Reading guide
Since the implementation of the package of debt policies, the market changes of urban investment bonds have been obvious to all. Since August, the standard bond has gradually become the focus of the market, and in the following months, the standard bond has soared all the way, and now the asset market is hard to find, and the yield of the standard bond project is also all the way. What to do?Smart people are starting to look at offshore urban investment bonds – that's what you've heard latelyU.S. dollar bondsI heard that the yield is much better than that of domestic bonds, and many investors are ready to move, whether to be the first wave of pioneers to enjoy benefits, or to worry about being cut off and wait and seeDon't worry, after reading the dollar bonds shared with you today, let's consider it comprehensively, in the investment feast, risk and return will always go hand in hand, and not everyone can control it. The author will tell you today what is a dollar debtWhat are the benefits and risks, and who is suitable to invest in urban investment dollar bonds?
What is a U.S. dollar bond?
Why are urban investment dollar bonds becoming popular?
The official definition of a U.S. dollar bond:Refers to bonds denominated in U.S. dollars;The full name of Chinese-funded US dollar bonds is "US dollar-denominated bonds issued by Chinese enterprises overseas, and the issuers include financial (banks, non-bank institutions), real estate, urban investment platforms, energy, technology (Internet platform enterprises and information technology enterprises) and other leading enterprises in industrial and commercial enterprises. There are too many bonds, and there are specializations in the industry, so the author will not introduce them one by one, and the dollar bonds referred to in this article specifically refer to urban investment bonds.
Chengtou dollar bonds simply putU.S. dollar-denominated bonds issued by urban investment platform companies in overseas markets;It is also called urban investment dollar bonds.
There are three main categories of Chinese enterprises that issue US dollar bonds overseas, namely real estate enterprises, urban investment platforms and financial institutions. The collapse of real estate companies, the main force of issuance is mired in the quagmire, and the dollar bonds of real estate companies have been sold off on a large scaleCoupled with the Federal Reserve's sharp interest rate hikes, US dollar interest rates have risen, and the yield of urban investment dollar bonds in the same period is at a high levelAs a result, urban investment entities have sprung up to replace real estate companies and become major Chinese investors. According to statistics, the stock of US dollar bonds of Chinese enterprises has exceeded 970 billion US dollars, accounting for more than half of the Asian dollar bond market, as of December 5, there are 2,886 Chinese dollar bonds, with a cumulative scale of 8,2290.3 billion US dollars;Among them, the outstanding amount of US dollar bonds on the urban investment platform is about 80 billion US dollars (although everyone may still be relatively unfamiliar, the issuance of US dollar bonds of urban investment has always existed and accounts for most of the US dollar bond market).
Source: CICC Research).
Data on the size of Chengtou dollar bonds on December 5).
The issuance process of Chengtou US dollar bonds
The five major issuance processes of US dollar bonds take about 6-12 weeks
The issuance process of US dollar bonds generally includes:Appointing intermediaries, initiating projects, preparing offering documents, roadshow and pricing, issuance and bookkeepingFive links.
Designated intermediaries:Initial selection of legal counsel in the first week of bond issuance, notification of the issuance of the bonds, and selection of trustees, listings** and printers. Intermediaries generally include underwriters, international issuer lawyers, international underwriter lawyers, China issuer lawyers, Chinese underwriter lawyers, rating agencies (if required), auditors, trust banks and printers.
Start the project: Hold a kick-off meeting and initiate business, legal, financial and other aspects of due diligence, contact rating agencies and prepare rating explanatory materials, which is generally completed in the first week. At this stage, companies can also make initial contact with potential investors to prepare for the development of sales strategies in the later stage.
Preparation of release documents:This includes conducting due diligence, drafting prospectuses, comfort letters, legal opinions, terms agreements, ** agreements, subscription agreements and other documents, holding rating agency briefings, drafting roadshow presentation materials and investor issues. It is generally completed between the second and sixth weeks of bond issuance.
