Chalco steps up with $500m perpetual

The state-owned aluminum giant pulls off an aggressive price after including a coupon step in its perpetual.

State-owned aluminum giant Chalco, rated BBB+/BBB-, raised $500 million of capital this week, selling a perpetual bond that becomes callable after five years.

The company became only the latest Asian corporation to issue perpetual bonds amid the tight interest rate environment.

The bond was priced at par to yield 4.25%, at the tight end of final guidance of between 4.25% and 4.375% and inside initial price talk circulated of "the 4.75% area". The pricing of the deal gave a clear demonstration of how structural differences — in particular, those that change an issuer's incentive to call a bond — can have a dramatic impact on pricing.

The Reg-S deal came after global supply chain manager Li & Fung, rated Baa3/BBB- by Moody’s and S&P, issued an upsized $650 million perpetual bond last week. That bond paid a coupon of 5.25%, but there was a crucial difference between the structures.

Whereas Li & Fung did not include any coupon step-up, Chalco agreed to increase its coupon payments by 500bp if it opted not to call the deal after five years. There were other reasons the deal was able to price inside Li & Fung — China state-ownership being a prominent one — but that was the main factor that appeared to separate the two deals. 

Perpetual motion

The new bond also showed quite how tight the current pricing environment is. The Hong Kong-listed group will use the proceeds of its bond to pay off an outstanding $400 million perpetual bond. That deal was priced at 6.25% in 2014, but by the start of this week, it was yielding 3.49%. The bond becomes callable in April 2017.

That is not the only perpetual the company has outstanding. Syndicate bankers pointed to Chalco's $350 million 6.625% perpetual bond as a second benchmark. The deal, which is callable in October 2018, was trading on a bid price of 106.5 to yield 3.23%.

Companies in Asia ex-Japan have issued $13.6 billion worth of perpetual bonds so far this year, compared with $5.4 billion raised for the same period a year earlier, according to Dealogic. It is not hard to see why. The low yield environment means issuers are keen to lock-in rates — and investors are more willing to help them in order for a boost.

Chalco's bond attracted an order book of $2.4 billion from 160 accounts. Asian investors took 76% of the entire deal, and European investors took the rest. Fund managers bought 43%, private banks 28% and banks 24%. The remaining 5% went to corporations, insurance companies and others. corporate/insurers/ others.

Given the aggressive pricing, the bonds traded slightly lower on 99.50/99.65 to yield 4.36/4.33% on Tuesday.

The joint global coordinators were BOC International, Barclays, DBS and Natixis, while China Citic Bank International, BOSC International and Haitong International joined as joint bookrunners.

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