China Huarong Asset Management braved volatile markets on Thursday by launching a $3.2 billion triple-tranche bond and becoming the first Asian corporate to raise foreign debt in 2015.
The bad debt manager, the second-largest in China, sold $600 million of three-year, $1.2 billion of five-year, and $1.4 billion of 10-year Reg S-denominated bonds via special purpose vehicle Huarong Finance II.
Despite weak Asian bond markets, China Huarong managed to price each tranche some 10 basis points tighter than initial price guidance at US Treasuries plus 270bp, 310bp and 360bp respectively, according to a term sheet seen by FinanceAsia.
The transaction was five times oversubscribed, obtaining a total orderbook of $15.5 billion from over 400 accounts, according to a source familiar with the matter.
That's in contrast to the broader market, which has been spooked by Chinese property developer Kaisa's default saga. The JP Morgan Asia Credit Index for high-yield companies is down almost 2% so far this year, after rising 6% last year.
The funds raised by China Huarong will be used to help shore up the company's working capital and for general corporate funding purposes.
Headquartered in Beijing, China Huarong is one of four major asset management companies established by the Ministry of Finance in 1999 to acquire and repackage bad loans from Chinese financial institutions.
It is the second-largest bad debt manager after China Cinda Asset Management, with reported consolidated assets of Rmb408.7 billion ($66.5 billion) at end-2013.
China Huarong has brought in strategic investors at a time when bad loans in China have picked up amid an economic slowdown.
Last August, the bad debt manager sold a 21% stake to eight strategic investors for Rmb14.5 billion, including Goldman Sachs, Malaysian sovereign fund Khazanah and private equity firm Warburg Pincus.
According to the China Banking Regulatory Commission, the average non-performing loan ratio of Chinese banks rose to 1.31% in November from 1.16% at the end of September and 1.08% at the end of June.
Rating terms, comparables
The issuance — which is supported by a keepwell deed and a deed of equity interest purchase undertaking by China Huarong Asset Management — comes after the borrower also established a $5 billion medium-term note programme on Monday.
While the deeds demonstrate China Huarong's willingness to support its overseas subsidiaries and the notes under the MTN programme, they are different from an explicit guarantee in terms of the procedures of enforcement.
The final result of such a legal claim is unclear given a lack of precedent litigation against Chinese corporations on such agreements, Moody’s said in a note on Monday.
As a result, the company's latest triple-tranche notes are rated Baa1/BBB+/A by Moody’s, Standard & Poor’s and Fitch, one notch down from its standalone rating.
The nearest comparables for China Huarong’s bonds includes its existing notes expiring in July 2017 and 2019, which traded at a G-spread of 220bp and 265bp prior to the deal's announcement, according to a source familiar with the matter.
Other comparables include China Orient’s outstanding notes maturing in September 2018 and 2019, which traded at a G-spread of about 250bp as well as the company’s 2024 paper, which traded at 295bp, the source added.
While some traders are not huge fans of Chinese asset management names given their lack of transparency, the deal is very cheap compared with its existing notes and peers.
“Its attractive yield/rating combo should see it well-placed with the likes of Chinese banks, life insurers and asset managers,” a Hong Kong-based fixed income analyst said. “What’s more, based on the apparent bearish outlook of most fast money accounts we have spoken to year-to-date, we don’t expect significant participation from flippers, which in turn is a good recipe for initial performance.”
Investor breakdown
Each of the tranches had large participation from Asian investors -- approximately 90% for the three- and five-year, while the 10-year had 81% Asian investor participation, according to a source familiar with the matter.
As for investor type, the breakdown for the three- and five-year were relatively similar, having a large participation from high quality investors including banks and fund managers. They subscribed to over 70% of the notes.
As for the 10-year tranche, long-term investors including the likes of insurers (17%), asset managers (45%) and banks (15%) purchased China Huarong's bonds.
Credit Suisse, Standard Chartered and Wing Lung Bank were the joint global coordinators and bookrunners of the transaction.
Other joint bookrunners include ABC International, Bank of China International, BoCom International, CCB International, China Merchants Securities Hong Kong, Citi, DBS, Deutsche Bank, HSBC, ICBC Asia, Jefferies and Morgan Stanley.
