Investors clamour for rare Chinese cement bond

West China Cement refinances outstanding notes with a $400 million bond, making use of the still-low interest rate environment and diversifying the property-heavy high-yield space.
The reconstruction of China’s shanty towns will benefit West China Cement
The reconstruction of China’s shanty towns will benefit West China Cement

West China Cement raised a $400 million five-year bond on Thursday, tapping the markets for refinancing purposes while the rates environment remains subdued.

The proceeds of the Reg S-registered offering, which is callable in year three, will be used to refinance a portion of the company’s $400 million bond maturing in January 2016 that has a yield of 7.5%, according to sources familiar with the matter.

At the same time, West China Cement’s new note offered investors sector diversification in the high-yield space, which is dominated by Chinese property companies.

“We still anticipate solid support given this bond’s scarcity value,” said a Hong Kong-based fixed-income trader. “As the pool of non-property Chinese high-yield issuers starts to shrink, we sense that investors will be willing to pay up for diversity — especially for familiar names issuing debt to refinance existing US dollar bonds.”

As a result, the bond received an order book of about $4 billion from approximately 260 accounts, more of which went to fund managers, the source said. Asian investors subscribed to 77% of the notes, while the rest went to European investors.

Pricing wise, West China Cement was able to tighten pricing by a hefty 50bp — one of the tightest ever in the high-yield space — from an initial price guidance of around 7% area, according to a term sheet seen by FinanceAsia.

According to Dealogic data, real estate property accounts for over 50% of Asia ex-Japan’s high-yield space year-to-date, followed by metal and steel 15% and oil and gas 7.7%.

The US 10-year yield rose 5bp to 2.45% on Thursday, according to Bloomberg data. Despite the increase, the yields are still lower than the 3% seen earlier this year.

The financial performance of West China Cement will benefit from the reconstruction of China’s shanty towns, which will reverse the weak demand of the cement market in 2014.

According to the Ministry of Housing and Urban-Rural Development of China, above 3.2 million households in shanty towns has been rebuilt in 2013 and 4.7 million households are expected to be rebuilt this year.

In the first half of 2014, West China Cement posted a revenue of Rmb2 billion ($324 million), which is a 1.5% increase year-on-year, according to the company's financial statement. 

Comparables

The nearest comparables for West China Cement’s bond were China Shanshui Cement’s existing notes expiring in 2016 or 2017 that were trading at a cash price of 103.375 and 107.5 respectively or a yield of 6.38% and 6.466%, according to sources familiar with the matter.

Other comparables includes Yingde Gases outstanding 2020 paper, which were trading at a cash price of 101 or yield of 7.026 prior to announcement of West China Cement’s transaction.  

The cement company’s bond joins the flurry of deals that came earlier this week, when the Republic of Indonesia sold a $1.5 billion global sukuk and Sri Lanka’s National Savings Bank raised a $250 million five-year note.

West China Cement is the largest cement producer in China’s Shaanxi Province, with a dominant position in its core markets of Southern and Eastern Central Shaanxi.  The company is also expanding its production footprint in Xinjiang and Guizhou and at June 2014.

The company was established in 2006 and in 2010 the company listed on the Hong Kong Stock Exchange, where its current market cap is HK$3.8 billion (US$495 million). 

Credit Suisse and Nomura were the joint bookrunners of the B1/B+/BB- rated transaction.

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