China Oil & Gas Group returned to international bond markets a second time on Monday with an opportunistic $300 million bond that met with strong investor interest despite unprecedented tight pricing.
The capped so-called 5.5-year non-call three bond was launched with guidance around the 5.375% area by joint global coordinators Deutsche Bank and JP Morgan. Morgan Stanley was also on the joint books.
After garnering orders totaling $2 billion by lunchtime, the leads tightened guidance to a range of 5% to 5.125% before closing the order book at the end of the Asian trading day.
By this point investors had placed orders totaling $3.4 billion, giving the issuer confidence to push final pricing to the tightest end of the range. According to a term sheet seen by FinanceAsia, the deal was priced at par with a semi-annual coupon of 5% and two call options -- one falling due on May 7 2018 at 102.5% and the second on May 7 2019 at 101.25%.
A total of 246 accounts were allocated paper with a split of 81% Asia and 19% Europe. Fund managers took 71%, with private banks on 17%, insurance companies 6%, banks 4% and agencies/other investors mopping up the remaining 2%.
China Oil & Gas's 5% coupon is unprecedented for an Asian double-B rated deal in the five-year sector.
A source familiar with the matter also noted that pricing came slightly through the company's existing yield curve. The group's outstanding 5.25% March 2018 bonds yielded 4.4% to 4.45%. An additional 2.5 year extension to bring them level with the new bond's maturity would have pushed the yield out to about 5.125%, according to the source.
The Ba1/BB+ rated group's ability to secure such tight pricing can be attributed to a number of factors. Firstly, the deal caught a very good market window ahead of an expected rush of new Chinese bank paper.
Secondly, it offered investors a chance to ride some of the momentum seen lately in the Chinese high yield debt space. After a period of underperformance, spreads have tightened significantly in the past two weeks particularly among Chinese property credits.
This was largely triggered by the Chinese government's unexpected decision to bail out Shanghai Chaori Solar Energy via one of its bad banks -- China Great Wall Asset Management. Fears that investors were going to be forced to take a haircut on non-performing Chinese debt have subsequently dissipated somewhat.
China Oil & Gas has also been able to take advantage of the secondary market performance of Ba2/BB+ rated Geely Auto's inaugural $300 million bond deal. This five-year bond with a three-year call option was priced in late September with a 5.25% coupon and traded up three points during the course of October.
Yesterday, it was being bid around the 102.25% mark, representing a yield of 4.73%.
Sources close to China Oil & Gas's deal said investors liked the fact its issue size was capped from the outset. Its existing bond has also been fairly stable, trading up about 0.25% points during October.
Investors seem comfortable with the fact that Standard & Poor's placed China Oil & Gas's rating on CreditWatch negative in late June after the group diversified into the upstream oil and gas business. That month it purchased Canadian oil and gas group Baccalieu Energy for C$235 million ($207 million).
The agency concluded that the move would lead to increased cash flow volatility because it exposes China Oil & Gas to fluctuations in oil and gas prices.
However, Moody's has re-affirmed China Oil & Gas's new issue rating at Ba1 stable. It said the new bond will not materially alter the group's leverage since it is using part of the proceeds to re-pay existing debt, in particular a HK$700 million loan from China National Petroleum Corporation.
The rating agency also noted that China Oil & Gas is planning to consolidate all its debt at the holding company level over the next 18 months and expects its overall debt to capitalisation ratio to remain in the 40% to 45% band through to 2016.
One factor influencing a potential ratings upgrade would be a fall in this ratio to the 25% to 30% level.
Overall, the agency said its rating is underpinned by the steady revenues from its core gas distribution business in Qinghai Province.