20131101-美银美林-Credit_enhancement__Likemake-up_for_bonds_14页_576kb

Credit Enhancement: SBLC Backed Bonds Summary

Core Content

This document provides a detailed framework for valuing bonds backed by Standby Letter of Credit (SBLC) from banks. It outlines the key features of SBLCs that impact valuation, including the credit risk of the SBLC provider, the timeliness of payment and enforceability, the issuer's fundamentals, and procedural differences. The analysis is based on a building block approach, where each component is evaluated and combined to estimate a fair value for the bonds. The document also compares the current market prices of these bonds with their fair value estimates, highlighting which bonds are overpriced or underpriced.

Main Viewpoints

• SBLC as Insurance: SBLCs act as a form of insurance rather than a direct guarantee, serving as a secondary payment mechanism in case of default.
• Valuation Framework: A structured approach is used to evaluate the fair value of SBLC-backed bonds by considering multiple building blocks such as the spread of the SBLC provider, enforceability, and issuer fundamentals.
• Fair Value vs. Market Price: The HAIAIR '20 and SUELIN '18 bonds appear to be expensive, while ZHTONG '18 and CITICS '18 bonds provide the best value. COSHOL '20s offer moderate value, and ZIJMIN and CHRESO bonds are closer to fair value.
• Jurisdictional and Structural Risks: The enforceability of SBLCs and the legal framework in which they operate can significantly affect their valuation, especially in jurisdictions with less robust legal systems.
• Issuer Fundamentals: Weaker fundamentals of the issuer increase the likelihood of triggering the SBLC, which in turn increases reinvestment risk and affects the valuation spread.
• Fee Structure: SBLC fees can be as high as 300bps, and they are negotiated between the issuer and the bank, not disclosed in the documentation.

Key Features Impacting Valuation

1. Credit Risk of the SBLC Provider

• The valuation starts with the senior unsecured spread of the SBLC provider.
• Even with a guarantee, bonds do not typically trade on top of the guarantor's spread due to reinvestment risk and uncertainty in enforcement.

2. Timeliness of Payment and Enforceability

• BOC Backed Bonds: Pre-funding requirements and need for bank consent to trigger SBLC.
• SBI Backed Bonds (SUELIN): Acceleration on default, with SBLC covering only principal and one coupon.
• DBS Backed Bonds (CHRESO): No prepayment requirement, but requires bank consent to draw down, leading to added uncertainty.

3. Reinvestment Risk

• The potential loss is calculated as the coupon income lost multiplied by the probability of default.
• A time decay factor is applied, assuming half the cumulative default rate for valuation purposes.

4. Approval and Procedural Differences

• Structural and procedural differences such as the need for bank consent, novation clauses, and cross-default provisions can affect the spread pick-up.
• The need for bank consent adds an additional spread of 10bps to the valuation.

Key Information

• SBLCs in Asia: The document focuses on SBLC-backed bonds in Korea, China, and India.
• Fee Levels: Fees can be as high as 300bps, and the cost-effectiveness of SBLCs depends on the comparison with onshore lending rates.
• Onshore vs. Offshore: In China, SBLCs issued by offshore branches may carry additional repatriation risks, leading to a higher spread.
• Legal Jurisdictions: English Law is typically used for SBLCs, but enforcement may be complicated by jurisdictional differences, especially in China and India.
• Issuer Ratings: Issuer ratings are considered in the valuation, with some assumptions made due to limited data.
• Market Comparison: The current market prices of SBLC-backed bonds are compared to their fair value estimates, using the senior unsecured bonds of the SBLC provider as a benchmark.

Conclusion

The valuation framework presented in the document allows for a more nuanced understanding of SBLC-backed bonds. While some bonds are overpriced relative to their fair value, others offer better value. The analysis highlights the importance of considering both the credit risk of the SBLC provider and the underlying fundamentals of the issuer. Additionally, procedural and jurisdictional factors significantly influence the spread pick-up and overall valuation of these bonds.