CNOOC returned to the international bond markets for the first time in just over a year late Wednesday (New York time) with a hugely oversubscribed offering that even managed to surpass the incredible success of the company's debut deal of March 2002.
After a 20 hour accelerated bookbuild and no formal roadshows, the Baa1/BBB rated credit amassed an order book of $7 billion and oversubscription rate of 14 times. This was nearly double the $4.3 billion in demand it garnered from its previous offering, which has outperformed its peers in the year since launch.
The new deal, which encompassed 10 and 30-year tranches, has also set a number of new records. These include the lowest ever coupon by an Asian borrower in the 10-year sector and first long bond by a Chinese corporate. Under the lead management of the group's house banks, Credit Suisse First Boston and Merrill Lynch, the 10-year accumulated $4.3 billion in demand and the 30-year $2.7 billion.
Raising $200 million, the10-year was subsequently priced at 98.638% on a coupon of 4.125% to yield 4.294% or 77bp over Treasuries. The 30-year, which raised $300 million, came at 97.393% on a coupon of 5.5% to yield 5.682% or 118bp over Treasuries.
Alongside the two leads, Goldman Sachs was elevated to joint-lead status and nine co-managers on aggregate economics of 1% comprised Barclays, BOCI, Cazenove, CCB, CIBC Asia, CCB, Daiwa SMBC, ICEA and Nomura. Fees for the 10-year were 50 cents and 75 cents for the 30-year.
About 200 investors were said to have participated similar to the 199 figure recorded last year. For the 10-year, the book split 73% Asia, 17% US, 10% Europe, while the 30-year saw 45% go to the US, 38% to Asia and 17% to Europe. As expected demand from China itself was extremely strong, but at roughly $1.5 billion, becomes less significant in relation to the overall size of the book.
Observers say that many US accounts in particular view CNOOC as an attractive relative value play that has the added benefit of a huge domestic backstop bid. Yet, most relative value calculations compare CNOOC to weak single-A credits such as Apache, when in fact it is a mid to high triple-B credit.
When CNOOC priced itself at these levels in 2002, it drew some flak from those who argued that it should not price through the Hong Kong credit curve. However, its subsequent secondary market performance has borne out the arguments of its supporters, who believe the company is clearly a single-A credit on a stand-alone basis.
A year ago, for example, the CNOOC 2012 bond was priced at a 1bp premium to a 2011 bond by Hutchison Whampoa, which has a three notch higher rating on the S&P side. This year, by contrast its 2013 bond has priced 153bp through Hutch's February 2013 issue.
Similarly, CNOOC has outperformed its own sovereign and also Baa1/BBB+ rated Petronas, its nearest Asian comp, which has a one notch higher rating from S&P. In 2002, CNOOC's 2012 bond priced at a 59bp premium to China's 2011 bond. Today the differential between the two is 35bp.
The 2012 was priced to yield 6.543% or 163bp over Treasuries. At Asia's close yesterday it was quoted at 75bp over. In March 2002, the Malaysian oil company's benchmark 2015 bond was quoted at 225bp bid. Yesterday it closed at 180bp bid, representing a 45bp contraction in the intervening period compared to 88bp for CNOOC.
The new deal also looks expensive on a Libor basis. The incredible steepness of the credit curve means that the 2013, which swaps to 47bp over Libor, has priced 25bp through the Libor level of the 2012, which is quoted at 72bp over.
The scarcity of Chinese assets combined with enormous liquidity of the Chinese investor base underpins CNOOC's success. However, the strength of the company's credit ratios and dollar denominated balance sheet also have an important part to pay. Despite the company's acquisitive tendencies, it was still in a net cash position of $734 million at the end of the year.
According to analysts, debt to capitalization stands at 24% but is expected to weaken as the company continues to accumulate assets. As UBS Warburg analyst Tse-Ern Chia comments, the firm believes that, "credit trends have peaked in light of a more active strategy for the enhancement of shareholder value - a special cash dividend was declared earlier this year and management's comments suggest potential for higher debt leverage with external debt probably targeted towards the debt markets - and also likelihood for future material acquisitions."
