Investors showed strong demand for the three-year and perpetual bonds of Power Construction Corporation of China, despite a negative outlook from S&P Global Ratings and criticism of its project in Africa. The Shanghai-listed firm’s 3-year $300 million senior unsecured notes and $500 million perpetual bonds were subscribed more than 5 times and 4.4 times respectively.
Order books for the 3-year Reg S $300 million bonds reached more than $1.5 billion from 71 accounts, with 96% of orders from Asia and the rest from Europe. Financial institutions including banks accounted for 47% of the book, while asset managers and fund managers accounted for 34%. Sovereign wealth funds also placed orders for the paper.
For the Reg S $500 million perpetual bonds, which are noncallable for 5 years, the order book surpassed $2.2 billion from 147 accounts, with Asian investors accounting for 94% of the orders and Europe the remainder. Fund managers and asset managers placed 56% of the orders, while financial institutions including banks accounted for 11%.
The coupon for the 3-year bond is 3%. It priced at 99.778 or T+128bp to yield 3.078%. Initial price guidance was T+160bp. The perpetual bond also tightened in from initial price guidance of 4.6% to price at 4.3%. Proceeds from both bonds will be used for working capital and general corporate purposes including refinancing.
S&P has a negative outlook for Power Construction Corp, as the state-owned enterprise intends to pursue aggressive revenue and profit growth over the next two years. The company is expected to maintain material exposure to investment projects which could have long payment cycles and require significant capital commitments. “We see a low likelihood of improvement in the company's financial performance over the next 12 months, with a possible weakening in credit metrics,” it said in a report last year.
The ratings agency has an issuer rating of BBB+ on the company. This is three notches higher than the firm's standalone credit profile of BB+ due to the “high likelihood of extraordinary support from the Chinese government”, it said.
On the positive side, S&P expects Power Construction Corp to maintain a leading position in the power-related engineering and construction (E&C) market in China over the next 12 to 24 months, as the company has a more than 60% share in the hydro E&C market and 30% to 40% in other power E&C markets in China.
Fitch is expected to assign an A- rating to the 3-year senior unsecured notes and BBB+ to the perpetual bonds.
It pointed out that the company’s operating cashflow adjusted for interest payments was negative for a second year in the row in 2018. Power Construction Corp suffered a negative capital outflow of Rmb20 billion ($2.9 billion) last year, due to increased receivables and inventory turnover and its net debt increased by 29% to more than Rmb260 billion. “We expect [Power Construction Corp’s] leverage to stay elevated in the medium term. Continued rise in [its] debt has also caused interest expenses to rise sharply,” Fitch said.
Last year, Power Construction Corp’s revenue reached Rmb404.9 billion and its profits hit Rmb13.8 billion. It ranked 182 among the Fortune Global 500 and was named the world’s sixth largest global contractor. The Chinese company has extensive projects overseas, including a ring road in Belgrade, Serbia, and a coal-fired power plant in Pakistan.
Power Construction Corp’s planned coal-fired power plant in Kenya, however, was criticised in a report published this month by the Institute of Energy Economics and Financial Analysis (IEEFA), a US organisation which studies energy and environmental issues. The construction contract for the $2 billion plant was awarded in 2016.
Describing the 981-megawatt plant as “the wrong choice for Kenya”, the IEEFA report said that “there is ample justification to cancel the entire project”. After the project starts operations in 2024, it will burden consumers with costly power and make it difficult for the African nation to meet its Paris climate change obligations, it said.
Both bonds will be issued by Power Construction Corp’s subsidiary DianJian Haiyu and are guaranteed by Power Construction Corp. The joint global coordinators, bookrunners and lead managers of both bonds are CCB International and Standard Chartered, while other joint book runners and leader managers include Agricultural Bank of China, Citigroup, DBS Bank, Everbright Sun Hung Kai, HSBC and ICBC International.