The transaction, managed by Morgan Stanley and Bear Stearns, is currently holding close to re-offer levels. The leads are supporting the deal in the secondary market.
In terms of comparables, KazhakstanÆs 100%-state-owned Intergas (BB/Baa1) priced a $600 million 10-year transaction at 6.5%, or 183bp over Treasuries. Tengiz Chevroil (sponsored by AA+/Aa1 Chevron Texaco) has a 4.5-year average- life issue currently trading at 200bp over Treasuries. Additionally, TNK-BP 2017s (sponsored by AAA/Aa1-rated BP) are trading at 200bp over Treasuries.
Asia bought 35% of the bonds, which feature a make-whole call, while the US purchased 49% and Europe 16%. Asset managers were allocated 69%, banks 15%, insurance and pension funds 11%, and private banking 5%.
Bankers say that the ambitious deal could have been upsized. Bookrunners tested the accounts down to 6.75%, at the issuerÆs request. An upsize between $1 billion and $1.25 billion was then suggested, which would have allowed the company to drop a carve-out allowing them to raise $150 million for future acquisitions. Apparently, the issuer stuck with the $1 billion, however, in the name of transparency.
Investors were split into two groups: those who felt that the metrics fell short, and those who believed in the sovereign support from parent company Citic Group, its strong relationship with the Chinese government and Citic Group's own investment-grade rating. The former felt Citic Resources had priced too tightly, the latter considered the deal cheap.
ôIÆm always sceptical when a non-investment grade company is being sold based on the relationship with the sovereign, rather than the companyÆs own metricsö, says one investor. Others say just the opposite. ôMany placed an emphasis of the investment-grade parent company Citic Group, and its strong connections with the government. A core of investors globally thought the deal would justify tighter levels. We feel we bought a cheap bond.ö According to these investors, local institutions feel the same and are happy to issue the company five-year funding at levels as tight as the high-70s. China Development Bank issued a committed-term 10-year funding at 110bp over Libor.
Accordingly, there are varying assessments of yesterdayÆs secondary performance. Some investors remarked on the many sellers, and a lack of follow-through buying, which they believed implied the placements had not been safely allocated. Other sources say that there had indeed been some sellers, who had not initially been involved, trying to short the bonds and failing. The buyers, on the other hand, were those who had been under-allocated and keen to top up their positions. Bankers, for their part, say the greatest care was taken in allocation. Investors suspected of over-ordering were penalised and cut back.
MoodyÆs assessment of Citic Resources reflects the fair-to-medium likelihood that its parent company would support it in a distressed situation. The downside is that Citic Resources is highly leveraged, relatively small-scale and suffers from a ôlack of experience for achieving reserve-replacement and oil-recovery enhancement targetsö. The companyÆs net debt-to-Ebitda stands at 3.5 times.
A Standard and PoorÆs report states that Citic ResourcesÆ BB rating is currently on creditwatch, with positive implications. This comes after Citic Group (BB+/B) was also placed on watch, as a result of China Citic BankÆs recent IPO and the sale of the oil assets to Citic Resources.
However, according to bankers, rating upgrades were far from the agenda. Rather, the transaction is part of the PRCÆs and Citic GroupÆs strategic objective to turn Citic Resources into an oil major, thereby addressing ChinaÆs huge oil and energy deficit. The fact that the Chinese government has pigeon-holed Citic Group as an investment window for external acquisitions following deregulation, (and appointed it sole bidder in the 2006 purchase of the Kazakhstan oil fields) reflects its strategic importance. The downstreaming of its oil assets to Citic Resources is in line with the latter's position as provider of strategic natural resources with particular focus in the oil business.
Size aside, Citic Resources surprised many by its choice of bookrunners. Strong relationships may have played a role here. Morgan Stanley led China's Construction Bank IPO. CCB's then president, Chang Zhenming, is now president of Citic Group. Similar dynamics may have been at work in the appointment of Bear Stearns.
Citic Resources' principal activities are in the fields of oil, aluminium, coal, import and export of commodities, manganese and iron ore.
¬ Haymarket Media Limited. All rights reserved.
