Chinese debut bond deals gather pace

SOE Binhai Investment is out with a maiden dollar bond while energy firm Kunlun Energy begins investor meetings for a potential greenback offering.
Tianjin-based Binhai is a supplier of liquified petroleum gas
Tianjin-based Binhai is a supplier of liquified petroleum gas

Debut bond issuances are gathering pace in Asia as savvy investors learn to price in the mounting default risks, with Chinese issuers dominating the bulk of the pipeline.

Rated Baa3/BBB-, Chinese state-owned enterprises Binhai Investment raised its first $200 million three-year bond late on Tuesday. 

Binhai priced its maiden Reg S-only bond — guaranteed by Tianjin TEDA Investment — at US Treasuries plus 245 basis points, which is 35bp tighter than its initial price guidance area of Treasuries plus 280bp, according to a term sheet seen by FinanceAsia.

Chinese energy firm Kunlun Energy is also mulling a maiden 144A/Reg S dollar offering and will begin investor meetings in Asia, Europe, and the US from April 29, a source familiar with the matter told FinanceAsia.

The company is rated A1/A+/A and Citi and Morgan Stanley have been mandated as Kunlun’s joint global coordinator and bookrunner. Other bookrunners for the firm, which is controlled by state-owned PetroChina, include Credit Suisse, Goldman Sachs and HSBC.

Confidence has been returning to Asian debt capital markets following a turbulent start to the year as fears spread over the broader ramifications of a default by Shenzhen-based property developer Kaisa. Some market participants now even view defaults by non-strategic, commercially unviable SOEs as a positive because they can help to instil greater market discipline and reallocate capital more efficiently within the Chinese economy.

“Without letting go the state guarantee, China will not succeed in developing a proper financial system that is capable of accurately pricing risks and efficiently allocating resources,” Aidan Yao, senior emerging market economist at AXA Investment Managers, said.
 
“The government clearly recognises this and we were encouraged by the recent comments from Premier Li [Keqiang] hinting a change of attitude that financial defaults will be allowed to happen going forward,” he added.
 
On April 22, Baoding Tianwei became China’s first SOE to default on its onshore debt. The company produces transformers, a sector suffering from significant excess capacity. Tianwei is the third Chinese company to default domestically, following solar panel maker Chaori in March 2014 and technology firm Cloud Live earlier this month.

In the offshore market, Kaisa said April 20 that it had missed two interest payments, becoming the first Chinese property developer to default on its overseas debt, which is estimated at about $2.5 billion.

Fitch expects Chinese corporate bond defaults to become less uncommon but to remain sporadic and isolated, as controlling systemic risk remains a top priority for the Chinese government while the economy remains soft.

So with the market already pricing in these risks, debut issuers have gradually been surfacing in China.

“The demand and interest to issue from China is very high,” one Singapore-based syndicate banker told FinanceAsia. “This is because the amount of debt from [mainland Chinese borrowers] is quite large and they’re going through an investment cycle.”

Chinese borrowers in 2014 accounted for nearly 78%, or $17.7 billion, of all dollar-, euro- and yen-denominated debut issuance in Asia ex-Japan — 54% more than the year before, according to Dealogic data.

The last debut issuer to tap Asia’s bond market was Seoul-based Doosun Heavy Industries and Construction. On April 20, it sold a $500 million five-year offering.

Binhai Investment

The funds raised as a result of Binhai’s bond sale will be used to repay other borrowings, including an outstanding $775 million syndicate loan, the company’s prospectus said.

A source close to the transaction notes said there is ample investor appetite for debt debutantes, especially for dollar-denominated offerings, so long as new issuers pay an adequate new issue premium. 

“Dollar deals do not face any major liquidity issue because the currency is appreciating, which is a plus for investors,” the source said. “Also because of the US’s ongoing lose monetary policy, investors still have money to put to work.”

The nearest comparables for Binhai’s looming transaction include similarly quasi-SOE names like Baa3/BBB- rated Shenzhen International, BBB-/BBB+ rated Qingdao City Construction Investment, and Ba1/BB+ rated China Oil and Gas.

These borrowers have outstanding bonds maturing in April 2017, February 2020, and April 2018 that traded at a G-spread of 215bp, 280bp and 415bp, respectively.

Fair value for Binhai’s offering is seen at US Treasuries plus 240bp, according to Mark Reade, fixed income credit analyst at Mizuho Securities.

However, Reade warns that with the chatter regarding China defaults on the rise and spreads yet to react, the firm is becoming more cautious about any SOE that gains investment-grade status because of implied government support.

Binhai is an investment holding company, whose subsidiaries are engaged in the construction and operation of gas pipeline networks, provision of connection services, supply and provision of gas, and sale of liquefied petroleum gas. 

Listed on the Hong Kong Stock Exchange, the company has a market capitalisation of HK$5.3 billion ($683 million). It is 57% owned by Tianjin TEDA Investment, which in turn is 100% owned by the Tianjin municipal government

Guotai Junan International and Standard Chartered were the joint global coordinators and bookrunners of the transaction. Other bookrunners include Barclays and Wing Lung Bank. 

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