CSSC (Hong Kong) Shipping has sold the first sustainability-linked Panda bond, adding depth to the growing onshore ESG market.
The ship leasing company, whose ultimate parent is China Shipbuilding Group Corp, the world's largest shipbuilding conglomerate, priced a Rmb1bn (US$144m) three-year sustainability-linked bond at par to yield 3.3%. That translated to a spread of 10bp over AAA rated onshore medium to short-term notes.
CSSC HK, which has sold offshore bonds linked with green and blue labels before, was considering all ESG options. A source close to the situation said the company chose the SLB structure to show its "innovation", as well as for flexibility on the use of proceeds. The funds will be used to repay offshore borrowings.
There was discussion around setting sustainability performance targets. The company was initially planning to link the coupon rate to its number of hybrid-energy-powered ships, but as it was the first SLB in the Panda market the leads decided to be more strict and used green ships as the target.
CSSC HK is required to have green ship assets reach no less than 24% of its total ship assets by December 31 2024. Failing to achieve the target will trigger a coupon step-up of 10bp for the last interest-bearing year.
The source said that 24% target was based on CSSC HK's current rate of increasing its green ship assets. As of the end of last year, 16% of CSSC HK's total ship assets were green.
The trade was CSSC HK's first Panda bond, and the company aimed to expand its funding sources with the transaction. The source estimated the Panda bond to be 30bp cheaper than if the company raised US dollar bonds.
But that price saving came at the cost of a longer bookbuilding time and a relatively smaller size. It targeted a size between Rmb1bn and Rmb2bn when it announced the mandate, and extended the bookbuilding deadline four times before closing the deal on Monday. The bookbuilding started at 9am on March 3.
The source believed investors' unfamiliarity with the name was the reason, rather than the SLB structure. Unlike many other Panda issuers that usually spend weeks communicating with investors before launching a deal, CSSC HK rushed to the market without much prior communication.
"They wanted to launch the deal before the Two Sessions, and they are worried that the market will become volatile after that," said the source.
The Two Sessions, China's annual meeting of the National People's Congress and the national committee of Chinese People's Political Consultative Conference, started on March 4 and is expected to last two weeks.
Most of the investors who participated in the deal were CSSC HK's onshore relationship banks, though a couple of offshore investors also joined.
Bank of China was the lead underwriter and bookrunner, while China Citic Bank was the joint lead underwriter.
ESG Panda pipeline
The Panda market saw just seven ESG issues last year totalling US$1.7bn-equivalent, according to Refinitiv data, but many are very optimistic about ESG Panda deal flow this year.
Towngas Smart Energy did a roadshow about a potential sustainability-linked Panda bond in February, according to Xinhua News, although the deal has not come to fruition. The source close to CSSC's deal said that she heard from a couple of bankers that they are in the process of pushing out ESG Panda bonds in the first half of the year.
Credit Agricole has seen strong interest from European and US corporates and Middle East sovereigns because of the attractive onshore funding cost, and strong deal flow is expected in the second half this year.
"We have got a pipeline of Panda deals we’re working on," said George Thimont, head of Asia ex-Japan syndicate and head of Asia-Pacific ESG Syndicate, Credit Agricole CIB. "One of them is in the ESG format, and another one we’re working on to get the ESG label. There’s an increased focus of international issuers on the market, and they’re trying to understand the current dynamics and opportunities.”
Luying Gan, head of sustainable bonds for Asia-Pacific at HSBC, also said she is working on a few ESG Panda deals either in the use of proceeds format or SLB format.
“The awareness of Chinese investors is getting better. They are asking insightful questions and are increasingly aware of issuers’ sustainable profiles," said Gan. "The difference is that domestic investors put more focus on the use of proceeds at the moment whereas international investors are focusing more on the holistic ESG credentials.”
The fast development of the ESG Panda bond market is driven partly by a number of moves from the government. In 2021, the National Association of Financial Market Institutional Investors published sustainability-linked bond guidelines, and China and the European Union published their Common Ground Taxonomy, which outlines ESG activities that are recognised by both jurisdictions. Last year, China made it clear that proceeds from Panda bonds can be remitted offshore, making the instrument more appealing for international issuers.