Dongfeng Motor made its international bond market debut on Tuesday with an €500 million ($567 million) three-year deal that attracted a relatively healthy order book packed with Chinese banks.
The A1/A/A rated auto maker also executed the first of what could turn out to be a troika of euro-denominated transactions from Chinese credits over the next week or so.
Right behind it stands Beijing Automotive Group, which launched roadshows for its own maiden international bond offering on October 14 via DBS, JP Morgan and Natixis. This Monday, Beijing Environment Sanitation Engineering Group also began investor presentations for a debut deal via Agricultural Bank of China, Bank of China, China Merchants Securities and Citi.
Bankers said Dongfeng Motor opted for euros rather than dollars as it has an €800 million re-financing need. It also plumped for a relatively short tenor to match the requirements of its China-oriented investor base, which was heavily populated by affiliates of its syndicate banks.
However, bankers added that while Chinese banks were strongly represented in the €1.5 billion final order book, distribution was geographically more widespread than is often seen with Chinese euro-denominated credits.
"Just before London opened we had an order book of around €700 million," one banker commented. "But the final order book was much broader based than normal."
Final distribution stats saw banks take 48%, fund managers 34%, insurers and pension funds 11%, private banks 5% and others 2%. By geography, 41% went to Asia, 20% to Switzerland, 17% France, 11% Southern Europe, 5% UK, 5% Germandy and Austria, with the remaining 1% classified as other.
After initially marketing the Reg S deal at 170bp over mid-swaps, price guidance was narrowed to 150bp to 155bp over. Final pricing was fixed at 99.945% on a coupon of 1.6% to yield 1.619%.
This represented 181.5bp over Bunds, or 150bp over mid-swaps.
In terms of comparables bankers cited two to three notch lower rated China Overseas Land & Investment (COLI), which has a Baa1/BBB+/BBB+ rating and completed the first euro-denominated property deal by a Chinese property company back in July.
Its €600 million 1.75% July 2019 deal was trading Tuesday on an asset swap spread of 154.9bp and Z-spread of 157.6bp to yield 1.77% according to Bloomberg.
Dongfeng Motor's closest sector comparable in terms of ratings is the embattled Volkswagen, which has a one notch lower A2/A- rating and is on negative outlook from both Moody's and Standard & Poor's.
The German group's debt has suffered massive spread widening since the emissions scandal erupted in mid-September. Its 3.25% January 2019 bond, for example, blew out from an asset swap spread of about 30bp in late August to a high of 257.6bp on September 29.
On Tuesday the three-year paper was still trading at an elevated 195bp level.
Higher rated yet higher spread
In determining fair value for Dongfeng Motor’s deal, bankers said investors also looked at BBB-/Ba1 rated Renault, one of its joint venture partners. The French auto manufacturer is rated six notches lower by Moody’s and four notches lower by Standard & Poor's.
Indeed, Dongfeng has a higher rating than every single one of its joint venture partners with the exception of Honda, which is rated A+/A1.
However, Renault's trading levels demonstrate just how much of an emerging markets premium European investors still expect Chinese deals to carry notwithstanding the strong backstop of home demand PRC credits can rely on.
On Tuesday, Renault's 3.625% September 2018 bonds were trading on an asset swap spread of 121.3bp, and Z-spread of 117.9bp to yield 1.29%.
Dongfeng Motor may not yet have the same name recognition as European auto manufacturers but that is changing thanks to its close collaboration with PSA Peugeot Citroen in which it purchased a 13.8% stake in 2014.
China's second largest auto group by sales joined the French government in a rescue plan to inject cash into Europe's second largest auto group by sales after the latter posted operating losses in 2012 and 2013. Since then the two auto groups have gone on to develop a number of joint projects including low emission engines.
In its ratings assessment, Standard & Poor's said the breadth of Dongfeng's joint venture partnerships underpin its rating. Alongside Renault, Peugeot and Honda, these partnerships also include Nissan and Kia and mean Dongfeng does not need to rely on one single brand for its profitability.
However, the rating agency said this strength was tempered by Dongfeng's lack of own brands and sagging demand for new cars in the face of China's economic slowdown.
At the end of September, the government attempted to boost the auto sector by waiving 50% of vehicle purchase taxes for cars with engines of 1.6 litres or less. Analysts said this effectively translated into a 5% discount on the purchase price of a typical car.
Dongfeng is expected to be one of the major beneficiaries of the move since cars with engines below 1.6 litres accounted for 54% of its sales in 2014.
Analysts noted that the country’s overall car sales jumped by 50% in 2009 when the government last announced similar measures to help the auto sector. However, the stimulus is not expected to have the same impact this time round because of the growth in car sales in the intervening period means the pump priming is starting from a higher base.
Both Moody's and Standard & Poor's also pointed to Dongfeng's strong balance sheet in their assessments.
The group ran a net-cash position of Rmb29 billion ($4.57 billion) at the end of 2014.
Moody's said that debt to Ebitda is expected to remain stable at around 0.8 to 0.9 times over the next 12 to 18 months, while Ebitda to interest expense should come in around 11.5 to 15 times.
Joint global co-ordinators for the bond deal were Bank of China, BNP Paribas, Deutsche Bank, HSBC and Societe Generale. Joint lead managers were BoCom Hong Kong, CCBI, ICBC Asia and Shanghai Pudong Development Bank Hong Kong.
