China Cosco is going through tough times. In 2011, China’s biggest listed shipping company made a loss of Rmb10.45 ($1.68 billon) as dry bulk and container shipping volumes fell, and it is set to make a loss again this year.
Its share price has collapsed. The company needs money, but international lenders demand a high price. Fortunately, one of China’s state-owned banks could give a helping hand. Late on Monday, China Cosco raised $1 billion with a 10-year bond — but backed by Bank of China.
The issuing entity was a special purpose vehicle called Cosco Finance (2011). China Cosco Holdings provides a keepwell deed and investors have a change-of-control put after five years.
More important, the bonds are supported by an irrevocable standby letter of credit (SBLC) issued by Bank of China. The SBLC covers both principal and interest payments for the full tenor of the China Cosco bond issue. Clearly, it must also have been cheaper for China Cosco to fund in the international capital markets than borrow directly from Bank of China.
Due to the SBLC, Moody’s is expected to assign the notes with the same A1 credit rating as Bank of China. Standard & Poor’s rates Bank of China a notch lower at single-A.
In common with other Chinese dollar bond offerings sold under Regulation-S only (which excludes onshore US investors), most of the issue was placed in Asia, despite one side of the triangular roadshow last week being in London. China Cosco also visited Hong Kong and Singapore.
The fixed rate, senior, unsecured notes attracted orders from 311 accounts worth more than $11 billion, according to a person familiar with the deal. By region, 82% was sold to Asian investors and 18% into Europe. Asset managers bought 40%, and 26% was allocated to private banks, 17% to commercial banks, 10% to insurance companies and 7% to sovereign funds and others.
Price suggestions started at 270bp to 275bp over the yield of the US Treasury benchmark bond. Enthusiastic interest from investors, which was anchored by a couple of large orders, soon narrowed the spread, according to the person. The deal was rapidly executed on Monday.
There was one clear comparison to help investors calculate the relative value arithmetic. In June 2011, Zijin Mining raised $280 million from a five-year US-dollar bond that was also supported by a standby letter of credit from Bank of China.
On Monday, it was trading at a spread of 190bp over US Treasuries, equivalent to 220bp over the five-year curve now. That worked out as 75bp over a seasoned vanilla five-year Bank of China issue; add another 30bp for a 10-year tenor, and the correct spread for a credit-enhanced deal seemed to be 250bp — which is where China Cosco eventually priced.
Basically, the structural premium over Bank of China was 75bp.
The new China Cosco bonds pay a 4% semi-annual coupon and were re-offered at 98.766, yielding 4.152% to a maturity date of December 3, 2022, with the first coupon to be paid on June 3.
It was the first 10-year US-dollar bond offering with a SBLC credit enhancement provided by one single bank in Asia ex-Japan.
At the break yesterday morning, the bonds immediately traded stronger and were bid at 239bp as under-allocated investors topped up their holdings.
Meanwhile, China Development Bank, the country’s biggest policy lender, approached investors yesterday. Its bond issue will have five- and 10-year tranches, and will be launched through an entity called Amber Circle Funding, and will be managed by a very large number of banks.