Cnooc's undersized 30-year bond attracts huge interest

Chinese offshore oil and gas company Cnooc closed a $2 billion dual-tranche bond early on Thursday morning, amassing the biggest order book ever generated for a Chinese company in the international bond markets.

Cnooc is a high-quality borrower, rated Aa3 by Moody’s and AA- by Standard & Poor’s, which is on par with China’s sovereign ratings — and, as such, investors were clamouring for its paper. The deal attracted a total of $17 billion worth of orders from investors, with the 10-year tranche attracting $7.5 billion of demand and the 30-year tranche attracting $9.8 billion of demand.

However, despite the mammoth demand for the longer tranche, the issuer kept the size small at $500 million and chose instead to print a bigger $1.5 billion 10-year bond.

This proved to be a major allocation headache for the leads. “The issuer wanted to keep the 30-year tranche smaller as it wanted to pay a lower coupon,” said one banker. “It was a bit disappointing given the strength of demand for the longer tranche. We had to cut back a lot of allocations. It was definitely the most difficult allocation process I have been through.”

The 2022s and 2042s printed at the same spread — at Treasuries plus 190bp, despite the initial guidance for the 30-year tranche starting 10bp to 15bp over the 10-year tranche. The initial guidance for the 2022s was Treasuries plus 210bp and the 2042s was Treasuries plus 220bp to 225bp.

“It was tricky and we were surprised by the amount of demand," said the banker. "It has been a long time since we saw a 10- and 30-year bond come at the same spread. The Cnooc 2041s were trading technically tight as it was a small deal and was parked with good accounts. But if you look at the oil and gas names such as Shell and Total, the 10s/30s spread is about 40bp/50bp."

The bonds were actively traded in the secondary market on Thursday. Unsurprisingly, given the size of the unfulfilled demand, the 2042s tightened sharply, while the performance of the 2022s ended up disappointing. As a result, the yield curve for Cnooc started to look inverted.

“The 2042s went straight from Treasuries plus 190bp to 170bp this morning and they are at 170bp/172bp now,” said one market participant on Thursday afternoon. “The 2022s were a bit disappointing. They tightened to Treasuries plus 183bp initially but are now weaker at Treasuries plus 193bp/191bp. It was a big deal and I guess tightening the guidance by 20bp took the juice out of it.”

The 30-year bonds printed some 35bp inside of initial guidance while the 2022s came 20bp inside of initial guidance. The outstanding 2021s and 2041s were both trading at Treasuries plus 160bp on Wednesday, so the new bonds offered a pick-up of about 30bp for an extension of more than a year.

Barclays, BOC International and Citi were the joint bookrunners.

For both tranches, Asian investors were allocated 49%, US investors 38% and European investors 13%. For the 10-year tranche, asset managers were allocated 52%, banks 22%, private banks 8%, insurance 7%, public 6% and other investors 5%. For the 30-year tranche, asset managers were allocated 54%, insurance 21%, banks 14%, private banks 5% and other investors 6%.

The coupon for the 10-year tranche was fixed at 3.875% and the notes reoffered at 99.869 to yield 3.891% while the coupon for the 30-year tranche was fixed at 5% and the notes reoffered at 99.232 to yield 5.05%.