Weichai Power, a Chinese diesel engine and forklift truck manufacturer, executed its debut international bond on Wednesday in the face of a deteriorating backdrop for China credits.
The fall in Caixin's Purchasing Managers Index to a new six-and-a-half year low prompted a sell-off in Chinese equities and credit that left investment grade spreads about 5bp wider on the day.
It made for a slow build up for Weichai's orderbook, which closed around the $700 million mark. This led the BBB/BBB rated group to size its five-year Reg S deal at $400 million.
After initially marketing the transaction at 285bp over Treasuries, the syndicate narrowed the range to between 275bp and 280bp over. Final pricing was fixed at 99.683% on a coupon of 4.125% to yield 4.196% or 275bp over Treasuries.
A total of 45 accounts participated of which 98% came from Asia and 2% from Europe. By investor type banks dominated taking 70%, with fund managers on 16%, insurers 4% and private banks 7%.
"I think this really was a good result," said one banker. "A number of Chinese SOEs including Qingdao City Construction and Shenzhen Expressway have roadshowed their deals but remain sitting on the sidelines because of the market volatility."
"Weichai Power decided to forge ahead and was able to narrow pricing in by 10bp," the banker added. "They did a great job because they are a debut credit so investors needed to do a lot of price discovery."
A second complication was the lack of a direct comparable. Weichai is an unusual BBB credit as it does not have a split rating like many of its Chinese counterparts.
Despite being 20%-owned by Shandong Sasac it does not benefit from a ratings uplift because of perceived government support. By contrast, Standard & Poor's rates two close comparables - Shanghai Electric Power and water treatment company Beijing Capital Polaris - three notches above their baseline assessment because of their full government ownership.
A third comparable, Shanghai Construction, also has a one notch uplift because it is 61%-owned by Shanghai Sasac.
This means all three trade at tighter levels than Weichai was priced at despite having far weaker underlying credit metrics.
Baa2/BBB/BBB+ rated Shanghai Electric has a 3.625% August 2020 bond outstanding. This was trading Wednesday on a Treasury spread of 194bp and G-spread of 195bp, some 80bp tighter than Weichai.
Shanghai Construction, rated Baa1/BBB/BBB, has a 3.75% July 2020 bond outstanding, which was trading Wednesday at 200bp over Treasuries and a G-spread of 203bp.
Baa2/BBB rated Beijing Capital Polaris has a 2.875% April 2018 bond at 218bp over Treasuries and 231bp on a G-spread basis.
Some fixed-income analysts advocated benchmarking Weichai against chemical producer Shanghai Huayi, which has a one notch lower Baa3/BBB-/BBB rating and is 100%-owned by Shanghai Sasac. It has a 4% December 2019 bond outstanding, which was trading Wednesday on a Z spread of 258.5bp.
"We see Weichai as a better investment that should be 5bp to 10bp tighter than Huayi," one broker wrote in a research note ahead of pricing. "After adjusting for the duration, Weichai and Huayi should trade flat to each other and we see fair value for the new bond at 265bp over Treasuries."
The same broker also noted that, whereas Huayi has a keepwell dead, Weichai Power offers a full guarantee for its debt issuance vehicle, Weichai International Hong Kong Energy.
Syndicate bankers said some investors also looked at ENN Energy, which has a split Baa3/BBB rating. The gas operator has a 3.25% October 2019 bond outstanding, which was trading Wednesday on a G-spread of 250bp.
"If you adjust for the duration, then a five-year would probably trade around 260bp to 265bp over," the banker commented. "Add on a new issue premium and that probably brings you out around the 275bp level."
German subsidiary forklifts profitability
In its ratings assessment, Standard & Poor's highlighted that Weichai Power has strong credit metrics tempered by the cyclical volatility of its industry sector. This was amply demonstrated by the group's recent first-half results, which revealed a 74% year-on-year drop in net profit to Rmb969 million.
This also led to a deterioration in its debt repayment ability, albeit from a high base, with the company's Ebitda to interest coverage ratio dropping from 15.3 times in the first half of 2014 to 7.7 times in the first half of 2015. Debt to Ebitda has remained fairly consistent around the 2.1 to 2.4 times range over the past three years.
In a sales note, Bank of China highlighted that, at 2.1 times, Weichai's debt to Ebitda ratio is far stronger than Shanghai Electric Power's 7.6 times, Shanghai Construction's 7.1 times and Beijing Capital's 8.6 times.
The biggest hit to Weichai's first-half earnings came from domestic sales of diesel engines and parts down respectively 61.5% and 48.5%. Analysts remain divided over when the sector may turn.
However, Weichai's German subsidiary Kion saw orders rise 6.9% year-on-year. It purchased a 25% stake in 2012 and consolidated the world's second largest forklift truck manufacturer into its accounts in 2014 after increasing its stake to 38.5%.
The group now accounts for 25.1% of group revenues, with diesel engines on 28.1% and components 43.5%. The acquisition helped propel Weichai 23 places up the Fortune 500 rankings of Chinese companies in 2014 to 70th place.
Barclays was sole global co-ordinator for the bond issue, with joint bookrunners comprising Goldman Sachs, HSBC and BOCI.
