China State Shipbuilding Corporation (CSSC) became the second Chinese borrower in as many weeks to raise euro-denominated funds on Wednesday in what may become a key trend in 2015.
The state-owned group opted for a credit-enhanced structure for its €500 million three-year Reg S deal, which was rated A1/A/A after securing an irrevocable standby letter of credit (SBLC) from Bank of China London. Pricing was fixed at 99.907% on a coupon of 1.7% to yield 1.732% or 155bp over euro mid-swaps.
This was 25bp inside initial guidance around the 180bp mark and the tight end of pricing 5bp either side of 160bp. The final order book topped €2.8 billion with an almost even split between Europe and Asia, tllted slightly in favour of Asia.
Investors' guidance on fair value was said to span 150bp to 250bp over euro mid-swaps, an incredibly wide range that reflects Europe's relative lack of familiarity with both Chinese credits and SBLC structures.
However, a strong bid from Chinese banks looking to increase their euro-denominated assets is said to have helped anchor the deal at the tight end of the range. Both the Chinese banking sector and corporate entities have been progressively stepping up their European investments, creating a natural funding and investor base that should start to become a far more prominent feature of the bond markets.
So far this year there have been three Chinese euro-denominated deals from State Grid Europe Development, CCB Asia and now CSSC. Notably, both State Grid and CSSC opted to retain their proceeds in euros to satisfy a local funding need rather than swap them back into dollars.
As one banker says, "Euros are looking very attractive to Chinese borrowers right now. They see extremely low absolute coupons and a currency [that] could depreciate a lot further. It's a very compelling proposition and we expect to see a lot more deals like this in future."
He added, "The key challenge was getting European investors up the learning curve but the very strong bid from Asian investors helped them to get comfortable and will hopefully benefit other deals that follow."
Indeed, CSSC's offering is likely to be followed on Thursday by a euro-denominated Reg S deal from Baoshan Iron & Steel. The five-year deal has an A-/A-/Baa1 rating and is being led by Deutsche Bank and HSBC.
SBCL structures enable credits to be priced relative to the guarantor's credit rather than the corporate's underlying credit. That was probably just as well in CSSC's case since it, along with five other state-owned enterprises, has just been sanctioned for corruption by the central government's anti-graft team.
It found that CSSC's procurement department had been overspending budgets and seeking financial gain for family members.
Comparables
The main benchmarks for CSSC's transaction were therefore Bank of China's dollar-denominated bonds and CCB's euro-denominated offering priced on February 4.
This latter deal comprised a €500 million five-year A2/A rated issue, which was priced at 99.938% on a coupon of 1.5% to yield 120bp over euro mid-swaps. On Wednesday, it was trading 5bp tighter around the 115bp mark.
The closest Bank of China comparable is a 3.125% January 2019 deal, which was bid Wednesday on a Z spread of 138bp and about 100bp over the euro-equivalent. For investors comfortable with SBLC structures, CSSC's new deal offers a 55bp pick-up over Bank of China's outstanding secondary market euro spread levels with one less year in duration.
This is in line with the 40bp to 60bp premium SBLC deals are currently trading at relative to banks' senior debt levels, plus the need for a new issue premium.
For example, CSSC has a 2.75% December 2016 bond outstanding, which has an SBLC provided by CCB. This was bid Wednesday on a Z spread of 175bp and euro equivalent spread of 136bp.
CCB's own 2.375% April 2017 bonds were bid on a Z spread of 138bp over. This means the CSSC 2016 bonds are trading 37bp wider, with just four months additional duration.
The other most recent benchmark comprises Aa3/AA-/A+ rated State Grid Corp's €700 million 1.5% 2022 deal and its €300 million 2.45% 2027 deal. The former was priced at 110bp over mid swaps and the latter at 170bp over.
On Wednesday the seven-year was bid on a Z spread of 87bp and the 12-year at 136bp.
Joint global co-ordinators for CSSC's deal are Bank of China, Barclays and SG CIB. Joint bookrunners are Agricultural Bank of China, ANZ, Bocom Hong Kong, CCB International and ICBC.
