Chalco debuts $350m senior hybrid

The Chinese aluminum company sold its first senior perpetual note amid increased market scrutiny towards the sector, with some experts commenting that it priced too aggressively.
Chalco’s perpetual received an order book of $600 million from approximately 70 accounts.
Chalco’s perpetual received an order book of $600 million from approximately 70 accounts.

Aluminum Corporation of China – also known as Chalco – has issued a $350 million senior perpetual with a callable option in the fifth year amid improved pricing conditions.

But domestic concerns circulating the sector have dampened investor appetite for the corporate hybrid offering – the first from a Chinese corporate since May.

“The challenge here was the credit not the structure and people complained that the pricing is on the aggressive side,” said a source. “Doing a debut transaction in hybrid format is not a straightforward exercise and required a lot of work on accounts to get them involved in the transaction.”

“The problem is that there is overcapacity in the sector,” he added. “Also, the corporate’s financial numbers look pretty overleveraged.”

Syndicate bankers close to Chalco’s deal commented that there were no close comparables, which made it a challenge to price the deal. The senior hybrid ended up pricing at its initial guidance of 6.625%.

Other market observers believe that the BBB-rated Reg S deal was priced too aggressively, comparing it with other existing hybrids in the market. One of which was Longyuan Power’s – the largest wind power producer in China and Asia – senior perpetual issued last December, which was trading at 6.5% at the time of pricing. This suggests that Chalco’s fair value should have been about 7%.

Alternatively, Citic Pacific’s – a steel manufacturer with sizable operations in China – subordinated perpetual sold in May, which traded as wide as 9.25% yesterday, was also used as a comparison.

“These deals were not relevant but they provided data points,” said a source close to the deal.

Chalco’s senior perpetual is currently trading at par in secondary markets, around a bid of 99.75.

China is tackling an overcapacity issue under a new plan targeting an array of industries that have seen too many competitors and subsequently losses for too many years.

The new plan issued by the state council on October 15 names steel, aluminum, cement, shipbuilding and glassmaking among the affected industries in which new projects will not be approved and oversized firms will be restructured, Reuters reported.

Strong incentive to call

Although Chalco’s senior perpetual faced some challenges, the structure of the deal was good enough to compensate for the additional risk that investors had to bear. For example, the premium incorporated into this bond - called a “step up” - gives the issuer an incentive to redeem the note.

From the fifth year onwards, the hybrid’s coupon will be reset to a new fixed rate equal to the prevailing five-year US Treasury yield plus an initial spread as well as a one-time step-up of 500bp payable semi-annually, notes a source.

Also, in the event of change of control, breach of covenants or indebtedness default, investors will receive a step-up of 500bp, but this will be reduced by the same amount if either of the conditions has been resolved. 

“The transaction was well-structured to overcome the challenges,” said the source. “The structure is very investor friendly and is not subordinated.”

Chalco’s perpetual received an order book of $600 million from approximately 70 accounts. Private banks subscribed to almost half of the issuance, followed by fund and asset managers with 44% and financial institutions 9%. Asian investors took a bulk of it - 87% - and the rest went to European investors.

HSBC was the sole global coordinator and structuring adviser. ANZ, HSBC and Natixis were the joint book coordinators.


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