China Longyuan Power closed a $400 million senior hybrid on Friday evening — the first hybrid from a mainland-incorporated company that is listed in Hong Kong.
The company is China’s biggest producer of wind power and a subsidiary of state-owned Guodian group, one of China’s five main power-generating companies.
China Longyuan develops wind farms and sells the electricity they generate to local grid companies. It has aggressive plans to expand its production capacity over the next few years and, according to reports, plans to increase its offshore generating capacity by five times during the next three years.
The hybrid gets 100% accounting equity, but it is unrated and so does not receive any equity credit from the rating agencies. However, according to a source, there are minimal equity requirements for projects in China and the hybrid would get counted as equity in the calculation of ratios for those projects.
China Longyuan had rattled equity investors in May when it said it planned to issue up to 1.36 billion new H-shares. This would have raised close to $1 billion based on share prices back in May, and resulted in an equity dilution of up to 18%. Investors clearly were not happy with such a dilution and dumped the stock (which fell 10% in a single day, during the trading session after the announcement).
The proposal to issue new shares was passed at an extraordinary general meeting in July, which came as no surprise as Guodian Group owns 62% of the company. However, most minority shareholders voted against it.
When China Longyuan announced its hybrid, there was speculation that the company would cancel its share placement, helping the stock to pop 8%. However, assuming the company had intended to raise the maximum $1 billion, there is still a shortfall of $500 million or so — and the approval to issue new shares is valid until July next year, so the company still has time if it wants to issue those shares.
“The company has said it is open to options, but the hybrid gives the company a bit more breathing room in terms of when they can issue equity, instead of jamming it in volatile markets,” said a source.
Strong incentive to call
China Longyuan’s perpetual, which is callable after three years, was better received by bond investors, attracting $6 billion of demand, with 40% of the bonds allocated to private banks.
As it was the first hybrid from an H-share company, it had a unique structure. The issuer was Hero Asia Investment and the deal has two keepwell agreements, one with China Longyuan and the second with Guodian, which is unusual as most deals typically offer just one keepwell agreement. Even so, this is not the same as a guarantee.
It was a senior hybrid, which is rare in the dollar space in Asia but has been seen in the Singapore dollar bond market — when Cheung Kong issued a S$500 million senior hybrid in September last year.
The initial guidance was in the area of 5.75% and the bonds eventually priced to yield 5.25%. There is a massive 5% step up at the third year — one of the highest seen so far — if the bonds are not called, so many investors were looking at it as a three-year bond in light of the strong incentive for the company to call the bonds.
The hybrid also has an equity interest purchase undertaking, a change-of-control clause and a make-whole clause. China Longyuan Power recently sought ratings and it is rated BBB+ by Standard & Poor’s and Baa3 by Moody’s.
Goldman Sachs and Morgan Stanley were joint global coordinators and bookrunners and UBS was a bookrunner. Morgan Stanley and UBS were mandated earlier to arrange the equity offering.
