China Shanshui Cement finally crossed the line with its $400 million high-yield bond on Friday evening in what turned out to be an unusually eventful trade. The deal was the first high-yield Chinese industrial name to price since May 2011, but its return was unfortunately overshadowed by delays and clunky execution.
The leads had gone out with guidance at 10.5% to 10.75% on Wednesday and launched a $400 million bond at 10.5% that night. They had completed preliminary allocations on the bonds though no final allocations were released. At the very last minute though, the deal was held up and could not price as lawyers were concerned that some investors may have had selective information from one-on-one meetings with the company.
“Some investors had asked questions about the company’s first quarter and the impact the cold winter had on its business and some had not,” said one source. “The lawyers thought it would be prudent to disseminate that information to all investors and wanted a paragraph added to the offering circular. Also, in the original document, the company had a caveat saying that if market conditions change, they had some flexibility on the use of proceeds. Investors wanted the offering circular to say that the use of proceeds was explicitly for refinancing purposes so the flex was taken out.”
China Shanshui Cement, which produces cement and clinkers, operates in northern China, where temperatures can fall to -30C during the winter months, when no construction work can be done. The first quarter is typically the weakest period for Chinese cement companies. However, the winter this year was particularly severe — in fact, the worst since 1986.
The wrangling with the lawyers lasted until late Thursday when the leads agreed to include an additional paragraph in the offering circular saying: “Our operating performance for 2011 benefited significantly from strong demand for our products due to certain construction projects promoted under the PRC government’s Eleventh Five Year Plan that were started in the fourth quarter of 2010.”
“Although we expect that our operating performance for the first half of 2012 would be substantially in line with that of the first half of 2011, we cannot assure you that the same level of demand for our products will be sustained in the first half of 2012, particularly in light of the prolonged winter season in 2012 which weakened demand for our products during that period.”
China Shanshui Cement reports its earnings on a half-yearly basis, and as it has just reported its full-year results for 2011, the next update investors can expect to receive is during the middle of this year.
“Any investor tracking the sector would know that the winter period is cyclically the weakest, but as the company had held one-on-ones with investors, they wanted the information to be disseminated across the board,” said another source.
After making the amendments, the leads relaunched the deal on Friday at $300 million to $400 million — with the same parameters. The guidance was released at 10.5% to 10.75% and the $400 million five-year non-call three issue priced at 10.5% that night.
It attracted an order book of $1.6 billion, with $1.3 billion coming from Asian accounts. Although the bulk of demand came from Asia they were allocated 58% of the bonds, with US investors and European investors allocated 30% and 12% respectively. The bonds were primarily allocated to fund managers which took 75%. According to a source, a couple of orders fell away, while some new ones came in, so net-net, the result was about the same. The bonds traded up to 100.5/100.75 on Monday morning.
The deal’s delay caused a few worries from debt bankers who were nervously eyeing any implications on their own deal flow. In light of the Sino Forest debacle and heightened concern surrounding China high yield in general, there was speculation on potential governance issues.
“We’re trying to set up meetings with investors and some of the US accounts won’t talk to us. The whole China Shanshui deal makes them think we in Asia are amateurs again,” said one rival who was arranging roadshows for another China corporate name.
The deal drew parallels to Sunac China, which last year was forced to abort its debut dollar bond due to similar selective disclosures. Sunac China recently concluded non-deal roadshows arranged by Deutsche Bank, UBS, ICBC and Nomura.
The leads’ defence was that while not ideal, at least China Shanshui Cement came clean on the mistake and managed to price its deal with its bonds trading up in secondary markets. “Unlike Sunac China, which never priced, China Shanshui Cement got the mistake rectified and then proceeded with the deal. It goes to show that Chinese companies do care about disclosure,” said the source.