Sinochem Hong Kong, a leading player in China’s fertilizer industry, issued a $2 billion dual-tranche bond late last week.
The deal was the inaugural offering of Sinochem HK in the international bond market. It was also the largest-ever international bond launch from a Chinese issuer – and the first by an unlisted Chinese non-bank company. The deal, made-up of $1.5 billion of 10-year notes and $500 million of 30-year notes, was priced late Thursday night (Hong Kong time).
The initial pricing whisper was in the low-200bp range for the 10-year tranche and in the mid-200bp range for the 30-year bonds. Despite falling US Treasury yields and uncertainty over the Federal Reserve’s quantitative easing programme, the lead managers quickly built up their order book and were able to price both tranches tightly.
The $1.5 billion shorter-dated bonds pay a 4.5% coupon, and were re-offered at 99.467 to yield 4.567% to a maturity date of November 12, 2020. That translated into a spread of 208bp over the yield of the US Treasury 10-year benchmark bond.
The $500 million longer-dated bonds pay a 6.3% coupon, and were sold to investors at 99.519, yielding 6.336% to a maturity date of November 12, 2040, equivalent to a 228bp premium over the yield of the US long bond.
According to bankers close to the deal, investors used recent and seasoned emerging market oil and gas credits in order to determine relative value. Sinochem’s notes needed to offer a yield premium over bonds issued by higher-rated Pemex and Petrobras. At the time of pricing, the Mexican state-owned oil company’s 10-year bonds were trading at 162bp and its 30-year bonds at 191bp, while the Brazilian government-controlled company’s 10-year paper was bid at 156bp and its 30-year paper at 180bp.
Korea’s KNOC, rated A1 by Moody’s, had issued five-year notes earlier in the week that were bid at 175bp. Compared to that, fair value for Sinochem’s two tranches had to be extrapolated both for a lower credit rating and longer duration.
Also relevant was the dual-tranche (10- and 30-years) deal by India’s lower-rated Reliance Industries in mid-October. Sinochem’s 2020 notes came about flat to the Reliance notes with the same tenor, but the 30-year notes were priced about 5bp wider than the Reliance 2040s. Reliance’s shorter-dated paper had weakened since launch, but the long tenor notes had held up well, so the spread differential had narrowed between them. However, the pricing of Sinochem's two tranches had to reflect investors’ more general perception of the appropriate spread difference adjusted for the yield curve, rather than be guided about the current relationship between the Reliance tranches.
There was strong subsequent demand for both Sinochem tranches from under-allocated investors, and at the close of secondary market trading in Hong Kong on Friday, the 10-year notes were bid at a yield spread of 197bp and the 30-year notes at 207bp.
The combined order book size for the two tranches was $7.85 billion, made up of orders from 310 accounts. The 10-year bonds attracted orders worth $4.4 billion. By geography, 55% of was allocated to US investors, 29% to Asia and 16% to Europe. By investor type, 67% was placed with fund managers, 12% with central banks and sovereign agencies, 8% each with commercial banks and insurance companies, 3% with non-financial companies and 2% with private banks.
The smaller 30-year tranche received bids worth $3.45 billion, but Sinochem was reluctant to increase the issue size because of the high interest rate relative to the 10-year notes. US investors bought 48%, Asian accounts took 39% and the rest was distributed in Europe. Fund managers took 72% of the long-dated notes – and presumably they allocated much of it to the portfolios of their duration-hungry pension fund and life insurance clients – 13% was sold to insurance companies, 4% each to commercial banks and non-financial companies, 6% to private banks and 1% to others.
The Regulation-S SEC Rule 144A senior unsecured notes will be listed in Hong Kong, but subject to New York law. The proceeds will be used for working capital, refinancing of short-term loans, capital expenditure and general corporate purposes.
The joint bookrunners and lead managers for the deal were Citi, HSBC and UBS.
All three major credit agencies assigned the same BBB+ or equivalent Baa1 rating to the issue – although Standard and Poor’s has it on negative outlook, whereas Moody’s and Fitch both believe the outlook is stable.
Sinochem HK is 98%-owned by Sinochem Group and holds most of its parent's important assets, including majority interests in listed fertilizer company Sinofert Holdings, and listed real estate company Franshion Properties (China). It is particularly dominant in potash imports.
It also acts as a primary treasury centre for the financing of Sinochem Group's overseas businesses and activities. According to an October 26 report by Moody’s, it accounted for approximately 61% of Sinochem Group's total assets at the end of 2009 and 78% of its revenue.
Sinochem Group is a central government-owned state-owned enterprise (CGSOE), and is directly owned and supervised by the State-Owned Assets Supervision and Administration Commission (Sasac) of China's State Council. It engages in agricultural, chemicals, energy and finance businesses. Sinochem is also one of 16 CGSOE that have approval from SASAC to carry out real estate business.
Sinochem Group has issued a letter of support in relation to the notes, confirming that it indirectly owns 98% of the guarantor, Sinochem Hong Kong, and that it intends to retain a majority holding. Investors have the right to sell the notes back to the issuer at a price of 101, if Sinochem Corporation – a subsidiary of Sinochem Group – ceases to own 100% of the guarantor company. The change-of-control put clause will also be activated if the sovereign no longer owns at least 50.1% of the guarantor, and if that event leads directly to a credit rating downgrade.
