One of China's leading state-owned enterprises made its international bond market debut on Tuesday, raising $1.5 billion from a three-tranche unsecured deal.
Aa3/AA- rated China Shenhua Energy is one of 53 companies owned by China’s SASAC (State-Owned Assets Supervision and Administration Commission), although the issuance vehicle was one notch lower rated China Shenhua Overseas Capital.
The deal was split into three equal $500 million tranches. A 20/01/2018 bond was priced at 99.647% on a coupon of 2.5% to yield 2.623% or 170bp over three-year Treasuries.
It attracted 85 accounts, with a split of 94% Asia and 6% Europe. By investor type, asset managers took 24%, banks 26%, private banks 2%, insurance/pension funds 7% and public 41%.
A 20/01/2020 bond came at 99.629% on a coupon of 3.125% and yield of 3.206%, which represented a spread of 180bp over five-year Treasuries. This was the tight end of final guidance 5bp either side of 185bp over.
A total 115 investors participated with a split of 91% Asia and 9% Europe. By investor type asset managers accounted for 55%, banks 36%, private banks 2%, insurance and pension funds 6% and other 1%.
Finally, a 20/01/2025 tranche was priced at 99.076% on a coupon of 3.875% to yield 3.988% or 205bp over 10-year Treasuries. This was also the tight end of guidance spanning 5bp either side of 210bp over.
This attracted 110 investors, with a split of 93% Asia and 7% Europe. Asset managers were allocated 45%, banks 13%, private banks 2%, insurance and pension funds 39% and other 1%.
In total, the Citigroup, HSBC and JP-Morgan led deal attracted an order book of about $3.8 billion, with the five year tranche the most popular with orders for $1.6 billion.
The deal closed more than two times oversubscribed, but its subscription levels are a far cry from those witnessed at the beginning of 2014 when huge order books guaranteed negative new issue premiums.
By contrast, China Shenhua has been launched into far softer markets. Chinese property names have all suffered the Kaisa effect and even higher rated names have not been immune from spread widening.
China Shenhua's closest benchmark, state-owned China National Petroleum Corporation, has seen its own outstanding bonds widen about 10bp to 20bp since the beginning of the year. CNPCCH has the same A1/A+/A+ rating as the Shenhua's issuance vehicle and its bonds also have the same keepwell provisions from its parent.
It has a 2018 bond outstanding, which was trading on a Treasury spread of 192bp over and G spread of 148bp over at the time of pricing. This is 7bp wider than the beginning of the year.
China Shenhua has priced 22bp tighter on a Treasury spread basis, although bankers said that most investors did not look at these bonds because they are less liquid than CNPCCH's 2019 and 2023 bonds.
The group's May 2019 bond was trading at about 148bp over at the time of pricing up from 135bp a week ago. On a G-spread basis, it was quoted at 163bp over.
CNPCCH's April 2023 bonds were quoted at about 185bp over Treasuries compared to 165bp over a week ago. On a G-spread basis they were trading around the 197bp level.
Bankers estimated that CNPCCH would probably have to pay about 10bp over current secondary levels for new five and 10-year bonds. This means that China Shenhua has priced flat to 7bp wide of CNPCCH on a like-for-like basis.
One banker said, "Every single new bond needs a new issue premium at the moment no matter how highly rated the credit. It's the new reality for 2015."
But the banker added, "Markets are still constructive and there is money to put to work. In many ways the tone is a lot more balanced than it was at the beginning of 2013 and 2014 when everything was attracting massive order books."
Key to positioning China Shenhua at the higher end of the Mainland credit spectrum was persuading investors that it is an integrated energy company and not just a coal producer. In 2013, 50.1% of its operating profit was derived from coal, with 27.5% from power and 19% from rail transportation.
Since 2009 it has seen revenues grow by a compound annual growth rate of 23.7% to Rmb284 billion ($4.6 billion) in 2013. It is now the 165th largest company in the Fortune 500 and the world’s largest coal producer above Coal India and Peabody.
It is also China’s second largest listed power producer with 41.8 gigawatts of installed power in 2013 which 89% was used by its own coal plants.
The new bond deal will not only help to diversify the group’s currency mix and extend its maturity profile, but also move it away from Chinese corporates’ traditional reliance on bank borrowings.
As of June 2014, 98% of the group’s debt was denominated in renminbi, with 60% due in less than one year. Bank borrowings accounted 76% of the overall mix, with direct financing the 24% balance.
During roadshows management argued that the group has a strong balance sheet with credit lines of Rmb217 billion ($3.5 billion) in June 2014 of which only 39% have been drawn down. Cash balances stood at Rmb63 billion ($1.06 billion).
Total debt to Ebitda stood at 1.2 times in June 2014, with debt to capitalisation of 71.3%.
