China's State Grid hopes to electrify in euros

The international arm of China's State Grid Corporation looks set to bring welcome diversification to the European utilities sector with its debut euro-denominated bond deal.

Roadshows begin on Monday for a debut euro-denominated offering by the international arm of China's State Grid Corporation.

The group is proposing to issue a senior unsecured transaction that will not only provide welcome diversification for the Euro-denominated utilities sector, but also rank as one of its highest rated deals, with a likely A1/A+/A rating.

Deutsche Bank, HSBC and Morgan Stanley have been appointed as joint-global co-ordinators for what is shaping up to be a two-tranche deal according to the group's preliminary offering memorandum. Roadshows will continue in Frankfurt and Munich on January 13, followed by Amsterdam and Paris on January 14.

The special purpose vehicle issuer, State Grid Corp European Development, is rated one notch below its ultimate parent Aa3/AA-rated State Grid Corporation, which is providing a keepwell deed for the transaction. In its rating release, Moody's said the credit fundamentals of the international arm, State Grid International Development, (SGID) warranted a Baa2 rating.

However, it said that it decided to lift this by four notches to A1 because of the support by its parent, the world's largest utility - responsible for almost 90% of China's electricity distribution. Since 2012, State Grid Corporation has injected $7 billion of equity into SGID and committed to fund about 40% to 50% of its future expansion. 

This expansion is likely to be one of the deal's key selling points since SGID remains on a very strong growth trajectory snapping up assets across the globe that marry long concessions with stable and predictable cash flows. This acquisition trail has turned it into one of China's most important national champions and helped bolster its parent against domestic critics who believe the latter is an unwieldy behemoth, which should be opened up to competition.

Since it was established in 2008, SGID has built up a portfolio encompassing Oceana (54% of assets as of June 2014), South America (19%), Asia (21%) and Europe (3%).

Key holdings include: a 25% stake in REN, Portugal's electricity and gas distribution network; a 20% stake in Hong Kong Electric; a 40% stake in NGCP, the Philippines electricity transmission network; a 60% stake in SGSPAA, which provides gas and power distribution across much of Australia; and full ownership of 12 transmission companies in Brazil. 

Its most recent purchase was a 35% stake in Italy's CDP Reti, which in turn owns a third of the country's electricity and gas distribution networks. This $2.8 billion acquisition represented China's largest ever investment in Italy and was financed last November by a €1.85 billion bridge loan.

In terms of pricing benchmarks, the parent has a full dollar curve, which has blown out by about 5bp over the past month. Its 2.75% 2019 bond is currently trading at 100bp over five-year Treasuries, while its 4.125% 2024 bond is bid around the 129bp level over 10-year Treasuries and its 4.85% 2044 bond at about 138bp over 30-year Treasuries.

The international arm's Australian subsidiary SGSP also has a euro-denominated benchmark outstanding. This €500 million 2% 2022 deal has a Baa1-rating and was issued last June. It is currently bid at 104.64% on a yield of 1.34%. 

As of June 2014, SGSP Australia accounted for 80.8% of SGID's outstanding debt, with a further 12.6% denominated in US dollars and 6.6% in Brazil's real. About 52.8% of SGID's debt falls in the two to five year maturity range, with 9.3% due in less than one year and 37.9% over five years.

The new transaction should further extend the group's maturity profile as well as diversify its currency mix. Moody's believes the company's FFO/debt ratio will also stay in the 14% to 16% range through to 2016 in line with European utilities such as E.ON (19%) and Enel (22.6%).

With assets of $19.35 billion, SGID is still far smaller than Europe's giant utility companies.  Germany's E.ON has electricity and gas distribution assets across Europe amounting to about $180 billion, While Italy's Enel has $226 billion.

E.ON has a two notch lower rating of A-A3 compared to SGID and is on negative watch with both agencies. Enel is rated BBB/Baa2 in line with where SGID would be on a stand-alone basis. 

The European utilities sector was one of the best performing assets classes in the Europe's corporate debt universe in 2014, with the iBoxx utilities curve tightening by 17% over the course of the year, with Enel one of the best performers. 

In a report released on Tuesday, Credit Agricole argued that European non-financial corporate credits still look cheap and are likely to tighten further if the European Central Bank initiates a bond buying programme as part of a quantitative easing arsenal. 

It also added that it expects about €25 billion of issuance from the European utilities sector in 2015, slightly below the €29 billion raised in 2014. This latter figure was split 64% senior debt and 34% hybrid debt.

Alongside the joint global co-ordinators for SGID's issue are also a group of joint bookrunners. These comprise ANZ, Bank of China, Barclays and RBS.

The syndicate is completed by co-managers comprising CBA, Intesa Sao Paolo, Natixis and Santander. 

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