Tianjin FTZ launched a debut international bond on Tuesday, attracting an outsized order book for a slightly larger-than-expected $500 million deal.
Bankers said the peak order book hit $4.5 billion before dropping back to $3.7 billion after the group revised priced guidance fairly aggressively.
They added that the deal was particularly well received because the issuer is not only viewed as one of the most important local government financing vehicles (LGFV) in China but also has a compelling story as the north's only Free Trade Zone.
The three-year Reg S deal, which is rated Baa2/BBB+ by Moody's and Fitch, was initially marketed at 290bp over Treasuries before guidance was revised to 2.5bp either side of 260bp over Treasuries.
Bankers added that the transaction got off to a good start as it had already locked in $400 million of anchor demand following a five-day roadshow. The book quickly rose to $1 billion within an hour of launch and had hit $2.5 billion by the beginning of the Asian afternoon.
This encouraged the group to push down on pricing, with final terms fixed at an issue price of 99.536% and coupon of 3.625% to yield 3.79% or 257.5bp over Treasuries. Syndicate bankers estimated fair value around the 250bp level, which means the deal offers a 7.5bp new issue premium.
Deal stats show 188 investors participated with 94% Asia and 6% Europe. By investor type 43% went to fund managers, 34% to banks, 10% to agencies and sovereign wealth funds and 3% to private banks/others.
The issuance vehicle was Hong Kong Baorong Development Ltd, with a keepwell and liquidity support deed provided by Tianjin FTZ Investment Holding Group. The absence of a full guarantee led Moody's to drop the rating one notch below the parent's Baa1 rating, while Fitch maintained both issue and parent at BBB+.
Moody's also rates Tianjin FTZ's deal one notch lower than its chief comparable, a $300 million 3.1% July 2018 deal by Zhaohai Investments, which has a keepwell deed and liquidity support from Binhai Jiantou Hong Kong Development.
Both companies ultimately come under the ownership of the Tianjin municipal government via Tianjin Sasac and there is a put option at 101% if ownership falls below 100%. In Tianjin FTZ's case, this very strong implicit support resulted in a six-notch uplift from Moody's B1 baseline assessment.
Binhai or Tianjin FTZ?
Bankers said that many investors disregarded Moody's assessment and preferred Tianjin FTZ over Binhai Jiantou because the former is far less leveraged than the latter. At the end of 2014, Tianjin FTZ reported high adjusted debt to Ebitda of 10.9 times. However, this pales alongside the enormous 100.6 times ratio reported by Binhai Jiantou.
In a pre-deal credit assessment, Nomura said it thought Tianjin FTZ would trade through Binhai Jiantou even though it believes fair value stands at 270bp over Treasuries, or a Z spread of 272bp, compared to Binhai Jiantou's current trading level of 246bp on a Z-spread basis. This incorporates a 45bp LGFV premium.
"We believe there will be strong technical support in the secondary market, which may see the bonds trade through fair value, especially give the small issue size," said Nomura.
"Nonetheless, we don't see this as a buy-and-hold name and we suggest playing at no tighter than our fair value of 207bp and take profit on any early tightening. Finally, we note particularly that our desk holds a cautious view on the whole LGFV space."
Syndicate bankers also concurred on the likelihood of strong support from Chinese banks and asset managers, which did not participate in the primary market.
According to Nomura, Binhai has double the revenues of Tianjin FTZ and 80% more assets. It also argues that the former is more strategically important as it accounts for 50% of Binhai New Area's fiscal income compared to 2% to 3% of Tianjin's in the case of its FTZ.
However, the latter has a far sexier story than Binhai, which is primarily involved in engineering and construction of gas pipeline networks. Tianjin FTZ's high profile clients, on the other hand, include Bombardier and Airbus, which is setting up an A330 completion and delivery centre close to its final assembly line plant in the FTZ.
Established in 2008, Tianjin FTZ Investment Holding Group develops and maintains the infrastructure of the Tianjin Port FTZ, the Tianjin Airport Economic Area and the Tianjin Airport International Logistics Zone in the Binhai New Area for the Tianjin municipal government.
According to its net roadshow, it derived 68.5% of its revenues from logistics during the first half of 2015, with 10.6% from city infrastructure, 6.9% for financing and investment, plus a further 11.1% from property and 2.9% other.
Joint global co-ordinators for the bond deal were DBS, Bank of China, Orient Securities and Standard Chartered, with joint leads comprising Agricultural Bank of China, Wing Lung Bank and Bocom International.
This article has been updated since publication with full deal stats and amending S&P to Fitch ratings