Rate cuts spur China dollar bond rush

Chinese phone equipment maker Huawei, property developer Agile and clean energy firm China General Nuclear Power collectively raise $2.1 billion in bond finance.

Three Chinese borrowers — Huawei, Agile, and China General Nuclear Power — priced Reg S-only offerings late in the Asian day on Tuesday, taking advantage of the improved investor mood following China’s interest rate cuts at the weekend.

Huawei sold a $1 billion 10-year bond, raising funds for general corporate purposes. The Chinese phone equipment maker priced its maiden unrated note at US Treasuries plus 195 basis points, which is 25bp tighter than its initial price guidance area, according to a term sheet seen by FinanceAsia. This translates to a yield of 4.248% or a coupon of 4.125%.

Chinese developer Agile Property also took the opportunity to tap global bond markets for refinancing purposes. The company priced a $500 million five-year note that is callable in year three at a yield of 9.125%, compared with initial guidance of around 9.375%.

CGNPC International, a subsidiary of state-owned China General Nuclear Power Corporation, raised a $600 million 10-year note to refinance short-term debt, replenish working capital, and for general corporate purposes. Rated A3/A-/A, the bond priced at Treasuries plus 177.5bp, 22.5bp tighter than its initial price guidance area of 200bp. This is equivalent to a yield of 4.073%.

Out of the three offerings, Huawei's obtained the largest order book, with demand reaching over $8.5 billion from more than 300 investors. CGNPC received an order book of $3.8 billion from around 200 accounts while Agile obtained an order book of more than $1.5 billion from 170 accounts, according to sources close to the deals.

The three offerings come off the back of the People’s Bank of China decision on Sunday to deliver its second round of interest rate cuts so far this year. The central bank reduced both its deposit and lending rates by 25bp to 2.25% and 5.10%, respectively, to help spur waning economic growth, giving Asian debt investors more reason to buy.

Based on JP Morgan's benchmark Asia Credit Indices, investment-grade spreads in the region tightened by 2.36bp to 185.91 on Monday while high-yield rates dropped 4.43bp to 7.05%.

Some credit analysts also noted that single-B Chinese property names fared especially well, rising by 0.25 to 0.5 points in price. 

Some rates experts expect further monetary easing in China if economic growth fails to stabilise by mid-year. Analysts at Barclays and Deutsche Bank, for example, predict rate cuts totaling at least 50bp by the end of the third quarter.

Deutsche Bank forecasts that China’s annual growth rate may slow to 6.8% in the second quarter and rebound to 7% and 7.2% in the third and fourth quarters, respectively. Barclays maintains a below-consensus GDP growth forecast of 6.8% for 2015.

The general consensus for 2015 as a whole is 7%, in line with what the world's second-largest economy managed in the first quarter, which at the time marked a six-year low.

Huawei connects

As the world’s largest provider of telecommunications equipment Huawei is something of a national champion in the Chinese technology sector. Even though it is not a state-owned enterprise, one Hong Kong-based analyst who declined to be named told FinanceAsia that he suspected the company would probably benefit from state support if it were ever required. 

In any case, investors in the Huawei bond are protected by a built-in put option as well as rewarded by a chunky yield. Bondholders have the right to insist all or some of the paper is redeemed on the put settlement date at 101% of the principal amount if Huawei Investment & Holding ever ceases to be the guarantor of the notes.

"With this bond coming at a yield well north of 4%, we expect it to hit the sweet spot for many life insurers and [sovereign wealth funds and] not to mention asset managers," Mark Reade, fixed income analyst at Mizuho Securities, said.

The large order book of $8.5 billion is a strong indication of how much appetite there was for this credit. Asian investors subscribed to 77% of the notes, while the rest went to European and offshore US accounts, according to a source familiar with the matter.  Fund managers purchased 58% of the bonds.

The nearest comparables for Huawei's bond include Lenovo, Tencent, and Alibaba, which have outstanding notes maturing in May 2019, February 2025, and November 2024 that traded at G-spreads of 205bp, 165bp and 160bp, respectively, added Reade. 

Founded in Shenzhen in 1987, the majority of Huawei's revenues are derived from China (38%) and Europe, the Middle East and Africa (35%).

In financial year 2014, Huawei posted revenue of Rmb288 billion ($46.5 billion), a 21% year-on-year increase. The company has a net cash position of Rmb78 billion.

ANZ, Bank of China (Hong Kong), DBS, ING, and Standard Chartered are the joint book runners on its bond issue.

Agile, CGNPC

Elsewhere, Chinese property developer Agile gave notice late on Monday that it too would be looking to tap global bond markets for fresh funding.

Moody's said the PBoC's latest rate cuts are positive for property developers because it will "support property sales and reduce borrowing costs," not least in the mortgage-dependent residential sector.

In Agile's case, the rate cuts are especially timely due to a tight liquidity situation. The developer's unrestricted cash balance of Rmb6.1 billion as of December 31 is insufficient to fund its short-term debt made up of Rmb5 billion in trust loans, Rmb6.4 billion in onshore construction loans, and Rmb5.1 billion in offshore syndicated loans. 

At an April meeting with credit research firm CreditSights, Agile said it was looking to raise as much as Rmb3.5 billion in 2015 from offshore debt markets.

The nearest comparables for Agile's expected bond sale is its outstanding 2019 bonds, which are callable in February 2017. These traded at a yield-to-worst — that is, the lowest potential yield that can be received on the bond without the issuer actually defaulting — of 8.8%. 

Fund managers purchased 47% of the notes, followed by private banks 40%, banks 10% and 3%. Asian investors subscribed to a bulk of the bonds with 77%, while the rest went to 23%, according to a source familiar with the matter.

HSBC and Standard Chartered are the joint global coordinators and book runners of Agile’s B1/B+ rated note. Other book runners include BNP Paribas and ICBC International.

Meanwhile, CGNPC's bond is guaranteed by its parent company China General Nuclear Power Corporation. As a result, the offering received a five-notch credit rating uplift based on the very high level of expected support from the Chinese government, according to Moody's.

Asian investors nabbed up majority of the bonds, accounting for 95%. Fund managers purchased 41%, followed by banks 27%, insurers, private funds and corporates with 25%, central banks 4% and private banks 3%, said a source close to the deal. 

HSBC and Industrial and Commercial Bank of China are joint book runners on CGNPC’s bond.

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