6 Min Read
* Property developer Longfor joins recent rush of environmentally friendly bonds
By Ina Zhou
HONG KONG, Feb 27 (IFR) - Longfor Properties last week printed the first Green paper from a developer in China's interbank bond market, joining a fast-growing pack of issuers even as uncertainties remain over the market's long-term prospects.
China's Green bond market has expanded rapidly since the government gave its blessing to the asset class in late 2015 to address mounting pollution. New China offerings accounted for one third of global Green issuance in the past year, according to data from rating agency China Chengxin.
The issuer base is rapidly diversifying and includes large state-owned banks, financial leasing firms, car makers, water utilities and wind-power companies.
However, there has been no corresponding emergence of a class of socially and environmentally conscious investors, raising questions about the "greenness" of the market.
"China's Green bond market is built in a top-down manner," said Liu Xinhe, a Green bond analyst with China Chengxin. "Some investors of Green bonds had expectation that regulators would introduce genuine benefits such as tax rebates, but it is uncertain whether/when they will happen." FIRST, OR LAST? Longfor Chongqing Enterprise Development, an onshore subsidiary of Hong Kong-listed Longfor, priced bonds of 3.04 billion renminbi ($442 million), split into 1.6 billion renminbi five-year non-call three notes at 4.40 percent and 1.44 billion renminbi seven-year non-call five paper at 4.67 percent.
The issuer, a AAA credit to Shanghai Brilliance, intends to use the proceeds for environmentally responsible construction projects.
The offering, registered under the National Development and Reform Commission's Green bond regime, prompting some to speculate that such notes may offer developers a loophole to issue onshore paper.
It arrived at a time when other property developers have faced delays, or even rejections, of their funding plans as part of China's efforts to rein in surging property prices.
However, a banker familiar with the deal said Longfor's could also be the last Green offering from the sector unless restrictions on developers' access to financings are relaxed.
Longfor's plan for the Green issue was submitted to NDRC in May 2016 and was approved last autumn, just before regulators started to curb massive fundraisings from developers, he pointed out.
The banker also said that Green bonds in general did not bring any cost savings for issuers when compared with regular corporate notes.
Last July, Longfor Chongqing Enterprise Development issued a 700 million renminbi five-year non-call three bond at 3.06 percent and a 3 billion renminbi seven-year non-call five at 3.68 percent on the Shanghai Stock Exchange.
"Market conditions have shifted significantly since last July, so we cannot really compare the pricing, but, in general, we did not feel investors saw the Green bond differently from regular corporate bonds,” said the banker.
China Securities was the lead underwriter on the offering, while Citic Securities and CICC were joint lead underwriters. GREEN MOMENTUM Besides Longfor, three financial institutions - China Development Bank, Huarong Financial Leasing and Wuhai Bank, a local lender in Inner Mongolia - have printed their first Green bonds in the past two weeks, raising a total of 7.5 billion renminbi.
The four issues boosted Green bond and ABS offerings in China's domestic market to 215.88 billion renminbi between January 2016 and February 22 2017, according to China Chengxin. That made up roughly 30 percent of total Green issuance globally in the same period.
Market participants said momentum in Green bond issuance would be sustained, primarily due to regulatory encouragement and profile-raising on the part of issuers.
In China, a bond is classified as Green if the projects where proceeds are invested are deemed by a third party, such as a credit rating agency, audit firm, or consulting firm, to meet criteria on NDRC's Green list or a green catalogue published by the Green Finance Committee of China Society for Finance & Banking (GFC), a body under the supervision of the People's Bank of China.
The green label, however, does not provide an incentive for mainland investors to buy the bonds.
"Unlike in the international market, where there are Green investors, investors in China simply look at yields when examining Green bonds," said another Beijing-based underwriter with a Chinese bank.
He said there were a few cases where Green bonds achieved slightly tighter pricing than regular bonds from the same issuers, but that the outcome was due to orders given to maintain business relationships and not to a green halo effect.
"Sometimes, issuers may ask favours from relation banks or investors to support their Green bond offerings – to make the profile-raising deals look even better," he said.
With appraisal fees for Green bonds dropping sharply in the past year, interest had grown, particularly from big corporate issuers, market participants said.
"A Green bond is a great point for their social responsibility reports, so they don't mind spending an extra, say, 70,000 renminbi, to get a Green label," he said. (Reporting by Ina Zhou; Editing by Daniel Stanton and Vincent Baby)