China Orient sells $1b dual-tranche bond

China Orient raises huge dollar-denominated offering, the third Chinese bad debt management firm to raise international funds this year.
China Orient, one of China's biggest bad debt banks.
China Orient, one of China's biggest bad debt banks.

China Orient Asset Management sold a $1 billion dual-tranche bond on Tuesday, shoring up funds for working capital and general corporate funding purposes as investors familiarity towards the issuer type improves.

The group's latest offering can be split into a $600 million five-year bond and $400 million 10-year note, according to a term sheet seen by FinanceAsia. The tranches have a coupon of 3.75% and 5% respectively.

The Reg-S note, issued by Charming Light Investments, is guaranteed by China Orient Asset Management International Holding and supported by a keepwell deed and equity interest purchase undertaking from the parent, which is the 100% owner of both the issuer and guarantor.

Given the improvement in investor familiarity towards the issuance of such bonds, China Orient was able to tighten pricing from Treasuries plus 255bp and 300bp area for the five- and 10-year tranches respectively to Treasuries plus 225bp and 275bp, a source familiar with the matter said.

Also, both tranches achieved a combined orderbook in excess of $10 billion from more than 270 accounts, added the source. 

China Huarong was the last Chinese asset management firm to raise a dollar bond. In July, it sold a $1.5 billion dual-tranche offering. In May, China Cinda sold an inaugural $1.5 billion dual-tranche note.

China Orient, 100%-owned by China’s Ministry of Finance, was established by the Chinese government in 1999 as one of four asset management companies tasked with removing problem loans from the Mainland’s major banks prior to their listing.

Aside from asset management, which accounts for 64% of China Orient’s assets, the company operations also involve insurance, securities, international finance and other businesses.

Restructuring

Today, these state-owned distressed asset managers are at various stages of commercialisation, which contributes to the difference in credit ratings, Standard & Poor’s said in a recent report. Cinda has the lowest financial leverage after its initial public offering last year, followed by Huarong, which has introduced new strategic investors under its joint-stock company status.

“We believe that all [state-owned distressed asset managers] will be listed at some point, thereby minimising their gap in financial leverage,” said Harry Hu, analyst at S&P, adding that China Orient has a higher risk given that it has a larger concentration to the real estate sector and a bigger portion of property under construction.

And although China Orient’s current restructuring proposal — a conversion to a joint-stock ownership or introduction to new strategic investors — will likely dilute the MoF’s ownership of the entity, investors took comfort that the government maintains a good track record of retaining controlling stakes in asset management firms, said a credit analyst.

Investors also analysed the performance of fellow peers’ bonds post the announcement of a share sale. For example, China Huarong’s outstanding dollar-denominated notes outperformed upon the announcement of a 20% stake sale on July 22 to the likes of New York-based private equity firm Warburg Pincus, Malaysia’s state investment arm Kazanah Nasional, US investment bank Goldman Sachs, Fosun, China International Capital, Citic Private Equity and Cofco, added the credit analyst.

The cash price of China Huarong’s 2019 bond jumped from 99.938 on July 21 to 100.206 on July 23, according to Bloomberg bond data.

Comparables

The closest comparables for China Orient’s five-year offering include its existing notes expiring in 2018 which were trading at Treasuries plus 205bp prior to announcement. Other comparables include China Cinda and China Huarong’s outstanding paper expiring in 2019, which were trading at Treasuries plus 201bp and 220bp.

As for China Orient’s 10-year tranche, the closest comparable is China Cinda’s existing bond expiring in 2024 that were trading at Treasuries plus 255bp prior to announcement, according to a source close to the deal.

Although asset managers are all chasing for the highest-yielding high-BBB state-owned enterprise bonds, thus benefiting China Orient’s new offering which is rated Baa1 by Moody’s and A- by Fitch, credit analysts said that shorter duration paper is likely to benefit the most.

“With the credit quality of China Orient benefiting substantially from Chinese government support, our strong preference is for the five-year [bond] in light of our view that China’s ongoing SOE reform programme translates into negligible risk of an SOE default in the short-to-medium term, but greater risk of SOE defaults in the longer term,” said Mark Reade, Asian fixed income trader at Mizuho Securities.

“What’s more, these shorter-dated deals also offer some protection against rising US Treasury yields, which we still see as the number one risk in Asian US dollar credit markets,” he added.

Investor breakdown

The five-year tranche received a total orderbook of over $6 billion, with Asian investors snapping up 82% of the paper, followed by EMEA (Europe, the Middle East and Africa) investors 16% and offshore US investors 2%, according to a source close to the deal. 

Funds and asset managers subscribed to 48% of the five-year notes, followed by financial institutions with 21%, private banks 15%, insurance and sovereign wealth funds 11%, and corporates and others 5%.

As for the 10-year tranche, it received a total orderbook of $3.7 billion, with Asian investors subscribing to 72%, followed by EMEA investors 22% and the rest to offshore US investors.

Funds and asset managers purchased 46% of the 10-year offering, followed by financial institutions 19%, insurance and sovereign wealth funds 16%, private banks 14%, and corporates and others 5%.

Bank of China International is the sole global coordinator and bookrunner of China Orient’s bond, which is drawdown of the company’s $2 billion medium-term note programme. Other joint bookrunners include Bank of Communications, Industrial Commercial Bank of China, Morgan Stanley and Standard Chartered.

¬ Haymarket Media Limited. All rights reserved.