As expected, pricing of a $500 million 144a debut by the Chinese E&P (exploration & production) giant came at the tight end of expectations, with a huge order book from the Mainland underpinning global expectations of a highly successful deal.
The Chinese banks alone are said to have accounted for about $1 billion of demand and as a result of minimal allocations, will almost certainly provide strong secondary support for the 10-year deal, which may yet tighten further from its 163bp issue price. The greatest difficulty for lead managers Credit Suisse First Boston and Merrill Lynch, therefore, was to how to avoid losing price sensitive US investors in the primary market, while making sure they did not cede enough basis points to tempt them into flipping the deal straight back to the Chinese in the secondary market.
Initially, the psychological hurdle for global accounts was said to have been 170bp over Treasuries, narrowing down a further 10bp as the strength of demand became clear. In the end, books closed at the $4.3 billion level, with participation from 199 investors, of whom 20 placed orders topping the $50 million mark and a number of Chinese banks placed orders that would have individually accounted for nearly half the deal.
Final distribution saw Asia allocated 58%, of which Hong Kong accounted for 22%, Singapore 18% and China 12%. The US, where there were about 35 accounts, took a further 22% and Europe 20%.
Pricing came at 98.781% on a coupon of 6.375% to yield 6.543% or 163bp over Treasuries. The all pot deal also comprised co-managers: Bank of China Hong Kong, Bank of China International, Cazenove, HSBC, ICBC, ING Barings, JPMorgan, Soc Gen and UBS Warburg.
At these levels, the transaction came at the tight end of the Hong Kong corporate universe and well inside comparably rated Asian oil companies such as Baa2/BBB- rated LG Caltex, which has a one notch lower rating from Standard & Poor's and was trading 185bp bid at the time of pricing. Baa1/BBB rated Petronas, meanwhile, has one notch higher rating from Moody's and was trading wide at 225bp bid on its 2015 bond.
Where some Asian bankers have taken issue is the fact that a Baa2/BBB rated Chinese oil company should be able to price a debut bond deal virtually flat to Asia's benchmark corporate borrower Hutchison Whampoa, which at A3/A, has a three notch higher rating on the S&P side and was trading 162bp bid.
As one says, "There were clearly no sensible relative value comparisons being conducted with this deal. It's ridiculous that a mid BBB credit should price at mid single A levels and flat to a global player like Hutch. It just shows who really bought the deal."
CNOOC's supporters, however, while not denying that geography was the swing factor, argue that the company's credit fundamentals are clearly single A material. "This was the best house in the right zip code," one observer comments.
But perhaps even more surprising than CNOOC's pricing relative to corporate Hong Kong, was its pricing relative to the even higher rated Singapore banking community. Although it came 3bp outside of Aa3/A- rated DBS Bank's 2011 issue, trading 160bp bid, it was over 30bp through A1/BBB+ rated OCBC Bank's 2011 issue, trading 195bp bid.
Other benchmarks such as Australia's Baa1/A- rated Woodside Petroleum, the world's fastest growing E&P company, was trading at 168bp bid on a 2011 bond.
For Chinese investors, a deal like CNOOC offers huge scarcity value given that there has only even been one pure corporate issue in the international dollar markets from China Mobile and it falls due in two-and-a-half years. "Chinese accounts would have certainly looked at this relative to the China sovereign curve, which they view as a Treasury curve," one observer explains. "The recent sovereign 2011 deal was trading at 104bp bid at the time of pricing and so this deal offers a 59bp premium. It's not surprising they said, 'yes please, thank you very much'".
For a company like CNOOC, which frequently chants the mantra of the world's super majors, it would have been important to position itself tightly relative to its global peers, but more importantly, to be seen to do so in a way that says more about its stand-alone credit strengths than its geography. Indeed, throughout the roadshow period, supporters have been quite vehement in their criticism of the stance of the two rating agencies, which often rate dollar earning E&P companies higher than their respective sovereigns.
Often described as the ultimate pure oil play, CNOOC is currently the world's second largest E&P company in terms of proven reserves. With an exceptionally low cost structure and strong balance sheet, the company will still be in a net cash position even after the new deal is taken into account. But underpinning the company's renowned management abilities, lies a favourable regulatory regime and as investors have learnt to their cost with the telecoms sector, the Chinese government has been apt to suddenly change the landscape almost at will.
Those who have some sympathy with the rating agencies stance, therefore, tend point out that CNOOC still derives half its revenue from production sharing contracts with overseas oil companies and in the past, has been able to use this revenue stream to fund capex rather than borrow from the capital markets.
During roadshows, management said that current capex plans are fully funded and the company will not return to the international bond markets unless it conducts a new piece of international M&A, oil prices fall dramatically, or it decides to add incremental reserves. Over the coming year, it plans to spend $1.5 billion to $1.65 billion, of which $585 million has been earmarked for the acquisition of Repsol YPF's Indonesian upstream operations (its first international purchase), roughly $700 million for development projects and $200 million for independent, offshore exploration.
CNOOC is currently 70.6% owned by the Chinese government, has a strategic alliance with Royal Dutch Shell and is listed in both Hong Kong and New York. The current bond deal adds to the company's recent tally of successes and for Asia's debt capital market bankers represents an all too rare instance of the bond markets proving a more cost efficient and high profile means to raise funds than the equity markets.