Beijing Enterprises Water and Zijin International both closed bonds on Friday, despite volatile markets.
Beijing Enterprises Water raised a total of Rmb1.45 billion ($224 million) from a dual-tranche dim sum bond — Rmb1 billion from a three-year tranche that paid a yield of 3.75% and Rmb450 million from a five-year portion that paid 5%.
Bank of America Merrill Lynch, Goldman Sachs and Morgan Stanley were joint global coordinators and bookrunners. DBS, Macquarie and Standard Chartered Bank were joint bookrunners.
The initial guidance was in the area of 3.75% and 5% respectively for the three- and five-year bonds, and this was revised to a final guidance of 3.75% and 5%, plus or minus 12.5bp.
The deal’s pricing reflected the challenging market conditions that borrowers are facing, although the relatively small size of the five-year tranche was also a factor.
Back in May, parent Beijing Enterprise had raised $600 million for a 10-year bond and paid a yield of 5%, which was exactly the same coupon that Beijing Enterprise Water paid on its much smaller Rmb450 million five-year offshore renminbi bond.
Beijing Enterprises has a 44.5% stake in Beijing Enterprises Water and there is a change-of-control put if the parent’s stake falls below 35%. The latter’s issue was unrated, whereas Beijing Enterprises is rated Baa1 by Moody’s and A- by Standard & Poor’s. However, one person familiar with the deal noted Beijing Enterprises Water would probably be a crossover credit, in between investment-grade and high-yield, if it was rated.
“Beijing Enterprises Water is a much smaller company, it’s less established,” said the person familiar with the deal, noting that investors have also become more selective about what they buy. “It was always going to price at a different zip code from the parent.”
The deal attracted an order book of Rmb2 billion from 60 investors. For the three-year tranche, banks bought 48%, fund managers 28%, private banks 21% and others 3%. Hong Kong investors bought 72%, Singapore investors 27% and others 1%.
For the five-year tranche, fund managers bought 58%, banks 21%, private banks 18% and others 3%. Hong Kong investors bought 78%, Singapore investors 11%, European investors 8% and others 3%. Both sets of bonds were bid at par in secondary trading yesterday afternoon.
Elsewhere, Zijin International, the offshore funding vehicle of Zijin Mining, priced its $280 million five-year bond at Treasuries plus 295bp. Zijin is the first dollar bond to close in the past couple of weeks. The coupon was fixed at 4.25% and the notes reoffered to yield 4.413%. The initial whisper was high 200bp. BOCI was the sole bookrunner and BNP Paribas was a co-lead manager.
The deal had an unusual structure — the bonds are supported by a standby letter of credit from Bank of China’s Paris branch, which equates to a guarantee from Bank of China. It was structured this way because Zhijin Mining is an H-share company that needs state approval to tap the offshore market.
The difficulty of winning such approvals means that Chinese companies usually choose to tap the offshore market through an overseas entity — in this case, Zijin International. However, that entity is not strong enough to tap the dollar market on a standalone basis.
“Zijin International has some assets but its cash flow is not strong enough,” said one person familiar with the deal. “It was different from Sinochem (Hong Kong), which has strong assets, and CNPC (Hong Kong), which had a keepwell agreement from the parent.”
There are a slew of Chinese companies that need to raise funds but it remains to be seen if banks will be keen to extend letters of credit to offshore entities.
According to a Nomura trading note, if Bank of China cross-defaults on its own senior debt of more than $25 million, then bondholders of Zijin’s new issue can trigger an event of default and the bond will become immediately due and payable. This means that Bank of China’s payment obligations under the standby letter of credit will rank equally with its other senior unsecured debt.
The deal gathered an order book of $850 million from 80 accounts. By geography, investors from Hong Kong and China bought 62%, Singapore 25% and Europe and others bought 13%. By investor type, funds bought 59%, private banks 24%, banks 15% and others 2%. The bonds traded tighter at Treasuries plus 290bp in secondary trading yesterday afternoon.