Three Gorges Corporation, the world’s largest hydropower company, returned to the international bond markets for the second time in its history on Tuesday with a $1.5 billion deal.
The company took advantage of its size and scale to exert the maximise pricing power it could over investors with an extremely aggressively priced deal that came through its own secondary market spreads on a like-for-like basis.
It also did so in a week when investors are awash with new issues and struggling to absorb recent ones, which are largely trading down. Monday's $400 million green bond for India's Axis Bank, for example, closed 5bp wider on Tuesday.
Nonetheless, investors appeared to stick with Three Gorges, with syndicate bankers reporting a peak order book of $5 billion when final guidance went out after the US open. This was, however, less than the $5.2 billion final order book it achieved almost a year ago when it raised $700 million from a debut deal.
Indicative pricing for the split five- and 10-year deal was initially pitched at 110bp and 150bp over Treasuries. This was subsequently narrowed to a launch spread of 90bp over and 130bp over for a $500 million 5-year and $1 billion 10-year.
"I think it's fair to say this was a good deal for the issuer," one banker commented. "But even though the majority of paper went into Asia, there was a very strong showing from the US because of the underlying credit quality."
At the time of pricing, Three Gorges' existing $700 million 3.7% June 2025 deal was trading on a G-spread of 129bp. It initially priced at 99.959% on a yield of 3.705% or 135bp over Treasuries.
This means the new 10-year has offered a 1bp pick up for a one-year curve extension.
However, the secondary market differential between State Grid Corporation 5-year and 10-year paper suggests the one-year curve extension is worth between 5bp and 7bp. On this basis, the 10-year tranche has come about 4bp to 5bp through fair value.
State Grid Corp has a $500 million 2.125% May 2021 bond outstanding and a $500 million 2.875% May 2026 bond outstanding.
There is a 33bp curve between the two, with the 5-year trading on a G-spread of 80bp on Tuesday and the 10-year on a G-spread of 113bp.
Bankers pointed out that Three Gorges has offered a steeper 39bp curve between its 5- and 10-year bonds than State Grid Corp.
However, pricing on the 5-year tranche is just as aggressive as the 10-year.
For example, Three Gorges offers investors a 16bp pick up over State Grid Corp based on its existing 2025 deal and State Grid Corp's 2026 deal.
This suggests that any new deal should price about 20bp over State Grid Corp after the one-year curve extension is factored in. Yet its five-year tranche has priced only 10bp over it.
State Grid Corp has an Aa3/A+/AA- rating in line with the sovereign. Three Gorges has the same sovereign ratings from Moody's and Fitch but is rated two notches lower by Standard & Poor’s, although it is on positive outlook.
Its credit metrics have declined slightly since 2014, with net debt to Ebitda standing at 2.9 times compared to 2.7 times one year ago.
According to its online roadshow, the company reported net profit of Rmb28.8 billion ($4.39 billion) in 2015, up from Rmb26 billion in 2014.
in terms of scale and strategic importance to the Chinese government, it is massive. At the end of 2015, it accounted for 15.9% of China's hydropower capacity on 50.6GW.
By 2020, it hopes to account for 20% after the 30.39GW it is currently building comes on stream.
It is also fast developing its international portfolio under a three-pronged strategy targeting countries neighbouring China, those in Latin America and Africa with abundant water supplies and developed Europe.
In 2015, it secured its largest international deal to date: a combined 4.99 GW project in Brazil. This cost the group $3.7 billion and will account for 4% of capacity in the country, making Three Gorges Brazil's second largest operator.
Joint global co-ordinators for the bond deal were: JP Morgan (lead left), Deutsche Bank and ICBC. Joint bookrunners were: Bank of China, Goldman Sachs and UBS.
