Sinopec sells Asia's biggest bond since 2003

China’s largest refiner issued the multi-tranche $5 billion jumbo for refinancing and capital expenditure purposes while interest rates remain favourable.

State-run China Petrochemical Corporation, also known as Sinopec Group, raised a $5 billion multi-tranche bond on April 2, taking advantage of the still-low interest rate environment to refinance its existing debt.

Sinopec’s transaction – the biggest dollar bond in Asia since 2003 and the largest-ever by a Chinese issuer – includes three fixed-rate tranches with three-, five- and 10-year tenors totaling $1.25 billion, $750 million, and $1 billion, respectively, according to a term sheet seen by FinanceAsia.

The bond also includes two floating-rate note tranches split into three- and five-year maturities totaling  $1.5 billion and $500 million, respectively. The floating-rate notes, which are the company’s first, targeted investors worried about a potentially rising interest rate environment.

“The floating-rate note is a perfect instrument to own because you get your returns without having to worry about the rates environment and your duration risk is nil,” said a source close to the deal.

Duration risk is the measure of the sensitivity of the fixed income instrument’s price to a change in interest rates. The longer the duration – expressed as a number of years – the higher investors' exposure is to a change in interest rates. 

The proceeds from the proposed issuance will be used to refinance Sinopec Group’s existing debt and for the general corporate purposes of its overseas businesses, sources familiar with the matter said.

“The proposed issuance will help improve Sinopec Group's debt maturity and liquidity profiles, as we expect the majority of the proceeds will be used for refinancing,” wrote Chenyi Lu, a Moody's senior analyst, in an April 1 note.

Based in Beijing, Sinopec is the largest refiner and petrochemicals producer in China and the country's second-largest oil and gas producer. The company is 100%-owned by the central government.

The impetus for Asian borrowers to refinance or raise funds early was increased again when the Federal Reserve chair Janet Yellen roiled markets on March 19 by suggesting that US interest rate rises could come in around six months time once the US central bank's bond-buying programme ends. The Fed's tapering of its quantitative easing policy is expected to end around November.

The 10-year US Treasury bond yield is currently hovering around 2.8% levels, according to Bloomberg data. The yield has risen from 1.81% a year ago, though it’s still less than the average over the past decade of 3.46%.

The last time Asia saw a mammoth deal like Sinopec’s was back in November 2003 when Hutchison Whampoa sold a $5 billion triple-tranche dollar note, according to Dealogic data. Chinese major national oil company CNOOC was the last mainland borrower to issue the region’s largest bond last year, when it issued a $4 billion multi-tranche dollar bond.

More SOEs to come

In addition to the looming threat of a rising interest rate environment, tighter onshore bank lending has encouraged Chinese corporates to access offshore markets for funding -- a trend that will continue for the rest of the year, say credit analysts.

“We expect a high level of issuance from Asian issuers this year given that interest rates are still relatively low, but the need for companies to raise financing is more pronounced from China where the credit conditions have tightened,” Edwin Chan, head of Asian credit research at UBS, told FinanceAsia. He added that mainland Chinese issuers accounted for 45% of the total $124 billion of Asia ex-Japan dollar issuance seen in 2013.

“From the Chinese issuers’ perspective, the cost makes sense especially for the investment grade credits,” he said.

Refinancing will be another key driver. Around $117 billion of bonds issued by Chinese state-owned enterprises are expected to mature for the remainder of 2014 and approximately $300 billion over the next two years, according to Dealogic data.

The data also shows that Chinese SOEs have issued a total of $6.5 billion worth of dollar-denominated bonds year-to-date, which is more than two times 2012’s total of $2.7 billion during the same period.

Tighter pricing

Sinopec’s multi-tranche bond received a strong response from investors, achieving a total order book of $17 billion from over 800 accounts across the globe, according to a term sheet seen by FinanceAsia.

Given the strong demand for the notes, the company was able to tighten its price guidance across the tranches by 15bp to 25bp.

Sinopec’s three-, five- and 10-year fixed-rate paper priced at the tighter end of their final guidance at Treasuries plus 90bp, 100bp and 160bp, respectively, having tightened by 25bp for the first two tranches and 15bp in the case of the 10-year.

The comparables were Sinopec’s existing 2017, 2018 and 2023 dollar bonds which traded at Treasuries plus 150bp, 85bp and 160bp, respectively, or a G-spread of 98bp, 104bp and 165bp prior to the announcement. This shows that the new triple-tranche fixed-rate notes priced inside their existing curve.

Meanwhile, Sinopec’s three- and five-year floating-rate notes priced at three-month Libor plus 78bp and 92bp, respectively, according to the term sheet. 

Citi, HSBC, Goldman Sachs, CCB International, JPMorgan were the joint global coordinators, lead managers and bookrunners of Sinopec’s bond. Other lead managers and bookrunners include Bank of China International, Morgan Stanley, UOB, Scotiabank, Commonwealth Bank of Australia, Société Générale, Royal Bank of Scotland, China Merchants Securities (HK).


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