Sinopec, the world’s largest energy company by revenue, made a slick re-entry into the international bond markets on Thursday with its second $3 billion bond deal of the year.
The Aa3/A+ rated group took full advantage of the yield compression, which accompanied the Fed’s decision to leave interest rates unchanged on Wednesday, by executing an aggressively priced deal
Pricing was pushed through fair value on all three tranches of its new deal on the grounds investors should make money in the secondary market as spreads continue to grind tighter.
And investors appeared to agree, with the peak order book building to $5.5 billion by Asia’s close and $8 billion by the US open. Back in late April, when bond markets had less momentum, Sinopec built a smaller peak order book of $5.4 billion for a similar $3 billion four-tranche deal.
"It’s a pretty conducive market environment for issuers right now," said one syndicate banker. "It’s a bit of a relief the Fed decided to leave interest rates unchanged."
However, one Singapore-based fund manager said central bank-fuelled liquidity is distorting fair value, making it much harder to accurately value investment opportunities.
"Tight valuations for Asian credit are being driven by inflows from developed markets and Chinese onshore money," the fund manager said. “Many institutional investors don't feel they’re being properly compensated for riding through the yield curves."
A second syndicate banker agreed that the traditional price discovery route has been forsaken as deals price through secondary curves. "It’s an issuer-friendly market," the banker concluded.
Unsurprisingly, Sinopec's new triple-header Reg S/144a also priced through each of its very recent and still liquid outstanding benchmarks.
Initial guidance for the three-year note was offered at 115bp over Treasuries, before being tightened to between 98bp and 100bp over.
Final pricing for a $1.1 billion September 2019 print was fixed at 99.611% on a coupon of 1.75% to yield 1.884% or 98bp over Treasuries, according to a term sheet seen by FinanceAsia.
The five and ten-year notes were initially marketed around the 120bp and 150bp mark respectively, before indicative pricing was tightened to 95bp to 100bp over and to 125bp to 130bp over.
A $1.3 billion September 2021 bond was priced at 99.462% on a coupon of 2% to yield 2.114% or 95bp over Treasuries.
A $600 million September 2026 bond was issued at 98.989% on a coupon of 2.75% to yield 2.867% or 125bp over Treasuries.
The issuance vehicle was Sinopec Group Overseas Development (2016) ltd, with a guarantee from China Petroleum Corporation.
The closest comparable for the shorter-dated paper is Sinopec’s outstanding 2.125% May 2019 bond, which was trading on a G-spread 99bp at Asia’s open on Thursday. It tightened about 1bp in yield terms over the course of the trading day to close on a mid-yield of 1.795%.
Meanwhile, Sinopec’s 2.75% May 2021 bond was quoted on a G-spread of 92bp in a syndicate sales note at the beginning of the trading day. This bond also tightened about 1pm over the course of the day in yield terms to the 2.02% level.
Finally, its 3.5% May 2026 note began Thursday on a G-spread of 132bp and tightened about 5bp over the course of the day to a mid-yield of 2.92%.
Relative to its G-curve, the 10-year bond carried the most aggressive pricing. But this was not surprising given the movement in its secondary spreads and also wider markets where investors reacted to the Fed’s inaction by moving further out in terms of duration.
The final order book closed at $6.5 billion with a split of $2 billion from 118 accounts for the three-year, $3 billion from 133 accounts for the five-year and $1.5 billion from 84 accounts for the 10-year.
Sinopec says it will use proceeds for re-financing purposes. In its online roadshow, the group revealed that its debt metrics are improving with debt to Ebitda declining from 2.9 times at the end of June 2015 to 2.8 times in June 2016.
Likewise, its Ebitda to interest coverage ratio has improved from 10.7 times to 15 times over the same time period.
Aside from country’s development banks, Sinopec represents one of the best sovereign proxies given its 3% contribution to China’s GDP in 2015.
However, profitability has been under pressure with net profit falling from Rmb21 billion ($3.14 billion) in June 2015 to Rmb19 billion in June 2016.
The story has been updated with final stats from first publication.