Chinese bonds re-activate supply

Two Chinese credits enter dollar and euro market as spreads remain stable following Fed comments hinting it may raise interest rates in December after all.
CGNPC and EDF sign agreement for Britain's Hinkley Point C nuclear power project
CGNPC and EDF sign agreement for Britain's Hinkley Point C nuclear power project

Two Chinese credits entered the international bond markets on Thursday with dollar and euro-denominated transactions.

The two deals came on the back of the latest monthly statement from the US Federal Reserve, which suggested a first interest rate hike since 2008 may be on the cards this December after all, although many economists remain sceptical in the absence of positive economic data points.

However, the more hawkish tone led Treasuries to sell off and Asian credit spreads to widen about 3bp on Thursday as sales desks reported some profit-taking from accounts.

But the relatively stable market response encouraged China General Nuclear Power Corp (CGNPC) to launch its second international bond deal of the year and Beijing Environment Sanitation Group to execute a debut euro-denominated transaction backed by a standby letter of credit (SBLC) from Agricultural Bank of China.

CGNPC raised $500 million in the name of China Clean Energy Development with a guarantee from CGNPC International and a keepwell deed and equity interest purchase undertaking from its ultimate parent CGNPC Group, which is directly owned by the central government's State Assets Supervision & Administration Commission (SASAC).

Having marketed the 10-year Reg S deal at an initial spread 220bp over Treasuries, the syndicate tightened guidance to 2.5bp either side of 200bp before pricing at the tight end. Final terms comprised an issue price of 99.235% and coupon of 4% to yield 197.5bp over Treasuries. 

The order book closed around the $1.75 billion mark, a less impressive achievement than it managed in May when markets were stronger and it raised $600 million on the back of $3.8 billion in demand.

This previous deal provided a clear pricing benchmark for the new offering, with bankers estimating the curve to be worth a couple of basis points.

Key was how much to factor in for structural subordination.

The lower security of a keepwell deed versus a full guarantee resulted in a one notch lower rating from Moody's of Baa1/A+ compared to the parent's A3/A-/A+ rating. In turn, Moody's noted that CGNPC's credit metrics warrant a Ba3 rating on a stand-alone basis.

The 4% 2025 May deal has a full guarantee and was bid Thursday on a G-spread of 185bp. This equated to a mid-yield of 3.87% and mid Z-spread of 193bp. 

Bankers said that, after factoring in the structural subordination, the deal had no new issue premium. 

Commenting on the new CGNPC deal, one banker said, "The sell off in Treasuries may have helped the yield a bit but investors like this name and the fact it's own by Sasac. There was a pretty well diversified order book with Chinese banks, fund managers, a couple of hedge funds and some private banks."

Will CGNPC and CNNC be fused together?

In its netroadshow, CGNPC said it currently has installed nuclear capacity of 14.9GW with a further 14.5GW coming on stream. The group is relatively unusual as it also has a portfolio of alternative energy assets including 7.08GW in wind power, 0.69GW in solar, 1.54GW in hydro and 1.86 in gas. 

As of end June it had total assets of Rmb398.5 billion ($62.71 billion) and net assets of Rmb125.2 billion. In its rating assessment Moody's flagged the group's high leverage resulting from its debt-funded capex to meet the government's nuclear and clean energy targets.

It also highlighted the complexity of the nuclear industry and the delays, which can often put projects years behind schedule. It commented that, while the group has cash and equivalents of Rmb30 billion, it also has short-term debt of Rmb24 billion and Rmb82 billion in capex to fund next year.

In its roadshow, CGNPC said debt to Ebitda stood at 9.1 times at the end of 2014 compared to 9.5 times in 2012. Ebitda to finance costs were 3.8 times compared to 3.5 times in 2012. 

It also said it has credit lines of Rmb725.9 billion of which Rmb369.3 billion remain unused. 

Both CGNPC and its main domestic rival China National Nuclear Corp (CNNC) have been expanding abroad, with analysts estimating that China could win 15% of global capacity additions through to 2030 worth an estimated $80 billion. During President Xi Jinping's recent visit to London, CGNPC signed an agreement with EDF to jointly construct a nuclear power project in England.

The government has been trying to prevent CGNPC and CNNC  from engaging in the same self-defeating rivalry as railway rolling stock manufacturers CNR Corp and CSR Corp did before their enforced merger earlier this year. It has already forced CGNPC and CNNC to merge their generation three technologies and a full merger between the two companies has been rumoured since last December. 

BESG brings club deal

Thursday also saw the completion of an €200 million three-year issue by Beijing Environment Sanitation Group (BESG). In the essence the deal was a club placed with the Chinese banks in its syndicate.

Pricing was fixed at 99.921% on a coupon of 1.45% to yield 1.477%. This equated to 177.3bp over Bunds and 145bp over mid-swaps.

The deal had an SBLC from Agricultural Bank of China, which boosted the rating to A1. 

Bankers said the closest comparable was China Development Bank's recent and badly received €500 million 0.875% three -year deal. This was trading Thursday at 59.2bp over mid-swaps and 91.3bp over Bunds.

When it was priced in September it came at 112.4bp over Bunds and 80bp over mid-swaps.

Joint global co-ordinators for CGNPC's deal were HSBC, ICBC and JP Morgan with joint bookrunners comprising Bank of China, Agricultural Bank of China, Morgan Stanley, Soc Gen and CIB.

Global co-ordinators for BESG were Citi with Agricultural Bank of China, Bank of China and China Merchants Securities. 


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