Roadshow & Pricing:This includes arranging roadshows and investor meetings, recording online roadshows, printing and distributing issuance circulars, announcement of transactions, roadshows, announcement of pre-transaction due diligence, pricing and signing. It is generally completed in the 7th week of bond issuance.
Issuance & Bookkeeping:This includes the finalization of the issuance circular, investor subscription, pre-settlement due diligence, submission of legal opinions, settlement and closing. It is generally completed in the 8th week of bond issuance.
Flow chart of the issuance of Chinese dollar bonds).
On September 14, 2015, the National Development and Reform Commission issued the Notice of the National Development and Reform Commission on Promoting the Reform of the Management of the Filing and Registration System for the Issuance of Foreign Debts by Enterprises, abolishing the approval mechanism for bond issuanceA registration system is in placeManage, encourage overseas financing and make it clear that funds can be freely used at home and abroad. Under the new institutional framework,The issuance of US dollar bonds by Chinese enterprises needs to be approved and registered with the State Administration of Foreign Exchange after issuance
SAFE filing process for Chinese-funded US dollar bonds).
To sum up, the issuance of urban investment dollar bonds can be subdivided into:Domestic vs. OffshoreTwo parts. The domestic urban investment entity needs to first file the overseas debt with the company, the underwriting broker, the international issuer's lawyer, the international underwriter's lawyer, the domestic issuer's lawyer, the domestic underwriter's lawyer, the rating agency (if necessary), the auditor and other relevant service agencies to prepare the issuance materials, submit the issuance information, and carry out international rating (contingent) and other workOverseas, the issuer selects a Global Coordinator (JGC) – JGC drafts the Bond Prospectus (OC) – JGC selects the Bookrunner (JBR) and Lead Manager (JLM) – announces the commencement of the transaction and publishes the OC – Roadshow (RS) – Pricing – Delivery and issuance.
Not only urban investment US dollar bonds, but also all Chinese-funded enterprises have a large process of issuing US dollar bonds, which requires the participation and cooperation of underwriters, lawyers, auditors, trustees and other partiesBetween $1.3 million and $1.8 million。The following author has also sorted out the specific responsibilities and costs of the parties involved, for your reference only!
Estimated intermediary fees involved in the issuance of Chinese dollar bonds).
There are two types of issuance of US dollar bonds
At present, there are two main modes of issuance of Chinese dollar bonds in the market. The first isDomestic companies issue bonds directly overseasand the second is the domestic parent company in various waysProvision of cross-border guarantees or commitmentsIndirect issuance and red-chip issuanceIndirect bond issuance. Let's break them down one by one.
1) Direct overseas issuance of bonds by domestic companies.
Direct issuance refers to the direct issuance of offshore bonds by enterprises registered in China after being reviewed and registered. After the issuance of Document No. 2044 in 2015, the approval of the quota for the issuance of foreign debts by enterprises was cancelled, and the management of the filing and registration system was implementedThe state approves the scale of foreign debts in a lump sum on an annual basis, and enterprises can complete the issuance in phases and batches, which reduces the difficulty of passing the examination of direct bond issuance.
Framework for direct overseas bond issuance by domestic companies).
Pros:Direct issuance does not require the establishment of subsidiaries or branches abroadThe debt structure is relatively simple, and it has higher creditworthiness, lower interest rates, and less supervision on the return of fundsThere are usually no credit enhancement measures such as guarantees and keepwell agreements, and there are no cross-border guarantees involved. In line with the latest national policy guidance。**The National Development and Reform Commission (NDRC) has deployed the 2016 Pilot Work on the Management of the Scale of Enterprises' Foreign Debts, encouraging the domestic parent companies of the pilot enterprises to directly issue foreign debts and appropriately controlling the issuance of foreign debts by overseas branches and subsidiaries.
Deficiencies:1.Direct issuance of US dollar bonds inThe 10% withholding tax on interest, which is payable at the time of interest payment, significantly increases the cost of issuance。However, according to the Regulations for the Implementation of the Enterprise Income Tax Law and the Interim Measures for the Administration of Withholding of Income Tax at Source for Non-resident Enterprises, the domestic financier is required to withhold and pay the tax payable to overseas creditors when paying interest, so it is required to pay a 10% withholding tax.
