Two Chinese borrowers from either end of the credit spectrum executed international bond offerings on Wednesday, with a $300 million deal from the Yunnan provincial government and a $120 million issue by Hong Kong Airlines.
The two transactions end a recent drought in offshore offerings by Chinese corporates following the latter's recent migration to the domestic bond market where funding is generally cheaper.
However, Yunnan's deal in particular is symbolic of the kind of the international brand building exercise bankers think China's provincial governments will increasingly engage in.
Its three-year Reg-S offering was initially marketed at 270bp over Treasuries before being tightened by 30bp to 240bp over. Final pricing for the BBB+ debt was fixed at 99.748% on a coupon of 3.375% and yield 3.464%, according to a term sheet seen by FinanceAsia.
The order book was about 10 times oversubscribed, suggesting strong interest from cash-rich investors.
“There has been little supply of this kind of investment-rated debt recently," said one source close to the transaction. “Investors also still favour government or quasi-sovereign credit as risk appetite remains subdued ahead of the Easter break.”
The new deal’s comparables include BBB+ rated Anhui Transportation Holding's 2.875% June 2018 bond and BBB+ rated Zhaohai Investment's 3.1% July 2018 bond.
The former was trading at a G-Spread of 197bp and the latter on a G-spread of 236.5bp.
Zhaohai also has a 4% July 2020 bond outstanding, which was trading on a G-spread of 252.4bp on Wednesday according to Bloomberg. This suggests 16bp on its curve between 2018 and 2020 and a theoretical 2019 deal at 244.5bp.
Syndicate bankers said Yunnan paid a non-existent premium and it has come through Zhaohai - the issuance vehicle of Tianjin Binhai New Area Construction & Development, which is owned by the Tianjin municipal government.
One syndicate banker commented that offshore issuance by local government financing vehicle should remain steady given the need to diversify funding channels and buidl an international profile. “Yunnan needs to finance its existing operations overseas,” the banker commented.
Since local government fiscal reform kicked off last year, Beijing has increased its efforts to restructure local government debt by swapping some existing bonds for issues with longer maturities.
After their credit-fuelled investment growth in 2008, China’s Local Goverment Funding Vehicles saw debt surge to Rmb17.9 trillion ($2.75 trillion) at the end of June 2013, according to the most recently released national audit results, up from around Rmb10.7 trillion in 2010.
In its online roadshow, Yunnan Provincial Investment Holding Company reported a net debt to Ebitda ratio of 12.9 times at the end of 2014 compared to 19.4 times in 2012.
On a stand-alone basis, Fitch said it would command a single-B rating. But it noted that profit maximisation is not the driving force for the investment vehicle.
It is wholly-owned by the south westerly province, which is located on the border of Laos, Vietnam and Myanmar. According to its online roadshow assets amounted to Rmb132.1 billion in the first half of 2015.
Joint global co-ordinators for the new bond deal were: China Minsheng Banking Corp Hong Kong branch, UBS and BOCI. Joint leads were: Quam Securities, Shanghai Pudong Development Bank Hong Kong branch, CCBI, ANZ and AMTD.
HK Airlines circles back
The HNA group's short-haul carrier, Hong Kong Airlines, also returned to the bond markets on Wednesday with a re-opening of January's $180 million deal.
Bankers said the $120 million tap was determined by the fact the unrated group had been unable to raise the financing it had hoped for in mid-January after only building a $360 million order book.
The new deal was able to position itself behind its predecessor given the latter has traded up since launch. Having been priced at 99.071% on a coupon of 6.9%, the January 2019 deal was trading Wednesday at 100.83% to yield 6.568%.
The Reg S re-opening was also issued in the name of Blue Sky Fliers and issued at 99.75% to yield 6.994% according to a termsheet seen by FinanceAsia.
One fund manager suggested the new deal appeared to have been as much hard work to execute as its predecessor. “Demand for high-yield instruments has waned since middle of last year because of worries about rising default risks as Chinese growth slows,” the source said.
Over the weekend, People’s Bank of China Governor Zhou Xiaochuan warned against rising debt levels on the mainland. He said corporate debt has become too high relative to GDP, with the country needing to develop deeper capital markets.
Joint bookrunners on Hong Kong Airlines new deal were: Guotai Junan International, BOCI, JP Morgan and Hong Kong International Securities.
