CNPC underwhelms with $1.85 billion debut bond

CNPC (HK) Overseas’ $1.85 billion bond falls short of the $3 billion expected, while its 30-year bonds rally sharply, prompting criticism of mispricing.
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CNPC's headquarters in Beijing</div>
<div class="ArticleImageCaption" style="text-align: left;"> CNPC's headquarters in Beijing</div>

CNPC (HK) Overseas Capital priced a $1.85 billion triple-tranche deal early last Thursday morning, marking its debut international dollar bond.

The bonds are guaranteed by CNPC Finance (HK), the subsidiary and sole offshore treasury centre for China National Petroleum Corp (CNPC). The company issued a $700 million five-year bond, a $650 million 10-year bond and a $500 million 30-year bond.

Citi, Standard Chartered Bank and ICBC were joint global coordinators and bookrunners. BOC International, Bank of America Merrill Lynch, Deutsche Bank and HSBC were also joint bookrunners.

The $1.85 billion size fell far short of the maximum $3 billion deal that the leads guided investors towards, making CNPC’s debut bond much less of a splash than expected. Meanwhile, the strong rally of its 30-year bonds prompted rival bankers to say that it was mispriced.

The leads went out with initial guidance last Monday, marketing the five-year bonds at 120bp to 125bp over Treasuries, the 10-year bond at 140bp over Treasuries and the 30-year bond at around 165bp over Treasuries.

At that point, investors were not officially told the size of the deal. However, there were market expectations that the deal could be as big as $3 billion to $5 billion.

At 3pm on Wednesday, investors were told that the book was approaching $4 billion and the transaction was capped at $3 billion. The slow build-up in the books coupled with the large deal size concerned investors, particularly as recent issues have not performed well in secondary.

“Billion-dollar Asian primary bond deals like Petronas, CNOOC and Evergrande didn’t trade well at their breaks,” said Scott Bennett, head of Asian credit at Aberdeen Asset Management. “So a lot of accounts hesitated to get involved in CNPC because they expected a mega transaction. When the $3 billion max deal size was announced, the book was only $4 billion so investors felt they could have been stuffed had they gone in,” he added.

There were suggestions — from rivals and investors — that the leads got the execution strategy wrong and were overconfident about how much they could raise.

“I think the leads should have told investors that the target size was $2 billion, and then they could have still upsized the transaction given sufficient demand,” Aberdeen’s Bennett added.

On Wednesday afternoon, the final guidance was released at Treasuries plus 123bp to 125bp for the five-year bonds, Treasuries plus 138bp to 140bp for the 10-year and Treasuries plus 163bp to 165bp for the 30-year. The company succeeded in pricing all three tranches at the tight end of the final guidance.

Despite pricing at the tight end of final guidance, the 30-year bonds rallied furiously in the secondary bond market. On Thursday afternoon, the CNPC 2041s were bid at 139bp, a massive 24bp inside their Treasuries plus 163bp issue spread, which meant that they had gained more than three points in the secondary market.

“It’s unheard of to see a bond tighten three to four points for an investment-grade name. It is clearly mispriced,” said one rival banker.

This extraordinary tightening of the 30-year bonds was due to the large book and under-allocation to Asian accounts. The size was capped at $500 million — as the company only wanted to raise that amount. But of the three tranches, the 30-year bond gathered the strongest demand with a $2.7 billion order book from 162 accounts.

US investors bought 50% of the bonds with the rest equally split between Asia and Europe. Fund managers bought 76%, banks 6%, insurance 7%, official institutions 7% and others 4%.

In contrast, the order books for the five and 10-year bonds were more muted at $1.5 billion from 100 investors and $1.7 billion from 115 investors, respectively. For the five-year bonds, Asian investors bought 76%, US 16% and Europe 8%. For the 10-year bonds, Asian investors bought 51%, US 36% and Europe 13%.

The other two tranches also tightened, but not as dramatically. The CNPC (HK) 2016s were bid at Treasuries plus 115bp Thursday afternoon, 8bp inside the issue spread, and the 2021s were bid at Treasuries plus 132bp, 6bp inside the Treasuries plus 138bp issue spread.

The main comparable for CNPC was the CNOOC 2021s and 2041s, which were trading at Treasuries plus 130bp and 133bp respectively on Monday, when the leads went out with initial guidance. While the CNOOC 2041s were trading 3bp back of the 2021s, the initial guidance put the CNPC 2041s about 25bp back of the 2021s and in that context, the pick up for the CNPC 2041s looked overly generous.

When CNOOC first issued in January, its 2041s came at a spread of Treasuries plus 120bp, or 20bp behind its own 2021s, but the latter has since widened substantially on a spread basis.

CNOOC’s issue is rated Aa3 by Moody’s and AA- by S&P, one notch above the CNPC (HK) bond issue, which is rated A1 (positive) by Moody’s A+ (stable) by S&P and Fitch.

While CNPC’s debut deal was cut back in size, the fact that its bonds have rallied in the secondary market probably means that investors will feel more warmly about participating again if it returns to market.

“I think it was a smart decision for CNPC to print less than $2 billion and this discipline helped the bonds perform in the secondary market, which in fact now means that CNPC is well-placed to re-tap the market,” Bennett said.

The coupon for the five-year bonds was fixed at 3.125% and the notes reoffered at 98.968 to yield 3.351%. The coupon for the 10-year bonds was fixed at 4.5% and the notes reoffered at 97.717 to yield 4.79%. The coupon for the 30-year bonds was fixed at 5.95% and the notes reoffered at 97.812 to yield 6.11%.

CNPC Finance (HK), the guarantor for the notes, is wholly owned by China Petroleum Finance Company, which in turn is 51%-owned by CNPC and 49%-owned by PetroChina, which is an 86.3% subsidiary of CNPC.

The bonds are not guaranteed by CNPC or PetroChina. However, CNPC and China Petroleum Finance will have ‘keep-well agreements’ — similar to a letter of support. This includes maintaining 75% and 100% ownership levels respectively in CNPC Finance (HK) and making capital contributions to enable CNPC Finance (HK) to meet contractual or other payment obligations.

However, the keep-well agreements are different from an explicit guarantee and as a result both Moody’s and S&P have rated the newly issued notes one notch below CNPC.

“The keep-well agreements between CNPC and CNPC Finance (HK), and China Petroleum Finance and CNPC Finance (HK), demonstrate the parent’s strong commitment to CNPC Finance (HK),” said S&P analyst Lawrence Lu in a release. “But we don’t view these agreements [to be] the same as a guarantee that would equalise the ratings on CNPC Finance (HK) with CNPC.”

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