bonds on SG Bond Express for June

Table 2: New additions to Bond Express for June

OCBC Bank

OCBC Bank (“OCBC”) announced the bank will be issuing AT1 SGD subordinated notes at a final price guidance (“FPG”) of 3.90%. The AT1 notes will not be callable for 5 years, after which it will have a call date on the 5th year. If not called, the notes will reset at the prevailing 5Y SORA-OIS plus the initial spread of 1.416%. The new issue qualifies as additional tier 1 (“AT1”) capital of the issuer and entails certain loss absorption features.

The issuer is rated Aa1 (Stable) by Moody’s, AA- (stable) by S&P and AA- (Stable) by Fitch. As the notes will be subordinated, the expected rating for the AT1 notes will be Baa1 (Moody’s), BBB- (S&P) and BBB+ (Fitch).

Investors who are interested may refer to our new issue view on OCBC – “OCBC announces NC5 SGD AT1 notes at 4.25% IPG”.

Credit Suisse Group AG

Credit Suisse was caught in yet another scandal as the Switzerland Federal Criminal Court found Credit Suisse guilty of failing to prevent money-laundering relating to a Bulgarian drug ring. The bank faced a fine of CHF 2m and confiscation of assets worth more than CHF 31m, the amount related to the accounts of the drug gang held at Credit Suisse. The court also imposed a fine and convicted a former Credit Suisse employee a suspended 20-month prison sentence.

Throughout 2020 to 2021, Credit Suisse was marred by various scandals like the Archegos and Greensill Capital collapse. Credit Suisse came out to announce that the bank will appeal the decision by the Switzerland Federal Criminal Court.   

Regarding Credit Suisse’s solvency, we remain positive on the capitalisation of the bank. CET1 ratio for 1Q22 is 13.8% (vs 12.2% in 1Q21), which remains well above regulatory requirements while liquidity coverage ratio was 196% in 1Q22, demonstrating a continued conservative liquidity position. However, we do note the amount of controversies regarding to risk management and money laundering faced by Credit Suisse within the past few years which will cause bond prices of Credit Suisse bonds to be volatile.

United Overseas Bank

United Overseas Bank (“UOB”) announced that the bank will be issuing a SGD NC5.25 perpetual notes at 4.25% FPG. United Overseas Bank Limited (“UOB”) is a leading bank in Asia with a well-established global presence and understanding of Asian markets. Headquartered in Singapore, the bank has over 500 branches and offices in 19 countries and territories across Asia Pacific, Europe and North America. It is rated Aa1 (stable) / AA- (stable) / AA- (negative) by Moody’s/S&P/Fitch respectively.

Proceeds from the new issue will be used for refinancing and general corporate purposes. The additional tier 1 (“AT1”) subordinated bond has an expected issue rating of Baa1/BBB-/BBB+ by Moody’s/S&P/Fitch respectively. The coupon is fixed at 4.25%, and it is first resettable on 4 October 2027 at the 5-year SORA-OIS plus initial spread of 1.47%. Distribution payments may be deferred, and such unpaid distributions are non-cumulative and do not accrue interest.

Investors who are interested may refer to our new issue view on OCBC – “UOB announces SGD PerpNC5.25 notes at 4.25% FPG”.

Country Garden Holdings Co Ltd

On the operating side, the Group’s attributable contracted sales from January to June this year were RMB 185.1 billion, down by 38.9% YoY. The sales decline rate was much smaller than the peers.

Given the loosening policies in Chinese real estate, we still expect the Group can generate over RMB 400 billion attributable contracted sales this year. The property sales and cash collection would become the key factors to support the Group’s liquidity and repayment ability.

As of end December 2021, the Group’s net gearing ratio decreased further to 45.4%, its adjusted liability to asset ratio was also improved to 75.7% and the cash to short-term debt improved to 2.5 times. The management expressed that the Group will be upgraded from “yellow light” to “green light” under the Three Red Lines requirements by the end of June 2023. This implies that the Group’s adjusted liability to asset ratio would decrease further to below 70%.

Even if we exclude the restricted cash and regulatory pre-sales proceeds, the adjusted cash to short-term debt was still 1.3 times, reflecting its good short-term liquidity.

The Group’s off-balanced sheet debt indicators are very nice, given low difference between consolidated ratios (3%), high contracted liabilities to attributable contracted sales (141%) and high positive return on JVs and associates (7.4%) in 2021.