2.Regulatory requirements have been liberalized. Prior to the issuance of Circular No. 2044 in 2015, the main entities directly issuing foreign bonds were financial institutions and large state-owned enterprises. However, after the issuance of Circular 2044, the policy supports the priority of overseas funds raised in key areas such as the Belt and Road Initiative, the coordinated development of Beijing-Tianjin-Hebei, and the development of the Yangtze River Economic BeltThe lowering of the entry threshold for direct bond issuance channels in certain industries, and the relaxation of supervision have also left a regulatory blind spot for direct issuance of US dollar bonds.
(2) Indirect bond issuance.
Indirect bond issuance refers to the indirect bond issuance in which the domestic parent company provides cross-border guarantees or commitments in various ways. Indirect bond issuance can also be divided into two categories, one is directly guaranteed by the domestic parent company, or the parent company opens a letter of credit with the bank and guarantees itThe other type is keepwell agreement + equity repurchase agreement (EIPU).
1. Domestic guarantee for overseas bond issuance.
1) Cross-border guarantee of domestic group companies.
It mainly refers to the bond issuance model in which a special purpose vehicle (SPV) established by a domestic group company overseas, or a subsidiary with certain business outside China acts as the issuer of bonds, and the domestic group acts as a guarantor to provide unconditional and irrevocable guarantees.
Double-tier cross-border guarantee for domestic group companies).
Pros:
1.The structure is simple and the preparation time is short. The parent company's direct guarantee has the simplest structure in indirect issuance, and only one SPV is required.
2.Relying on the credit rating and asset strength of domestic group companiesRecognition of group companies and bonds by Shenzhen international investors(As mentioned above, the issuer of US dollar bonds is generally a city investment company, a state-owned enterprise or an industry leader with sufficient strength, or a bank or other financial institution.) The overall credit and asset strength of such enterprises are excellent).
Cons:
1.An offshore company (SPV) has little or no assetsIn the event of a debt default, the repayment priority of the offshore bondholders is lower than that of the parent company's onshore creditors.
2.The issuance interest rate is affected by the credit rating of the domestic parent company. In the event of a credit turmoil on the domestic parent company, the issuance interest rate may rise；However, compared with the guarantee method of keepwell agreement and equity repurchase agreement, the credit directly guaranteed by the domestic parent company is better.
(2) The bank issues a standby letter of credit guarantee.
Domestic enterprises issue a standby letter of credit (SBLC) to guarantee the letter of credit through the bank, and use the bank's credit to guarantee the credit enhancement of the bond. If the issuer fails to pay the principal and interest of the debt on time, the investor can directly request the bank that issued the standby letter of credit to pay on behalf of the issuer (the guarantor is the four major state-owned banks, mainly the Agricultural Bank of China, Bank of China, etc.).or overseas banks, most of which are foreign branches of the four major state-owned banks). Here's a key point:The issuer needs to obtain the rating of the issued bonds from at least one international rating agency in order to be supported by a bank standby letter of credit.
Standby letter of credit guarantee provided by domestic and foreign banks).
Pros:
1.There is little regulatory pressure. In the 2014 Regulations on Foreign Exchange Administration of Cross-border Guarantees, the State Administration of Foreign Exchange (SAFE) abolished all prior approvals related to cross-border guarantees, allowing domestic banks to provide financing external guarantees on their own without the need to apply to the State Administration of Foreign Exchange for approval on a case-by-case basis. Regulatory pressure is to be resolved internally by domestic banks.
2.Take advantage of the bank's creditIt can effectively enhance the credit of bonds and reduce the coupon rate。By using a standby letter of credit or letter of guarantee as a credit enhancement tool, there is a high chance that the bond rating will be treated as a bond rating issued by its bank, and the company is not required to disclose information about its business or operations to the rating agency.
