Xi'an Municipal continues Chinese LGFV deal flow

Debut issue sails through empty market awaiting non-farm payroll numbers from the US.
chiming with investors?
chiming with investors?

A debut issue by Xi'an Municipal Infrastructure Construction Group sailed into an empty market on Friday as investors waited to see whether non-farm payroll numbers from the US signalled an impending interest rate hike.

However, the distraction did not appear to prove to be much of a handicap for the issue, which had built up a respectable peak order book of $2.5 billion by the time final guidance was revised. 

This was not as strong as the $3.8 billion order book fellow LGFV issuer Chongqing Western Modern Logistics had built up earlier in the week, but Xi'an Municipal went out with more aggressive indicative price guidance.

This was subsequently revised by less than normal, which consequently led to very little drop off in the final order book, according to one banker who said the book closed around the $2.5 billion level.

Initial guidance had been pitched at the low 200bp level over Treasuries before being tightened to 2.5bp either side of 195bp over Treasuries.

Final pricing for a $500 million Reg S deal was fixed at 99.880% on a coupon of 2.8% to yield 2.842% or 192.5bp over Treasuries. 

A total of 116 accounts participated of which 94% were from Asia and 6% Europe. By investor type, fund managers and insurers took 47%, banks 30%, sovereign wealth funds 21% and private banks/other 2%. 

There were a number of comparables for the deal, which has a BBB rating from Fitch. The most recent is Chongqing Western's $500 million 3.25% five-year deal from earlier in the week, which also had a BBB rating from Fitch. 

This had been priced on Tuesday at 99.407% on a yield of 3.38% and spread of 220bp over Treasuries. By Friday, it had traded up about half a point and was being quoted on a G-spread of 208bp.

From the three-year sector, the most recent comparable is Chongqing Nan'an Urban Construction and Development's 2.875% July 2019 bond. This was trading on a G-spread of 181bp on Friday. 

Chongqing Nan'an has a one-notch higher rating of BBB+/BBB+ from Fitch and Standard & Poor's, which suggests a 10bp differential with Xi'an Municipal. On this basis, fair value for the Xi'an deal would fall around the 192bp level, where it priced. 

Bankers said roughly 100 accounts participated. Bankers said the deal was viewed as a good hedge against non-farm payroll numbers whatever way they went given the LGFV sector currently has good momentum and any big Treasury sell off will lead to a flight to quality that should benefit state-linked entities. 

Xi'An Municipal issued the debt in its own name with no guarantee structure and the entity is directly plugged into the Xi'an municipal government's budget. Its public sector role also gives it a more strategic role than some other LGFV vehicles. 

In its rating release, Fitch notes that it is the primary public sector service provider in Xi'an accounting for 70% of public transportation services, 70% of the heating supply market and is the leading distributor of piped gas into the city. 

Xi'an, which is the capital of Shaanxi province, is not growing at quite the same clip as Chongqing where the two main benchmarks both provide property related services for their government: Chongqing Western running a logistics park that serves the Silk Road and Chongqing Nan'an responsible for the government's urbanisation plan. 

According to Mizuho, Xi'an's net debt to Ebitda stood at 24.4 times at the end of the 2015 financial year. 

Xi'an deals entered a market where secondary trading was fairly subdued on Friday according to sales desks, although more buyers were seen in Chinese high yield paper, which traded up about a quarter of a point.

In the US, 10-year Treasuries closed trading in New York on Friday down three basis points to 1.60%. Non-farm payroll numbers came in a 151,000 jobs below consenus expectations for 180,000. 

However, analysts were quick to point out that they have done this in August for a number of years on the trot and then been subsequently revised.

Global co-ordinator for Xi'an's deal was DBS. Joint bookrunners who included investors in the deal comprised CEB International, ICBC Singapore and Shanghai Pudong Development Bank.

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