Baosteel Resources sold a $500 million five-year bond on Wednesday, helping to break the week-long silence that descended on Asia’s debt capital markets.
The Reg S-only debt offering priced at US Treasuries plus 270 basis points, which is around 20bp tighter than the initial price guidance area of Treasuries plus 290bp, according to a term sheet seen by FinanceAsia.
But the borrower still ended up paying a slight premium to its peers as heightened global market worries continued to gnaw away at investor confidence.
“Investors are still [cash-rich] but it’s still very restricted as to who can come to the market,” said a Singapore-based debt capital market banker away from the deal. “Right now the market is open for well-known, high-grade repeat issuers, but even they have to pay a premium."
The last Asian dollar issuer that came to market was Woori Bank on January 15, when it launched a $350 million 5.5-tranche deal.
Global market volatility eased on Wednesday, buoyed by hopes of further easing by the European Central Bank. Mario Draghi, president of the ECB, is expected to unveil on Thursday a new plan to help boost the struggling eurozone economy.
Specifically, analysts and investors expect Draghi to announce a programme of quantitative easing, whereby the ECB would spend over €500 billion ($579 billion) to buy the bonds of EU governments.
The spectre of the ECB’s stimulus and recent global markets volatility as oil prices have tumbled has boosted demand for safe-haven assets such as US government bonds but dampened demand for weaker credits.
The 10-year US Treasury yield has declined from 2.3% at the beginning of the year to about 1.79% currently, according to Bloomberg data. Meanwhile, the Markit iTraxx Asia ex-Japan Investment Grade Index fell to 119.9 on Wednesday from a year-to-date high of 123.0 on Monday, signalling that the market has somewhat stabilised.
The proceeds of Baosteel’s latest note — supported by credit enhancements such as a keepwell deed and liquidity support covenant deed — will be used to repay its existing debt as well as for the development of its overseas resources.
In an effort to increase its competitiveness at home and internationally, Baosteel has been on a buying spree in the last year.
In August, global equity firm Warburg Pincus and Shanghai Baosteel Gases agreed to buy the industrial gas assets of Henan Jinkai Chemical Investment Holdings for Rmb3 billion ($489 million). In June, Baosteel and partner Aurizon Holdings agreed to buy Australian steel maker Aquila Resources. The deal will give the Chinese steel maker a share of the A$7.4 billion ($6 billion) West Pilbara iron ore mine, port and rail project in Western Australia.
The offering received a total orderbook of $4 billion from 290 accounts, 80% of which went to Asian accounts, according to a source close to the deal. Fund managers subscribed to 58% of the notes, followed by insurance and sovereigns 19%, private banks 15% and banks 8%.
Credit enhancements, comparables
According to the deed of investment and keepwell undertaking as well as a liquidity support covenant deed, Baosteel Group must maintain more than 50% ownership in Baosteel Resources and ensure that the entity has a minimum net worth of $500 million.
Additionally, the credit enhancement instruments ensure that Baosteel Resources maintains sufficient liquidity to allow timely payments under the bond through a dollar-denominated shareholder loan or equity investments.
“Baosteel Group has a track record of providing significant support to [Baosteel Resources],” Chris Park, senior vice president for Moody’s corporate finance group, said in a note on January 16. “Baosteel has also provided letters of comfort for [Baosteel Resources]’ bank loans and helped arrange financing for [its] overseas investments.”
The nearest comparables for Baosteel’s Baa1/BBB+/BBB+ rated note includes its existing 2018 paper, which traded at a G-spread of 225bp prior to announcement of its new bond, according to a source familiar with the matter.
Other comparables include Chinese dairy products manufacturer China Mengniu Dairy and travel company China Travel Service, whose outstanding, similarly-dated bonds traded at a G-spread of 193bp and 224bp, respectively, the source said.
Baosteel Resources, founded in 1995, is the core resources platform of Baosteel Group. The company mainly engages in overseas resources development and trading business. It also offers capital support to Baosteel Group via centralised fund management and financing. In addition, it has a small logistics business.
Deutsche Bank and Standard Chartered were the joint global coordinators and bookrunners of the transaction. Other joint bookrunners include ANZ, Bank of China, DBS and HSBC.
The co-managers of the deal were Commonwealth Bank of Australia and National Australia Bank.