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Cosco Caps Dollar Debt Sale Surge With Guarantee: China Credit

Cosco Caps Dollar Debt Sale Surge With Guarantee
China’s biggest listed shipping company sold $1 billion of notes, helping to boost bond sales by Chinese issuers to $5.98 billion this month, an increase of 74 percent from October, according to data compiled by Bloomberg. Photographer: Victor Sokolowicz/Bloomberg

China Cosco Holdings Co., which lost money for the past seven quarters, capped the busiest month for the nation’s dollar-denominated bond sales since April 2011 amid signs of state support for global offerings.

China’s biggest listed shipping company sold $1 billion of notes, helping to boost bond sales by Chinese issuers to $5.98 billion this month, an increase of 74 percent from October, according to data compiled by Bloomberg. Cosco’s bonds due December 2022 were priced to yield 4.152 percent and are guaranteed by a letter of credit from the Beijing branch of state-backed Bank of China Ltd. Cosco’s yuan-denominated debt due September 2020 was last quoted at a yield of 5.27 percent, according to Chinabond prices.

Letters of credit from state-owned banks allow companies to sell debt more cheaply and may be a sign authorities are encouraging offshore sales. Yields on Chinese corporate dollar bonds dropped to a record low of 4.88 percent this week, a JPMorgan Chase & Co. index shows. That compares with an average 5.16 percent for yuan debt onshore, according to Bank of America Merrill Lynch’s China Corporate Index.

“If Cosco was on a standalone credit they would probably struggle to raise any money from the market,” Jeffrey Yap, the Hong Kong-based head of Asia fixed-income trading at Mizuho Securities Asia Ltd. said in a telephone interview yesterday.

The company is not the first to use a letter of credit, China Cosco said in an e-mailed response to questions about the bond sale. The proceeds will be used for overseas operations, according to the company statement.

Zijin Mining

China Resources Cement Holdings Ltd., a cement maker, sold $400 million of five-year bonds in October guaranteed by a letter of credit from DBS Bank Ltd., according to data compiled by Bloomberg. In 2011, Zijin Mining Group Co. sold $480 million of bonds guaranteed by a letter of credit from Bank of China’s Paris branch, according to data compiled by Bloomberg.

The People’s Bank of China has refrained from monetary easing since July after cutting interest rates twice in five weeks. The benchmark one-year lending rate has since remained at 6 percent. Yields on the 10-year government bond increased one basis point this month to 3.54 percent.

The average yield on Chinese dollar bonds dropped 25 basis points in November, JPMorgan indexes show.

“The PBOC benchmark rate hasn’t come down that much whereas the offshore U.S. dollar market yield has come down to a historical low-level,” Fang Fang, chief executive officer of China investment banking for JPMorgan Chase & Co. told reporters in Beijing on Nov. 26. “Chinese companies are more educated and sophisticated in tapping that market now. It is wise that the regulators are letting them tap such a low-cost fixed-income market.”

19-Year High

The yuan dropped 0.08 percent to close at 6.2273 per dollar in Shanghai yesterday, down from a 19-year high after the central bank lowered the currency reference rate.

Five-year credit-default swaps protecting China’s debt from non-payment dropped 11 basis points this month to 57.1 as of Nov. 27, the lowest since November 2010, according to data provider CMA. The contracts pay the buyer face value in exchange for the underlying securities or the cash equivalent if a government fails to adhere to its debt agreements.

China Cosco, based in Tianjin, northern China, reported a third-quarter net loss of 1.53 billion yuan on Oct. 31, according to data compiled by Bloomberg. General Manager Ma Zehua, said last month it would take another two years to three years for a full recovery, though improvements in the global economy may mean that 2013 will be a bit better than 2012. The company operates container vessels and dry-bulk ships.

Fifth-Highest Grade

Moody’s Investors Service assigned a provisional rating of A1 to Cosco’s dollar-denominated bonds, its fifth-highest investment grade credit ranking and the same as it grades Bank of China’s senior unsecured debt, according to a statement on Nov. 19. Moody’s cited the “unconditional and irrevocable standby letter of credit provided by Bank of China” as support for the rating.

China’s policy banks have also guaranteed debt in the offshore yuan-denominated Dim Sum market, according to data compiled by Bloomberg. Hai Chao Trading Co., a subsidiary of tire maker Hangzhou Zhongce Rubber Co., sold 900 million yuan of Dim Sum bonds last July guaranteed by the Export-Import Bank of China.

Chinese banks need regulatory approval to guarantee debt offshore and don’t need to provide cash upfront, according to Steve Wang, Hong Kong-based head of fixed income research for BOCI Securities Ltd., a unit of Bank of China.

Still, the banks are taking on off-balance sheet risk by guaranteeing the debt, which could create problems if more lower-quality companies’ bonds are protected, according to Mizuho’s Yap. That could lead to a number of claims on the bank for funds, he said.

“The authorities need to watch out if the banks are putting on a lot of risky credit onto the book by guaranteeing the credit of those companies,” he said. “If we start seeing smallish companies, or even property companies, getting bank guarantees that’s what we need to watch out for.”

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