Chinalco issues upsized $800m unrated bond

The state-owned miner captures more than $8 billion of orders, highlighting investors' continuing hunt for yield.

Aluminum Corporation of China (Chinalco) priced its unrated five-year bond on Thursday, upsizing the deal on the back of a massive order book amid an increasingly frenetic hunt for yield.

The Reg S sale comes after the minutes of the US Federal Reserve’s latest meeting showed policymakers were in no rush to raise interest rates.

As a result of the dovish signal from the Fed, strong demand from investors allowed underwriters leading the sale to upsize the deal to $800 million, up from initial guidance of $500 million, according to two people familiar with the deal.

The Beijing-based state-owned company garnered more than $8 billion of orders at peak level, which was five times more than what China Aircraft Leasing achieved for its $300 million five-year debut two days before. The Hong Kong-listed company, backed by China Everbright Group, captured more than $1.3 billion of orders at peak, before slipping to $1.2 billion.

One of the people familiar with the deal said the state-owned group launched the transaction after a flood of anchor interest, where investors commit to take a minimum amount of bonds. Some of them have common business interests or are fellow SOEs, brining more certainty to the transaction.

"The anchor demand has helped create demand for the transaction and get a better pricing for the issuer," the person said.

A lot of onshore investors including banks, asset managers and securities houses have flocked to the offshore bond markets after the 10-year yield on Chinese government debt fell to the lowest level in a decade, the people familiar with the deal said.

"We are in a liquidity-driven market, where yields are being distorted significantly," a Hong Kong-based investor said, explaining some of the aggressively priced transactions in the offshore market recently.

Final order book finished at $8 billion from 281 accounts. By invetor type funds/asset managers took 48%, banks 32%, private banking accounts 12%, insurance/corproates 5% and others 3%. By geography, the book split 86% Asia and 14% EMEA.

Initial guidance of Chinalco's August 2021 transaction was set at 4.5% area before tightening to 4%-4.1%. Final pricing of the five-year note was fixed on par to yield 4%, according to a term sheet seen by FinanceAsia.

The closest comparables were China Minmetals' 3.125% July 2021 and Baosteel's 3.875% January 2020 notes, which were trading 160bp and 175bp over five-year Treasuries. The former is rated Baa1/BBB+, while the latter is rated Baa2/BBB/A-.

A syndicated banker said it was hard to gauge Chinalco's fair value because its comparables were investment grade credit. "It should be treated as high yield, so the fair value should be in 4.5% area given its strong state-owned status," the person said.

In the three three months to March, sales at its Hong Kong-listed subsidiary, Chalco, fell 24% to Rmb20.9 billion, while earnings per share fell 75% for the same period, highlighting the challenging operating environment.

According to Dealogic, Chinalco issued two US dollar bonds in 2014: A credit enhanced $500 million five-year debt with a guarantee from Bank of China and a $300 perpetual note.

Joint global coordinators of the latest transaction were Bank of China, BOCI, Barclays and SPDB International, while CNCBI and Haitong International joined as joint bookrunners.

The story has been updated from first publication with final stats.

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