Chinese state-owned steel company Shougang Corp priced a Rmb1 billion ($157 million) two-year dim sum bond at 4.875% on Thursday.
The unrated bonds were issued through British Virgin Islands-incorporated Shougang Holdings Bonds. The guarantor is Shougang Holdings (Hong Kong), a holding company with no significant assets aside from equity interests in various companies, which has paid dividends of roughly HK$45 million ($5.7 million) during the past year.
Investors bought the bonds for exposure to the onshore parent company, Shougang Corp, which is owned by the State-owned Assets Supervision and Administration Commission.
However, the bonds are not guaranteed by Shougang and, apart from limited obligations in its keepwell agreement, the parent has no obligation to guarantee or make any interest or principal payments. Underscoring the untested nature of the keepwell agreement, the offering memorandum also said that its enforcement may be subject to “procedural difficulties”.
Bank of China International, Citic Bank International, DBS, ICBC Asia, J.P. Morgan and Wing Lung Bank were joint bookrunners. The preliminary offering document had named Bank of China, DBS and J.P. Morgan as joint bookrunners. Citic, ICBC and Wing Lung Bank — which each put in anchor orders — were later added to the deal as bookrunners. Bank of China, Citic and ICBC are lenders to the company.
There is speculation that the deal was not widely distributed. The leads had announced the trade with anchor orders of Rmb700 million and the deal gathered an orderbook of Rmb1.1 billion. It was sold mostly to Hong Kong investors and no distribution statistics were available.
“It’s a farce to market this deal as a public deal that is widely distributed,” said one rival banker. “This is another of those deals like Tsinlien and Sinotrans, which has been mostly subscribed by the banks because no sensible credit investor will buy it, and the balance jammed with a few private banks. Investors will be stuck with a bunch of illiquid bonds,” he added.
One person familiar with the deal said that “a few institutional investors” participated in Shougang’s bond along with private banks. He added that the anchor orders included other investors besides the Chinese banks and that the bonds were quoted at 100/100.5 in secondary, around the par issue price.
Shougang was competing with another Chinese state-owned steel company, Baosteel, which was also in the market on Thursday. The company was expected to price the first dim sum from an onshore Chinese company early this morning. Institutional investors preferred Baosteel, which is expected to be rated A3/A/A- by Moody’s/S&P/Fitch.
“I didn’t look at Shougang. We’re not into fly-by offshore renminbi bonds,” said one Singapore-based investor. “Baosteel looks okay and, versus CNPC, it is pricing in the right ballpark. However, we have more underlying concerns about renminbi appreciation now so we are not looking to increase our offshore renminbi exposure, regardless of pricing.”
Baosteel’s two-year bonds were marketed on Thursday at 3.125% to 3.375%, the three-year bonds at 3.50% to 3.75% and the five-year bonds at 4.375% to 4.625%.
Bondholders of Baosteel’s bonds rank equally with Baosteel’s onshore loans, which is positive for investors. Issuing via an onshore entity is also a cleaner structure compared to issuing through an offshore entity with a guarantee from the onshore company.
Deutsche Bank and HSBC were joint global coordinators. China Merchant Securities, DBS Bank, ICBC International and Standard Chartered were joint bookrunners.