The $600 million transaction had aggressive pricing but attracted peak demand of $6.9 billion as investors bet on a future when ChemChina overtakes Germany's BASF and America's Dow Chemical to become the world's largest chemical company.
The fundraising is part of the group's efforts to lengthen the duration of its debt profile and re-finance loan funding for the acquisition of Swiss agrochemicals firm Syngenta. The $46.5 billion deal, which remains on course to close later this year, represents China's largest outbound M&A deal to date.
But ChemChina is also in talks to merge with China's Sinochem, which is also 100% owned by the State Council. Their merger will not only create world's largest chemical company, but also potentially re-anoint Sinochem chairman, Ning Gaoning, who is positioning himself for the top job.
The domestic press variously refer to Ning as China's "M&A king" or an "M&A maniac" thanks to the frenetic dealmaking he undertook during his decade-long reign at Cofco. This came to an end in late 2015 when new senior management were drafted in to bring some semblance of order to his multiple acquisitions.
ChemChina's bond deal was launched into a market trying to digest the implications of Moody's sovereign downgrade from Aa3 to A.
However, as one syndicate banker noted: "Chinese credits initially bounced out by about 2bp to 5bp, but then the market shrugged the move off and they tightened right back to where they were again. The downgrade had no impact on ChemChina at all."
What its deal did have was considerable rarity value.
While the group has been very active in the loan market of late, it has very little outstanding paper in the bond market. Investors are far more used to seeing deals from its 53.8% owned subsidiary, China National Bluestar, which has an outstanding perpetual of its own.
Syndicate bankers also said investors lapped up the deal because it came from a credit in the industrial sector, which has not provided much issuance year-to-date.
Structure had the right formula
There was also a marked contrast between the primary and secondary market receptions to ChemChina’s perpetual non-call five issue and Nan Fung's $500 million perpetual non-call three issue only two days earlier.
When Nan Fung's Baa3-rated deal broke syndicate on Tuesday, it traded down a point. When ChemChina's Baa2/BBB+ rated deal followed suit on Thursday, it traded up three quarters of a point.
The contrasting trading pattern was due to Nan Fung's fixed-for-life structure, which makes its deal an extremely long-dated security that is likely to perform badly as soon as interest rates rise. By contrast, ChemChina chose a traditional perpetual with a punitive step-up structure, which effectively makes its deal a short-dated bond.
Having set out with initial guidance around the 4.2% level, bankers priced the deal at par on a coupon of 3.9% to yield 207.5bp over Treasuries. The first call option falls due in 2022 and has a 400bp step-up.
The deal, which was issued in the name of CNRC Capital with a guarantee from ChemChina, is expected to be EMBI-eligible after a seasoning period.
The Reg S offering attracted a final order book with $5 billion of demand and allocations to 180 accounts.
One close comparable was a perpetual deal by its own subsidiary China National Bluestar. This issue has a one-notch lower BBB- rating from Standard & Poor's, although the same Baa2 rating from Moody's.
Its call option falls due in December 2018.
During the bookbuilding process for ChemChina's deal, it was being quoted at 101.5% to yield 3.38% or 212bp on a G-spread basis.
This means ChemChina's three-and-a-half year longer transaction has priced 4.5bp through its subsidiary.
Other comps were Huarong Asset Management's Baa1/A- rated 4.5% issue, which has a similar call option in 2022. This was trading at 102% to yield 4.02% or a G-spread of 224bp on Wednesday.
Likewise Chalco's BBB-rated 4.25% deal was trading around the 101% area to yield 4% or 226bp over on a G-spread basis. It has a 2021 call option.
Distribution statistics show that 87% of ChemChina’s paper went to Asia and 13% to Europe. By investor type, fund managers took 77%, private banks 12%, sovereign wealth funds and corporates 7%, with insurers and pension funds on the final 2%.
At the end of the 2016 financial year, ChemChina recorded a net debt to Ebitda ratio of 5.6 times down from 7.1 times in 2015 according to the online roadshow for its new bond deal. However, this ratio is likely to have already shifted quite significantly because of its various refinancing activities and will do so again if it merges with Sinochem, which has far stronger debt ratios.
An US SEC filing, posted on May 18, reveals ChemChina has privately issued perpetual capital securities to: Bank of China ($10 billion), China Reform Holdings ($7 billion), Industrial Bank ($1 billion) and Morgan Stanley ($2 billion through convertible preferred securities).
In total, ChemChina took out $32.9 billion in bridge loans to fund the Syngenta acquisition and has $19.7 billion in syndicated financings, which fall due over the next 18 months.
The group's online roadshow also showed that it currently derives the greatest percentage of its Ebitda from the tire and rubber sector thanks to its $2.069 billion acquisition of Pirelli in late 2015.
As a result, 29.5% of 2016 Ebitda came from this segment in 2016 compared to 27.4% from the new chemical materials and speciality chemicals segment. Agro chemicals accounted for a further 15.6%.
HSBC is also advising ChemChina on the Syngenta deal alongside China CITIC Bank International. Goldman Sachs, JP Morgan and UBS have been representing Syngenta according to S&P Global Market Intelligence data.