State Power charges into the bond market

The Chinese energy giant enjoyed a day to itself in Asia’s dollar bond market — and it certainly made the most of the attention.

The last time China’s State Power Investment Corp raised dollars, it was in the midst of an aggressive acquisition.

The company had turned to bank lenders to help fund its takeover of Pacific Hydro, an Australian renewable energy company, at the start of last year. It turned to a mix of Chinese and foreign banks to help the fund the deal, securing a loan worth $2.5 billion.

The catch was that the loan was only a bridge facility, and State Power needed to find replacement funding before its loan matured on January 29, 2017. It did just that this week, turning to bond investors for a deal worth $1.2 billion — and boosting the maturity of its debt to a mix of five and 10 years.

State Power raised $900m from a five-year bond paying 130bp over Treasuries, and $300 million from a 10-year note offering a 157.5bp Treasury spread. It managed to price both tranches without giving investors much in the way of a new issue premium, according to bankers on the deal.

That achievement was helped by the timing. State Power was the only Asian issuer to attempt a dollar bond on Tuesday, coming to the market before a raft of issuers launched deals. Agricultural Bank of China, Guangzhou Industrial, Shinhan Bank and Shougang Corp were all planning to sell dollar bonds on Wednesday night, while ChemChina was attempting a euro deal.

But State Power’s success was not just the consequence of good fortune. The issuer’s willingness to start guidance wide — no doubt trusting its banks to push spreads lower during book building — also helped drive momentum.

The bookrunners approached investors with initial prce guidance of 160bp over Treasuries for the five-year bond, and 190bp over for the 10-year note. That looked generous compared to outstanding bonds from other Chinese power companies, but the initial deluge of demand helped the bankers pull off an aggressive cut in price guidance.

By the time the bookrunners announced much tighter final price guidance, the order book had swelled to $6.75 billion, said a banker close to the deal. Bankers then announced that the five-year would price between 130bp and 135bp over Treasuries, and the 10-year bond would come with a spread of 157.5bp to 162.5bp. 

Bankers steered investors towards three main comparables for the new bond: China Three Gorges, State Grid of China, and China General Nuclear Power.

Three Gorges and State Grid are both Chinese state-owned power companies, making them almost perfect comparables. But that ‘almost’ is there because both bonds are higher-rated than State Power’s deal, which got an A3 rating from Moody’s. Both Three Gorges and State Grid are rated AA-. This is why the bookrunners chose to add China General Nuclear Power to the list. That deal is rated A3 by Moody’s and A+ by Fitch.

Here’s where the comparables were trading when State Power’s bankers opened the order books for its bond:

  G-spread (bp)
China General Nuclear Power 4% May 2025 161
China Three Gorges 2.3% June 2021 108
China Three Gorges 3.15% June 2026   132
State Grid Corp of China 2.125% May 2021 112
State Grid Corp of China 2.875% May 2026 119
Source: Bankers' estimates; Dealogic  

Some investors dropped out of the book at this point, but there was still more than enough demand to price both deals at the tight end of guidance.

The final order book — which totalled $4.8 billion across both tranches — also ensured allocations would be tight, helping the after-market performance. The new five-year note was bid at 124bp over Treasuries on Tuesday afternoon, while the 10-year spread had tightened to 148bp, said a banker.

Although State Power raised slightly less than half of what it needs to pay back the acquisition loan, the company appears to have secured enough cash from other means. Bankers said they offered State Power a bigger deal during bookbuilding — and the company did have approval to go higher — but funding officials at the company said $1.2 billion was enough.

It may appear the coming maturity of the loan gave State Power more urgency than some other Chinese issuers. But bankers say a rush to sell deals before the end of the year, when any funding approvals given by China’s regulator will expire, is going to drive the bulk of bond issuance heading into Christmas.

ANZ, Credit Suisse, HSBC, ICBC International and JP Morgan were the global coordinators of the bond. BOCI Asia, CCB International Capital and Bank of America Merill Lynch were joint leads.

The five-year bond got $2.9 billion of demand from 82 investors. Banks were allocated 59%, fund managers 38%, and private banks 3%. The 10-year bond got $1.9bn of demand. Fund managers took 59% of the longer-dated tranche, insurance companies 32%, banks 7% and private banks 2%.

On both tranches, Asian accounts were the overwhelming buyers, taking 97%. The rest was sold into Europe.

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