Three Gorges powers into bond markets

The world's largest hydropower development company makes its international bond market debut with the first dual currency issue from a Chinese state-owned enterprise.

China Three Gorges Corporation made its international bond market debut on Wednesday, with a first dual currency transaction by one of the country's state-owned enterprises (SOE).

In doing so, the Aa3/A+/A rated group was able to take advantage of rallying credit markets to raise $700 million from a 10-year tranche and Eu700 million from a seven-year tranche. 

Particularly noteworthy was the group's decision to aggressively ratchet down indicative pricing on the dollar tranche after building up an order book of $5.2 billion. After going out with initial price guidance of around 165bp, the group shaved it back to 135bp over Treasuries, a 30bp differential. 

A total of 229 accounts participated in the 144a 10-year tranche, which was priced at 99.959%, with a coupon of 3.7% and yield of 3.705%.

By geography, there was a split of 54% Asia, 34% US and 12% Europe. By investor type, asset managers took 51%, insurers and pension funds 38%, banks 9% and others 2%. 

The euro-denominated tranche attracted an order book of Eu1.43 billion and was priced at 99.497% with a coupon of 1.7%, yield of 1.77% and spread of 100bp over mid-swaps. Initial guidance had been around the 110bp level. 

By geography European investors took 55%, Asian investors 39%, Middle Eastern Investors 5% and US investors 1%. In terms of investor type, banks were allocated 45%, asset managers 40%, hedge funds 8% and insurers and pension funds 7%. 

One of the main pricing variables for the lead management group was Three Gorge's split rating. In late May, Moody's lifted it one notch to Aa3.

However, Fitch rates Three Gorges one notch lower at A+, while Standard & Poor's rates it one notch lower still at A.

By contrast, fellow utility State Grid Corp has an Aa3/A+/AA- rating. Moody's rates it at the same level as Three Gorges, but both S&P and Fitch rate it one notch higher.

State Grid provides the most direct comparable since it has recently issued euro and dollar denominated debt. 

On January 19, it similarly raised Eu700 million from a seven-year deal that was priced at mid-swaps plus 110bp. This has subsequently traded in well and was bid Wednesday at mid swaps plus 87bp.

Three Gorges has offered a 13bp pick up.

In the dollar market, State Grid has a 3.125% 2023 transaction, which is currently bid at 106bp over Treasuries to yield 3.16%. Three Gorges is offering a 29bp pick up without accounting for the two-year maturity extension. 

Bankers said investors also looked at Aa3/AA- rated CNOOC, which also has a 2025 bond outstanding. This was trading at 138bp over Treasuries on Wednesday. 

Three Gorge's initial price guidance suggested a very tempting 27bp pick up to the oil giant. Final pricing came 3bp through its curve. 

Sources close to the deal said investors were prepared to accept the pricing differential because Three Gorge has more predictable and stable cash flows than CNOOC, which has also been impacted by negative sentiment towards the petroleum sector. 

However, all Chinese investment grade credits benefited from buying enthusiasm on Wednesday with fixed income sales desks reporting renewed interest from real money accounts. Re-bounding Chinese equity markets initially prompted more activity from prop desks.

But yield buyers were also reported to have re-entered the market after US Treasuries sold off. This led many Chinese investment grade credits to tighten in between 2bp to 5bp on Wednesday, creating good secondary momentum for Three Gorge's deal. 

Credit profile

Three Gorges ranks as the world's largest hydropower development company with 50 gigawatts (GW) of installed capacity and 24 GW under construction. By 2021 it is targeting 70GW. 

Building the Three Gorges Dam across the Yangtze River controversially required the re-settlement of 1.7 million people and is estimated to have cost up to $80 billion, almost nine times its original estimate. It now produces the equivalent power of 18 nuclear power stations and is five times larger than America's Hoover Dam.

Its operations accounted for 15.3% of China's hydro power in 2014. One of the group's key selling points is its strategic importance to the government, which wants to ensure that 15% of its electricity consumption is met by non-fossil fuels. 

However, like many SOE's Three Gorges has ambitious international expansion plans targeting three key areas - renewable energy projects in Europe and the US, margin-enriching hydro projects in Latin America and Africa, plus projects in neighbouring countries that fit China's one belt, one road policy to create new land and maritime silk routes.  

As of end 2014, 91.2% of assets and 85.9% of operating revenue were generated onshore. Its offshore assets include its 21% stake in Portugal's EDP and its 50% stake in Brazil's Santo Antonio do Jari hydropower project. 

The group is also jointly developing a second project in Brazil with EDP. In addition it has a hydroproject in Laos and a wind power project in Pakistan. 

According to the group's roadshow presentation net debt to Ebitda stood at 2.7 times at the end of 2014 compared to 4.5 times in 2012. The group's Ebitda/interest coverage ratio has similarly improved from 4.8 times in 2012 to 6.8 times in 2014.

Three Gorges has said it intends to use proceeds from the deal to fund overseas investments. Total capex in 2014 amounted to Rmb28.5 billion ($3.2 billion).

Prior to the bond deal, 93% of the group's debt was Rmb-denominated, with 6% in US dollars and 1% in euros. Some 68% of the total comprised bonds and commercial paper, with loans accounting for the remaining 32%. 

The new deal will help the group to further extend its maturity profile. At the end of 2014, 21% of its debt was due in less than one year, with 44% due in years one to five and the remaining 35% after year five. 


Joint global co-ordinators were JP Morgan, Deutsche Bank and ICBC. Joint bookrunners also included Bank of China, CCB International, Citic CLSA, Goldman Sachs and Soc Gen. 



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