Citic proves it's no ITIC

Citic Pacific has ridden on the back of positive momentum towards greater China spreads with a tightly priced euro-144a offering.
The BBB-/Baa2-rated deal has been the first this year to test the true depth and strength of demand for Hong Kong and China credits. Recently, some analysts have started to predict that high grade Hong Kong could soon be pushed through the 100bp mark by asset hungry Asian investors. It would be hardly surprising then, to conversely discover that US investors were worried that a ‘Citic’ might unduly benefit from geographically-driven spread tightening which its stand-alone fundamentals did not deserve.

The 10-year deal that closed last night (Thursday) in New York, however, seemed to show that those international accounts which had done their credit work, were still prepared to buy in small size. Led by HSBC and Merrill Lynch, an issue for Citic Pacific Finance 2001 was priced at 99.655% with a coupon of 7.625% to yield 7.675%, or 228bp over Treasuries.

Co-managers, allocated 5% of bonds, were Goldman Sachs, ICBC, JP Morgan and UBS Warburg. Fees totaled 50 cents.

Observers report that the book closed just over two times subscribed, with the deal upsized slightly on pricing from $300 million to $350 million. A total of 81 orders were counted, with just two orders between the $25 million and $50 million mark.

Orders and allocations were split 75% Asia, 15% US and 10% Europe. Of the Asian book, about 60% was said to derive from Hong Kong, of which there was said to be surprisingly little true Chinese demand.

By investor type, the book split: 49% banks, 29% funds and 22% retail.

"With a number of deals this year, it's often seemed as if investors haven't even bothered to read the prospectus," one observer comments. "It's been a matter of 'what's the rating, what's the spread, how big's the book? Ok I'll buy it'.

"With this deal," he adds, "investors really rolled up their sleeves, did their homework and argued the point with their credit committees. This is a deal which had noise behind it. Citic Pacific has that ITIC brand name, it was viewed by some as being a heart beat away from non-investment grade status and it has unlicensed telecoms exposure on the Mainland."

A number of mainly US-based accounts were not prepared to look at a deal which priced below 250bp over Treasuries. Some did the credit work and walked away. Some of the largest accounts did their credit work and whereas they might usually put in an order for $20 million, settled on $3 million to $4 million instead. But there were enough small orders to build a healthy book and enough leverage from Asia to bring the deal to within 58bp of Hutchison Whampoa.

At the time of pricing, Hutchison Whampoa's 7% February 2011 bond was trading at 170bp bid. Other comparables include Bank of East Asia, whose BBB-/Baa2-rated 2011 subordinated debt deal was trading at 220bp to its five year call. Baa3/BBB-rated Wharf Holdings also has a highly illiquid bond quoted at 225bp.

A number of observers conclude that from a borrower's perspective, Citic's pricing compares favourably with that of SK Corp, which priced a $250 million five year deal the night before. With a one notch lower rating, but a five year shorter tenor, the Korean oil refiner launched its deal at 255bp and saw the bond tighten in yesterday to 242bp/240bp.

Others, however, point out that a 26bp spread differential between the two at their respective pricing, only further highlights how investors have started to finely tier Asian countries by spread, with Hong Kong putting clear water between itself and the rest of the region.

From a credit perspective, investors report that Citic was positioned as a Hong Kong conglomerate, with a de-emphasis on its China angle and strong tilt towards the strength of its Hong Kong-based cash flows. Both rating agencies also underlined the point in their ratings assessment, applauding Citic for the prudent management of its balance sheet.

With a net debt to equity ratio of only 26%, the company also maintained an interest coverage ratio of 3 times 2000 earnings. Total debt stood at HK$15.7 billion ($2.01 billion) as of end December. 

During roadshows, the company re-emphasized that its main focus will continue to be in civil engineering (24% of assets) and aviation (35% of assets through stakes in Cathay Pacific and Dragonair). It also said, however, that its telecommunications activities would become more of a focus going forwards and that it was still confident of receiving an operating license from the Mainland authorities.

And as one observer concludes, "Investors had some concerns, but Citic addressed them very thoroughly and positioned itself correctly as a diversified Hong Kong conglomerate with upside potential from its investments on the Mainland.

"In buying the deal," he further states, "investors showed that they too were looking for diversity and yield. It shows that there is greater depth to the investor base here than some might have imagined." 


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