While the market is concerning the refinancing ability of non-stated owned developers, the Group is still able to do refinancing either in onshore or offshore markets, such as issuing an RMB 1.5 billion offshore bonds (RMB 1 billion in December 2021 and RMB 500 million in May 2022), RMB 1.53 billion asset backed securities this year and HKD 3.9 billion convertible bond. The Group also secured a loan facility of RMB 55 billion with China Merchants Bank and Agricultural Bank of China in March 2022.

It is emphasized that the issuance of onshore bonds in the onshore market require approvals from regulatory authorities. As such, we can see that the regulatory authorities, banks and the capital market have a greater confidence in the Group’s credit profile.

On 23 June, the rating agency, Moody's, downgraded Country Garden's rating from Baa3 to Ba1, with a negative outlook, while other rating agencies, S&P and Fitch, did not follow the downgrade, i.e. BB+ / BBB- (S&P / Fitch).

We believe that such the downgrade will have a little impact on the Group’s liquidity, given that the Group has resilient fundamentals, with off-balance-sheet debt risk under control and strong refinancing ability. The credit risk of the Group’s short- and medium-term bonds remain under control.

Investors who are interested in following the developments within the Chinese Real Estate space may refer to our weekly updates on Chinese real estate developers – “A List of 26 Key Chinese Developers’ Latest Development (Ongoing Update)”

Shimao Group Holdings

As of 30 June, Shimao faced a USD 400 million private placement bond due on 14 June. According to some unverified sources, the Group did not repay this private bond. According to Reorg Research, the Group intends to extend the maturity of its USD 1.3 billion syndicated loan due this year to four-year installments, with principal payments of 10%, 20%, 30% and 40% from 2022 to 2025, respectively.

At the beginning of June, a rumour claimed that the Group might have a similar treatment with the bondholders of the July USD bond, i.e. repaying the bond principal by installments.  Besides, the Group also seek maturity extension for several onshore bonds and trust loans from February to May, showing that the Group’s current liquidity is very tight. However, as of 30 June, there is no exchange offer for the Group's upcoming USD bonds due in early July, with the outstanding amount of USD 1 billion. Given the huge outstanding amount, this bond likely goes into default directly.

Shimao announced that the company has missed payment of its SHIMAO 4.750% 03Jul2022 Corp (USD) on the debt repayment date. The principal amount and the accrued and unpaid interest totalled to around USD 1 billion. At the date of the announcement, Shimao Group has not received any notice of acceleration of repayment from its creditors. We expect Shimao to come up with a debt restructuring plan to settle the offshore bondholders. 

As most of its land bank is located in tier-one and tier-two cities, the asset quality is higher compared to the peers. If the industry sentiment gradually improves, it might help the Group propose a better debt restructuring plan in the future. 

On the operating side, the Group is still able to generate some sales, with the total contracted sales of RMB 34.3 billion from January to May this year, which was decreased by 72% YoY.

To ensure the delivery of homes and unlock the large regulatory pre-sales proceeds (As of Nov-21: RMB 52.9 billion), the Group should make sure that there is no sizeable labor strike caused by insufficient capital or the debt issue. The only way for the Group’s turnaround is to regain property sales, improve confidences of homebuyers and borrowers and keep the daily operation as normal.

The next step is to observe the future property sales performance, the progress of the delivery of homes and whether it proposes a preliminary restructuring plan soon.

Investors who are interested in following the developments within the Chinese Real Estate space may refer to our weekly updates on Chinese real estate developers – “A List of 26 Key Chinese Developers’ Latest Development (Ongoing Update)”

About Bond Express

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Declaration: For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) holds a position in OCBCSP 3.900% Perpetual Corp (SGD), UOBSP 2.550% Perpetual Corp (SGD), UOBSP 4.250% Perpetual Corp (SGD), CS 5.625% Perpetual Corp (SGD), SINTEC 4.200% Perpetual Corp (SGD), ESRCAY 5.650% Perpetual Corp (SGD), SHIMAO 3.975% 16Sep2023 Corp (USD), COGARD 6.600% 23Feb2023 Corp (MYR), COGARD 6.500% 08Apr2024 Corp (USD) and the analyst who produced this report hold a NIL position in the abovementioned securities.

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