A $1 billion 10-year offering for the People’s Republic of China was first mandated to Goldman Sachs, JPMorgan and Morgan Stanley at the beginning of last year. Yet, having originally prepared for launch in November 2000, the sovereign decided to hold off and many observers wonder why it is seriously considering launching now when the 'spy plane incident' has yet to fully play itself out.
With all documentation and approvals finalized, roadshows had been scheduled to begin on Monday, April 23. Over the past week, however, speculation began to grow that this date was being moved forwards to Tuesday, April 17, in the process beating to market Hong Kong Land and Citic Pacific, whose respective $300 million to $500 million transactions are both scheduled to begin roadshows at the end of the same week.
But over the past 24 hours, China specialists have said that there has been no final decision whether to launch next week and that the sovereign will continue to watch the market closely over the Easter break. They also argue that while the spy plane incident will undoubtedly cloud the psychology of US investors, it has had no impact at all on China spreads.
With a limited outstanding debt universe and almost no supply since the last sovereign deal of December 1998, China debt remains tightly held and aggressively traded. Indeed, fixed income analysts also report a growing differential between the region’s outperformers, with Hong Kong/China spreads starting to outpace benchmark Korean and Malaysian spreads.
As Jason Carley, head of fixed income research at Merrill Lynch, puts it: "Generally, investors remain very willing to invest in top tier names across the region. But there has been a noticeable tiering between Hong Kong and China spreads on the one side and Korean and Malaysian spreads on the other. We also think that supply is unlikely to lead to any technical weakness at the very top level. On the contrary, investors are looking for assets in which to position themselves."
John Woods, HSBC's head of Asian fixed income research, further adds: "China has been the market’s big outperformer. If you look at our ADBI index, China has returned 16.01% year-on-year versus 12.38% for the overall index. Year-to-date, it has also returned 5.8% compared to 4.45% for the overall index. The fact that the country's spreads are perceived as being too rich is of less importance than the fact that they’re stable. We have overweighted the country in our model."
Bankers also comment that although US investors have been selling out of Asia because spreads are considered too tight on a relative basis, paper is being mopped up by regional accounts, a large number of which are Hong Kong/China-focused and based.
Consensus opinion prices a new China 10-year at about 155bp to 160bp over Treasuries. While this seems aggressive relative to the sovereign's existing and largely short-dated yield curve, it reflects recent pricing trends, where split five- and 10-year deals have come fairly flat to one another.
"Ford, for example, has just priced a five-year at 188bp over Treasuries and a 10-year at 203bp over," one banker notes. "The curve is very flat between five and 10 years at the moment and investors have been happy with a 20bp differential between the two."
This is also borne out by the respective spread differential between the China curve and recent deals from Hong Kong sovereign proxies MTR Corporation and the Kowloon Railway Corporation (KCRC). Where, for example, the PRC's benchmark 2006 and 2008 transactions are trading at respective bid spreads of 135bp and 137bp over Treasuries, the MTR and KCRC's 2010 issues are at 154bp and 159bp over.
Traditionally the two credits trade within the bid/offer spread of each other, although over the past year, A3/BBB-rated China has traded up to 20bp tighter than A3/A+ rated Hong Kong on a like-for-like basis. The China sovereign curve is heavily populated at the short-term end, with transactions due in 2001, 2002, 2003 and 2004, but only one issue due in 2027 out at the longer-end.
For strategists, the sovereign credit story is also fairly straightforward. UBS Warburg chief economist Arup Raha comments: "There is pretty much a consensus view among economists. Basically, this says that China will not be immune to a global slowdown, but it will be less affected than the rest of the region because its growth is being driven by domestic demand. This year we're forecasting GDP growth of 7.2% against 8.1% in 2000."
Hong Kong Land
Of the three potential deals, Hong Kong Land’s is shaping up to provide the most interesting proposition for a number of investors, since it will be the first time that a Jardine group company has accessed the international bond markets. And ironically for a group that was once considered the very symbol of corporate Hong Kong, its main pricing benchmark is likely to come from its usurper, Hutchison Whampoa.
