Government-owned Shanghai Huayi sold an inaugural $350 million five-year debt offering on Monday night, braving fragile commodity chemical market conditions to raise funds for refinancing and working capital purposes.
Irrevocably and unconditionally guaranteed by Huayi Group, the bond priced at US Treasuries plus 245 basis points, which is 20bp tighter than bankers' initial price guidance, sources familiar with the matter said.
Shanghai Huayi, a major producer of bulk chemicals in eastern China, included a keepwell and liquidity support deed in the Baa3/BBB-/BBB rated notes. A keepwell deed is essentially a contract between a parent company and a subsidiary to maintain solvency and financial backing over an agreed term.
Another credit enhancement in the deal was a deed of equity interest purchase undertaking, in which gaps in bond repayment amounts can theoretically be met by the onshore parent company agreeing to buy a stake in the offshore issuer. The equity proceeds can then be used by the offshore issuer to pay back bondholders.
“Margin pressures will continue to be severe over the next two to three years because of China's slowing GDP growth and the significant new commodity chemical capacity in the pipeline,” Lawrence Lu, credit analyst at S&P, said.
Diversification
Still, Shanghai Huayi's efficient processes and product-development capabilities means it has some scope to lower production costs and develop higher-value derivative products to alleviate some of the competitive pressures.
For example, on September 24, Chinese steelmaker Baosteel signed agreements with Shanghai Huayi and China National Salt Industry's Kunshan — located at the Southeastern part of Jiangsu province — to jointly operate an air separation and synthetic gas unit.
This, together with the proximity of the company's main facilities to other key markets in eastern China, will enable the company to maintain substantially high capacity utilisation than the industry average.
“We expect Huayi to gradually improve its business profitability and lower its debt leverage in the next few years,” Jiming Zou, local market analyst for China at Moody’s, said. “This will be achieved through the discontinuation of loss-making businesses; relocation of its production to efficient new plants; resolution of legacy issues related to early staff retirements and disposal of various assets, including valuable land in Shanghai.”
The firm’s adjusted debt-to-Ebitda (earnings before interest, tax, depreciation and amortisation) was 5.2 times in 2013, and Moody's expects this to improve to about four times over the next 12 to 18 months.
Comparables
According to credit analysts, the closest comparables to Shanghai Huayi’s bond are state-owned Shanghai Electric Group's and Beijing Infrastructure’s outstanding notes expiring in August 2019 and January 2020, respectively. Ahead of the Shanghai Huayi sale, these traded on a G-spread basis at Treasuries plus 110bp and 170bp.
Other comparables include Shanghai-based multinational food and beverage company Bright Food’s May 2018 bonds, which traded with a G-spread of 210bp prior to the offering.
“We think [this] looks okay compared to most of its provincial SOE peers, noting also that the broader SOE sector is currently benefiting from renewed appetite as investors scour the market for real value opportunities into year-end,” a Hong Kong-based credit analyst said.
Shanghai Huayi is a major producer of bulk chemicals. It specialises in five areas — energy chemicals, advanced materials, green tyres, specialty chemicals, and chemical services.
It generated Rmb60.6 billion ($9.9 billion) in revenues in 2013, a 30% increase year-on-year, and the company is 100% owned by the Shanghai Municipal Government.
Deutsche Bank and ICBC International were the joint global coordinators and bookrunners of Huayi’s transaction. Other bookrunners include DBS, Morgan Stanley and UBS.
