Guanghui debuts Chinese preferred shares

Chinese companies have one more arrow in their quiver to reduce debt, but investors still have questions.
Guanghui Energy produces coal and natural gas in Xinjiang province
Guanghui Energy produces coal and natural gas in Xinjiang province

Shares in Guanghui Energy rose 4.6% on Friday after the Xinjiang-based coal and gas producer said it would issue Rmb5 billion ($197 million) in a preferred share offering to qualified investors, the first placement of such instruments in China’s onshore market.

The proposed plan came as a surprise to market participants, who had expected one of the big banks to issue first, particularly after Chinese banking and securities regulators published detailed rules on the issuance of preferred shares by commercial banks on April 18. But analysts say that banks still need further guidance on accounting treatment.

Shenzhen-listed Guanghui plans to issue up to 50 million preferred shares at a floating rate to no more than 200 investors, it said in a company statement. Proceeds will be used for a railway project and working capital.

Beijing-based Hong Yuan Securities, China’s first listed securities house, is rumoured to be advising on the deal, according to a source familiar with the situation, though bookrunners have not yet been confirmed.

The proposal is still subject to approvals from shareholders and the securities regulator.

Preferred stocks typically do not come with voting rights, but have seniority over common stock in terms of assets and earnings. Preferred stockholders are still junior to bondholders in the event of bankruptcy.

Regarded as equity for accounting purposes, preferred shares can help companies reduce their debt ratio and improve their financial structure. Guanghui Energy hopes to cut its debt ratio down to 58.4% from 66.7% after the preferred share issuance.

“For investors whose portfolios are low risk, investing in preferred shares can help them balance yields and improve overall return,” Wu Qihua, an analyst with Shanghai-based Guotai Junan Securities, told FinanceAsia.

Banks are especially interested in issuing preferred shares to replenish their capital ahead of a requirement to retain a tier-1 capital adequacy ratio, a main measure of financial strength, of 7.9% by the end of 2014 and 9.5% by end-2018. Banks may need to issue as much as Rmb720 billion to meet this requirement, according to a research report by Chinese brokerage Northeast Securities.

Analysts estimate Guanghui’s preferred shares could be priced at a yield of around 11%, compared to an expected cost of 7% to 9% for the big banks, according to several research reports.

Not all investors are pleased to see Guanghui hit the market first. “Preferred shares are still new in China. I might be more interested if the first such shares were issued by a blue-chip company,” said a chief investment officer with a Shenzhen-based fund who has been active in IPOs and share placements in the domestic market.

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