China Metallurgical priced a $500 million three-year bond on Thursday, shoring up funds for refinancing and working capital purposes amid the still-low US Treasury yield environment.
The note was issued under the name of MCC Holding Hong Kong, an indirect subsidiary of the engineering and construction group, with the benefit of an irrevocable standby letter of credit (SBLC) from Agricultural Bank of China and a keepwell deed from the company, according to a term sheet.
China Metallurgical’s Reg-S offering is the first dollar-denominated bond to be issued in Asia ex-Japan investment grade space this week, capturing the full attention of investors.
The issuer was able tighten pricing by 25bp from an initial price guidance around the 200bp area, the source told FinanceAsia. The coupon is 2.5% and the reoffer yield is 2.697%.
The paper launched shortly after the company completed its global roadshow in Hong Kong, Singapore and London, which began on August 18 and post the release of the Federal Open Market Committee’s minutes, which triggered a market rally as fears of an earlier than anticipated interest rate hike mounts.
The yield on the policy-sensitive two-year US government bond, which moves inversely to its price, was up 5bp at 0.48%, while the 10-year Treasury yield was up 3bp at 2.44%, according to Bloomberg data. Despite the increase the 10-year UST rate, it is still lower than the 3% level seen in the beginning of the year.
Use of proceeds
The proceeds of China Metallurgical’s offering will be used to refinance its outstanding foreign currency loans, a separate source familiar with the matter said. Excess proceeds will be used to fund the company’s overseas operations as well as for working capital purposes.
In May, China Metallurgical announced that it plans to invest $347 million in building a steel plant with annual production capacity of $1 million tons in southwest of Iran. Upon completion, the plant would create 2,000 jobs.
The state-owned enterprise is also working with Indonesia’s largest steel manufacturer Krakatau Steel to construct a blast furnace smelter in Cilegon, Banten — a province located on Jawa Island in Indonesia.
The smelter, which has been under construction since 2012, will have the capacity to process 1.2 million tons of hotel metal per year and is scheduled to finish by the third quarter of 2015.
Earlier this month, China Metallurgical made an effort to reduce its debt leverage and strengthen its balance sheet by disposing its 100% equity interest in Wudaokou Real Estate in Nanjing City, China for Rmb1.04 billion ($170 million). The company had Rmb150 billion worth of debt outstanding at the end of 2013.
Comparables
The closest comparable for China Metallurgical’s bond was the company’s existing $500 million three-year bond issued in June this year, which was trading at Treasuries plus 168bp prior to announcement, the source said. Just like the new offering, the outstanding note is backed by an SBLC, making it a good comparable, even though it’s backed by Bank of China’s London branch.
The other comparable is Beijing Energy’s existing note expiring in February 2017 that was trading at Treasuries plus 179bp prior to announcement. The bond — the company’s first — is backed by an SBLC from Agricultural Bank of China.
China Metallurgical's offering received a total orderbook of $3.3 billion from over 170 accounts, majority of which went to Asia. Financial institutions subscribed to half of the paper, funds and asset managers 29%, private banks 13%, and insurers and others 6%, according to a source.
China Metallurgical Group Corporation is engaged in the engineering and construction, equipment manufacturing, property development, and resources development businesses.
Based in Beijing, it is a central state-owned enterprise and is wholly owned by the State Council of China and supervised by the State-owned Assets Supervision and Administration Commission.
ABC Hong Kong, ABC International, ANZ, BOC International, DBS and Morgan Stanley were the joint bookrunners of the A1-rated bond.
