Credit-supported transactions and how to value them Global Research Credit Alert |
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) Guarantee to bank subsidiary ICBC 21 170 ACIRC 17 94 ACIRC 22 131 BOCOM 23 163 Guarantee to corporate DAEHIM 16 169 Proportional credit commitment 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 Source: Standard Chartered Research 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 Guarantee to bank subsidiary Skysea ICBC 21 International Amber Circle ACIRC 17 Funding Amber Circle ACIRC 22 Funding Azure Orbit Intl. BOCOM 23 Finance Ltd. Guarantee to corporate Doosan Infracore DAEHIM 16 Co. Ltd. Proportional credit commitment 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. Source: Standard Chartered Research Figure 4: Structural differences Support currency Issue Guarantee to bank subsidiary ICBC 21 NA ACIRC 17 NA ACIRC 22 NA BOCOM 23 NA Guarantee to corporate DAEHIM 16 NA Proportional credit commitment 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); Source: Standard Chartered Research GR13AP | 12 April 2013 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. GR13AP | 12 April 2013 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). GR13AP | 12 April 2013 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. GR13AP | 12 April 2013 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). GR13AP | 12 April 2013 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 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 hold 100% of issuer To maintain the solvency of the issuer and sufficient liquidity to ensure timely payments on the bond Source: Standard Chartered Research 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. GR13AP | 12 April 2013 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” Source: Standard Chartered Research 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 Source: Standard Chartered Research GR13AP | 12 April 2013 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 GR13AP | 12 April 2013 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). GR13AP | 12 April 2013 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 Source: Standard Chartered Research GR13AP | 12 April 2013 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. Source: Standard Chartered Research 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. Proportional credit commitment 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 Guarantee to corporate DAEHIM 16 Proportional credit commitment DAEHIM 42 214 Source: Standard Chartered Research GR13AP | 12 April 2013 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 Source: Standard Chartered Research 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. Source: Standard Chartered Research GR13AP | 12 April 2013 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 50mn for guarantor bank 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. GR13AP | 12 April 2013 15 Credit Alert Bank of Communications Co. Ltd. BOCOM 23 BOCOM 23 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 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 25mn for guarantor bank 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. GR13AP | 12 April 2013 16 Credit Alert Doosan Infracore Co. Ltd. DAEHIM 16 DAEHIM 16 versus KDB 16N 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 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 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 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. GR13AP | 12 April 2013 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 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 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 Net operating cash flow Capex and investments Free cash flow Total debt/Total capital (%) Total debt/EBITDA (x) EBITDA interest cover (x) 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 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 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. GR13AP | 12 April 2013 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 Net operating cash flow Capex and investments Free cash flow Total debt/total capital (%) Total debt/EBITDA (x) EBITDA interest cover (x) 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 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 Support currency Support limit Keep well Index eligibility Others COSCO Finance (2011) Ltd. British Virgin Islands English 1,000 Corporate subsidiary 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 - Required to maintain ratings from one agency - 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 Net operating cash flow Capex and investments Free cash flow Total debt/Total capital (%) Total debt/EBITDA (x) EBITDA interest cover (x) 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 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 Support currency Support limit Keep well Index eligibility Others Hainan Airlines (HK) Co. Ltd. Hong Kong English 500 Corporate subsidiary 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 - Required to maintain ratings from one agency - 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. GR13AP | 12 April 2013 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 Net operating cash flow Capex and investments Free cash flow Total debt/total capital (%) Total debt/EBITDA (x) EBITDA interest cover (x) 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. GR13AP | 12 April 2013 20 Credit Alert Appendix 2 – Allocation profile of new issuance New-issue allocation profile by geography 100% Guarantee to bank subsidiary 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 Guarantee to bank subsidiary 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 GR13AP | 12 April 2013 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 GR13AP | 12 April 2013 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. GR13AP | 12 April 2013 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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