Chinese specialty chemical producer, China National Bluestar, made an embarrassing return to the international bond markets for the second time in the space of week on Thursday with a debut $1 billion two-tranche issue.
The group's re-appearance followed the cancellation of an earlier $1 billion transaction, which had priced on Thursday 28 May and was supposed to settle on June 3.
Investors first became aware there was a problem the day before settlement, when the leads announced it was being delayed because of the need for additional disclosures to the preliminary offering circular.
The following day the bond was withdrawn altogether and all secondary market trades deemed void. This announcement was accompanied by a supplementary circular correcting inaccuracies in the original offer document ahead of the launch of a new deal.
At issue were provisions in the Keepwell Deed, which Chinese companies routinely deploy as a form of guarantee to enhance the creditworthiness of their subsidiaries and offshore issuance vehicles.
In this case, central government-owned SOE ChemChina had stated it would not 'pledge, charge or in any way encumber' its effective 63.6% ownership in China National Bluestar. However, it subsequently emerged that the shares had been pledged to the Export-Import Bank of China as collateral against a $1.89 billion loan taken out in 2011.
"This is very unusual," one fund manager told FinanceAsia. "Investors know that some terms change before a deal is finalised, but nothing this major. It should have been discussed with the issuer prior to launch and confirmed by their legal counsel."
The fund manager said he believed the new covenants materially weakened the deal in legal terms.
In its rating release, Moody's also said it had assigned China National Bluestar a Baa3 rating two notches higher than its stand-alone credit fundamantals warranted, because of the strong support it received from its parent, ChemChina. Standard & Poor's and Fitch assigned a BBB- rating.
Yet for many investors, weaker covenents are likely to be less of a consideration than an underlying belief in the existence of an implicit government guarantee all the way down through the ownership chain.
ChemChina is not only the country's largest pure play chemicals company, but is also strategically important to the Chinese government as an industry consolidator. It owns it via the State-Owned Assets Supervision and Administration Commission (SASAC).
In turn, China National Bluestar is ChemChina's most significant subsidiary accounting for 29.1% of its Ebitda in 2014.
As such, bankers argue that investors have received an unexpected windfall as a result of the re-pricing, which had to be pushed wider to compensate them for the messy execution as much as the weaker covenants.
The new deal, which priced on Thursday, has a similar overall structure to its predecessor. The issuer is Bluestar Holdings with a guarantee by China National Bluestar and an amended Keepwell Deed provided by ChemChina.
As before, the deal is split between a $500 million three-year tranche and $500 million five-year tranche.
The three-year tranche was marketed at 250bp over Treasuries, 30bp wider than the original deal priced at the week before. The five-year tranche was marketed at 270bp over, 35bp wider than the week before.
Final pricing of three-year tranche was settled at 99.893% on a coupon of 3.5% to yield 3.538% or 250bp over. The earlier tranche priced at 99.855% on a coupon of 3.125% to yield 3.176% or 220bp over.
The five-year tranche was priced at par with a coupon of 4.375% to yield 270bp over Treasuries. The earlier tranche was priced at 99.982% on a coupon of 3.875% to yield 3.879% or 235bp over Treasuries.
The two tranches also have a make whole call option, which was priced at 40bp over Treasuries compared to 35bp one week earlier.
The original deal attracted an order book of $5.5 billion with a split of $1.8 billion for the three-year tranche and $3.7 billion for the five year.
The new deal had far less demand and less investors. It built an order book of $2.9 billion of which $1.9 billion was for the five-year tranche with 120 accounts and $1 billion for the three-year tranche with 75 accounts.
The previous deal had 200 accounts in the five-year and 120 in the three-year.
By geography, 85% of the five-year tranche was placed in Asia and 15% in Europe. By investor type, 40% went to asset managers, 28% to banks, 24% to insurers and sovereign wealth funds, with the remaining 8% to private banking clients.
For the three-year tranche, 95% went to Asia and 5% to Europe. By investor type, fund managers took 36%, banks 47%, insurers and sovereign wealth funds 12% and private banks 5%.
Last time around the three-year tranche had a split of 84% Asia and 16% Europe, with 45% going to banks, 41% to fund managers, 8% to private banks, 4% to insurers and 2% to other.
The five-year had a split of 85% Asia and 15% Europe, with 58% going to fund managers, 17% to banks, 10% to private banks, 9% to sovereign wealth funds and corporates, plus 6% to insurers.
Investors had a number of reference points when considering the attractiveness of the new pricing.
The most important was the trading performance of the original deal and this does not paint a particularly pretty picture.
The three-year tranche immediately traded down in the secondary market and stayed there until it was formally cancelled, recording a last traded price of 99.649% according to Bloomberg.
The five-year fared slightly better. It traded up to a high of 100.04% on May 29 before slipping below its issue price to 99.247% at the point when the original deal was formally pulled.
China National Bluestar's nearest comparables have also softened over the course of the week.
Similarly rated Shanghai Huayi has traded down very slightly over the past week. Its $350 million 4% 2019 bond was bid at 101.77% last Thursday. This Thursday it was bid at 101.217%.
However, A3/A- Sinochem has been harder hit. Its 4.5% 2020 bond was bid at 107.17% last Thursday. This Thursday it was bid at 106.55%, some 0.62 of a point lower.
In its roadshow presentation the company highlighted its role as one of the world's largest specialty chemical producers particularly in methionine (an additive in animal feed), silicone monomer (used for rubber, oil and resin products), paste PVC resin (used in flooring and wallpaper) and polyphenylene oxide (a high temperature thermoplastic used in electronic devices).
In 2014, it recorded revenues of Rmb51 billion ($8.23 billion) and Ebitda of Rmb5.9 billion, resulting in an Ebitda margin of 11.6%, up from 8.6% in 2012.
The company derives 45% of its revenues from new chemical materials, 30% from performance chemicals, 19% from nutritional sciences and 6% from environmental sciences.
Overseas operations accounted for 54.7% of revenues and Chinese operations for 45.3% in 2014. In its ratings release Moody's commented that one of the issues constraining the current rating is the company's high debt, which has been taken on pay for overseas acquisitions including Adisseo, Qenos and Elkem.
At the end of 2014, debt to Ebitda stood at 6.6 times, down from 9.6 times in 2012, while the interest coverage ratio was 2.5 times up from two times in 2012.
Moody's said it would consider increasing the rating if the company can consistently keep its debt to Ebitda ratio below five times and will conversely consider reducing it if it stays in excess of seven to eight times.
Syndicate and legal advisors
Joint global co-ordinators for the new deal are Deutsche Bank, Morgan Stanley and Bank of China International. JP Morgan and BNP Paribas also acted as joint bookrunners.
Legal advisors to the company are Paul Hastings on English law and Zhong Lun on Chinese law. Legal advisors to the bookrunners are Clifford Chance on English law and Jun He on Chinese law