Analysts nevertheless argue that Jardine's property arm still provides the best proxy for the assets on which much of the Territory's wealth was founded. Backed by an A/A- credit rating, the group is hoping to raise $500 million in 10-year debt via bookrunners Goldman Sachs, HSBC and JPMorgan. Roadshows are still being finalized, but seem likely to start between Wednesday and Friday next week, for pricing five business days later.
Having maintained a highly conservative balance sheet and low gearing for many years, the company's strong credit ratios and stable earnings are likely to play well with investors. The credit's rarity value is also likely to make it an attractive buy for Hong Kong's liquid bank investors that have under utilized lines to the group.
Consequently, some observers argue that the credit will be able to cut very fine pricing against A3/A-rated Hutchison Whampoa. Despite the fact that the latter has a one notch higher rating from Standard & Poor's, observers argue that investors will counter its negative outlook against Hong Kong Land's stable outlook. Contrary to past practise, Hutchison's telecom assets have also become a drag on spread performance, while Hong Kong Land's property portfolio is likely to be viewed as a more stable revenue generator.
Analysts say that net gearing stands around the 10% to 12% mark, with the group running an EBITDA to gross interest coverage ratio of 2.6 times 2001 earnings.
Where pricing is concerned, Hutchison Whampoa's recent 2011 bond is trading at a bid/offer spread of 215bp/206bp. Investors say that preliminary price talk puts a Hong Kong Land bond about 10bp to 15bp above this level.
Citic Pacific
After a long absence, Citic Pacific is also planning a $500 million 10-year global bond offering, with roadshows tentatively planned to start between April 18 and 20. HSBC and Merrill Lynch are joint lead managers.
The Baa2-rated group last ventured into the international debt markets in May 1997 when it launched a $200 million five-year FRN at 35bp over six-month Libor. In the fixed rate sector, Citic Beijing also has a $200 million 9% October 2006 issue outstanding, with a quoted bid/offer spread of 400bp/325bp over Treasuries. Yet since the latter deal is completely illiquid, market participants say that it consequently provides a very poor benchmark.
Key to the success of any new deal may lay in persuading investors to benchmark Citic against Wharf Holdings, which trades at much tighter levels despite the fact that it has a similar credit rating and asset mix. Rated Baa3/BBB, the Hong Kong conglomerate has a March 2007 issue outstanding trading on a bid/offer spread of 250bp/240bp.
Implementing such a strategy may, however, depend on the attitude of Standard & Poor's, which has previously assigned Citic transaction-specific ratings of only BB. This time round, the company will be hoping that it is rated in line with Moody's, which in turn rates Citic one notch higher than Wharf.
Analysts say that for investors, Citic is an unusually emotive credit and often viewed as a leveraged play on China, even though its revenue stream is extremely stable and its assets concentrated in Hong Kong rather than on the Mainland. As one puts it: "Over the past five years, this stock has surpassed the HK$50 ($6.41) mark twice and both times, at high points of China fever. Over that same period it has also veered sharply down to a low of HK$8.85 in August 1998. At the moment it is trading around the HK$20 mark and the truth is that it should have stayed at this level for the entire period, since it produces utility-like returns."
The company's asset base is currently split: 35% aviation; 32% civil engineering; 13% power generation; 10% property; 6% trading and distribution; 2% telecoms; and 1% other. About 75% of its assets and two-thirds of its revenues are derived from Hong Kong and about 25% of its assets and one-third of its revenue from China.
For investors, however, what is likely to weigh most heavily on their minds is the company's status as the overseas investment arm of the Chinese government, its telecommunications investments on the Mainland and perhaps most importantly of all, its ITIC branding.
Yet analysts conclude that investors have also made a clear distinction between Citic and the rest of the distressed Itic sector. "Even when the Japanese banks were sharply pulling back at the height of the Asian crisis, they still kept their lines open to Citic," says one observer. "The company has never had any financial problems and for the banks, it still represents one of their most strategically important PRC-related clients."
But some investors believe that the company may yet fall foul of the market if it is cannibalized by the China sovereign and Hong Kong Land. “It falls between the two because it is both a China play and a Hong Kong corporate,” says one. “Still it is by no means certain that all three will go and recent deals have shown how much demand there is out there for quality Asian credits.”