Cons:
Since the issuer is also required to pay a certain cost or provide a corresponding onshore guarantee to open an existing letter of creditIt will increase the cost of comprehensive financing and occupy the credit line of enterprises in banks
2. Keepwell agreement + equity repurchase commitment.
If the issuer is unable to pay the interest or repay the principal on time, the parent company of the domestic group will repurchase the equity of the overseas subsidiary or the domestic subsidiary held by the SPV in accordance with the agreement** (usually exceeding the amount of the principal and interest of the bond), and remit the acquisition funds overseas to repay the interest or principal.
keepwell agreement + equity repurchase commitment).
As the name suggests, "keepwell" is the essential difference between maintaining a good and direct unconditional joint and several liability guarantee in the previous category. Under the keepwell framework, the onshore parent company only needs to maintain sufficient liquidity for the offshore issuer to meet its obligations such as repayment of principal and interest on the bonds. For creditors, when there is a bond payment crisis, they can only force the keepwell provider to provide funds to the issuer to supplement and maintain liquidity, so that the offshore issuer can continue to perform the contract;However, it is not mandatory for the domestic parent company (keepwell provider) to repay any debts directly to creditors on behalf of the issuer.
Pros: EffectiveIt circumvents the cross-border guarantee limit of enterprises。The credit line of an enterprise in the bank is limited, so the guarantee may be limited by the cross-border guarantee limit, but the keepwell agreement is not a guarantee, which avoids this limit problem.
Cons:The modeThe coupon rate is relatively highIn addition, keepwell undertakings and comfort letters do not directly provide guarantees for the performance of debts, and are not enforceable, and only serve as a consolation for overseas creditors. The whole process of keepwell agreement + equity repurchase is operational, and the issuance structure is more complicated.
The text seems to look complicated, don't worry, these 4 distribution models are sorted out on a table for everyone, which is more convenient for you to compare horizontally and vertically:
Comparison of the four distribution architectures).
The benefits and risks of urban investment dollar bonds
The comprehensive yield of urban investment US dollar bonds now seems to be much higher than that of onshore urban investment bonds, because compared with domestic urban investment bonds, in addition to credit risk, there are also income parts such as the unique US dollar risk-free interest rate, the liquidity premium of domestic and foreign bonds, and the exchange rate.
1. Risk-free rate. The yield on all bonds is based on the risk-free yield, which means adding points to the yield on Treasury bonds, and the yield on the 2-year US dollar Treasury is now at 4Around 9%, then the yield of the 2-year urban investment dollar bond must be at 49% or more;That's a cut above domestic debt.
2. Liquidity premium between domestic and foreign bond markets。In China, banks, brokerages and other financial institutions are rushing to buy urban investment bonds, and the cost of taking bonds will naturally go upBut overseas, sorry, many overseas financial institutions don't know about the urban investment platform, let alone the county-level urban investment platform, and the domestic capital buys more, and the price of the bond naturally cannot go up, so the same entity has more room for liquidity discount when issuing US dollar bonds overseas, and the yield is naturally high.
3. Exchange rate risk. Just like the exchange rate, the exchange rate between the RMB and the US dollar is a two-way fluctuation, there is an exchange rate difference, the main body of the bond has to pay for this uncertainty, then the urban investment dollar bonds, compared with the bonds issued in China, because of the potential exchange rate fluctuation risk, have to discount some more before selling, and finally the yield of investors can rise a little more.
To sum it up briefly,The yield of Chengtou dollar bonds is anchored by the risk-free rate of return of US bonds, which will naturally increase the yield under the influence of credit risk, and then trade at a discount due to its liquidity risk and exchange rate riskIf you enter at a low level and hold it to maturity, if there is no credit risk in the middle, the income is really fragrant. However, in this offshore bond investment, the biggest risk is actually the risk of exchange rate fluctuations, and there are unpredictable and uncontrollable uncertaintiesIf the renminbi appreciates sharply, the total amount of renminbi exchanged for the same size of US dollars will also decrease, and it may make less money or even lose money.