China Merchants Holdings priced its inaugural international bond on Monday, raising $500 million. The Reg-S deal was originally sized at $350 million but was upsized in the face of an order book in excess of $2.5 billion.
Such was the demand that pricing of the issue was tight. Initial guidance was at T+115bp-125bp. That pricing was revised down to T+113bp-115bp and the deal priced at the bottom of that range. The bonds carry a coupon of 5.38% and were priced at 99.885%
A slight concern for lead managers HSBC, Merrill Lynch and BOCI was that the issuing entity CMHI Finance (Caymans) Inc had a rating one notch lower than the parent by S&P. The deal was rated BBB- by S&P but the parent and guarantor has a BBB rating. However, both issuer and parent have a Baa2 rating from Moody's. In the end this split had no effect on pricing.
Allocations saw 126 accounts come into the deal, with 31% from Hong Kong, 24% from Singapore, 14% from China, 5% from the rest of Asia and 126% from Europe. In terms of investor type, asset and fund managers took 41% of the deal, banks took 31%, insurance companies took 18% and private banks and corporates took the remaining 10%.
The pricing equates to a level of around 70 basis points over Libor, which for ten year money is cheap for the issuer. If it had gone to the bank market, it is doubtful it could have raised a ten-year loan, and if so certainly not at 70 over Libor.
Indeed a key reason for doing the deal was to diversify China Merchant's funding sources away from banks. In terms of demand, banks put in up to 47% of the orders, but were only allocated 31% of the deal.
The pricing of the bonds equate favourably with other similar issuers. Bankers say the closest comparable is Cosco Pacific. However Cosco is a red chip shipping company, not a red chip port operator and so not a direct comparison. Nevertheless Cosco has an unrated bond due in 2013 and thus with eight years left which is trading at 80bps over Libor on the bid.
Other comps that could be used are Hutchison Whampoa's 2014 bond at 69bp over Libor and PCCW's July 2013, which is at 66bps over Libor. Add in a few more years and some new issue premium, and China Merchants has priced through these Hong Kong blue chips.
Syndicate bankers say that accounts were attracted by the size and liquidity of the bonds as well as by diversification of buying a red chip name as not many red chips have international bonds outstanding. Moreover, China Merchants is perceived to be well entrenched with the hierarchy in Beijing. "The credit story was liked but the technical aspects of the bonds helped a lot too," says one.
There were said to be some concerns about the gearing level of the issuer. However, with a 34% debt to equity ratio after the new deal this is lower than Hutchison Whampoa, China Resources and in line with Citic Pacific. Moreover the company has a debt to ebitda level of 3.9 times which is also lower than Hutchison Whampoa and Citic Pacific although it is higher that Cosco Pacific and China Resources.
It is understood that the bond proceeds will be used to take out a bridging loan the company used to pay for its recent purchase of Shanghai International Port, although this is not specifically mentioned in the prospectus.
In December the company announced that it was to pay some $677 million to buy 30% of Shanghai International Port (Group) Co., which runs the world's third-busiest container port at Yangshan near Shanghai. The Shanghai municipal government owns the remaining 70% of the port. The timing of that purchase and this bond deal are said to be closely linked.
The bond deal managed to price just before a 10bp crash in the US ten-year Treasury market yesterday. This luck was further compounded by generally fair winds in the Asian fixed income market. Strangely these fair winds have not caused many new issuers to set sail, as China Merchants has done. "The market has been pretty good for Asian new issues but the supply has been less than we expected," says one fixed income banker.