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Euromoney’s borrower awards 2007 |
| Overall awards | |
| Best sovereign/supranational/agency borrower | Best bank borrower |
| Best insurance borrower | Best ABS |
| Best CDO borrower | Best covered bond issuer |
| Best corporate borrower | Best high-yield/leveraged finance borrower |
| Latin America regional awards | |
| Best sovereign borrower | Best corporate borrower |
| Best financial borrower | |
| Central & Eastern Europe regional awards | |
| Best sovereign borrower | Best corporate borrower |
| Best financial borrower | |
| Asia regional awards | |
| Best sovereign borrower | Best corporate borrower |
| Best financial borrower | |
| Middle East and northern Africa regional awards | |
| Best borrower | |
With just a handful of regular sovereign borrowers and unpredictable issuance levels from investment-grade credits in Asia, much of the excitement in the region’s bond markets is reserved for the high-yield sector which, although still small, is beginning to grow rapidly, dominated thus far by Chinese and Indonesian issuers.
The story of the past 12 months was the high-yield bond issues from mainland Chinese real estate plays: the sector raised some $1.6 billion in 2006 alone, despite the challenges from the collapse in July of Chinese high-yield issuer Ocean Grand.
Although the performance of China’s real estate sector is significant, this year’s best corporate borrower award goes to a Chinese retailer, Parkson Retail Group, for its inaugural $200 million five-year high-yield bond sole led by JPMorgan.
The first non-investment-grade credit in the Chinese retail sector to issue an international bond, the deal was greeted with an overwhelming response from investors. JPMorgan received orders totalling $1.5 billion, or 7.5 times the bonds on offer. As a result the deal was eventually priced with a coupon of 7.875%, just 321 basis points over 2011 US treasuries, the second-lowest yield ever for a non-investment-grade Chinese issuer.
“From a diversification standpoint for investors, it helped that this wasn’t another China property play,” says Tim Donahue, head of Asia Pacific leveraged finance at JPMorgan. “As a bondholder, Parkson is one of the few ways to play the Chinese consumer story: you can’t do that investing in property companies and oil and gas pipelines.”
The scarcity value of the bond clearly helped to generate such a positive response from investors but the complicated structure of the deal made it far from straightforward to execute, and is a key factor that sets it apart from other high-yield issues.
While Parkson wanted to raise capital offshore for expansion of its stores network, with revenue and cost bases wholly denominated in renminbi, remitting foreign capital onshore would require regulatory approval and incur withholding costs. To mitigate these risks, JPMorgan devised a credit-linked structure that entailed the bank’s Shanghai branch lending the necessary funds in renminbi to Parkson onshore, while the funds raised from the bond issues offshore were deposited with JPMorgan in London against the credit-linked note (CLN). Bondholders were granted a guarantee over the note and, with JPMorgan acting as an onshore intermediary, the effect, argues Donahue, is to provide investors with an additional synthetic charge over the company.
“The CLN gives the investors a claim on the onshore assets,” he says. “In the event of a default, JP Morgan in Shanghai would move against Parkson to recover and remit funds back to investors, and bond investors effectively leapfrog the waterfall.”
JPMorgan also assumed the foreign exchange exposure in the transaction, giving Parkson pure renminbi funding at a very attractive cost.
JPMorgan’s CLN structure was the first in China, and it might yet prove difficult to emulate, even for JPMorgan, according to Donahue.
The bank has the balance sheet and on-the-ground branch presence that many of its US bulge-bracket competitors lack but new Chinese banking regulations requiring local incorporation are likely to impose single credit limits on banks significantly below the Parkson deal size.
That should take nothing away from Parkson’s bond issue. It has been so successful that JPMorgan has just raised $125 million of additional capital for the company by way of another high-yield bond, this time without a CLN, but with a five-year non-call three structure, indicative, says Donahue, of the improving credit of the company.
“We expect the company will call these [new] bonds once it gets an investment upgrade. That’s what differentiates this company from other China high-yield plays. Most of the property companies are BB credits and are likely to remain so. Parkson is heading quickly for investment-grade status.”
