If the latest actions of China Railway Rolling Stock Corporation, or CRRC, are any guide, Chinese companies are poised to embrace the country's newly streamlined approvals process by venturing offshore to raise fresh equity-linked debt capital.
On Friday the world’s largest locomotive manufacturer won board approval to issue $1 billion worth of H-share convertible bonds, giving debt capital market and equity-linked bankers every reason to get excited about a potential new boom in business.
That's because CRRC's announcement comes less than a month after China’s National Development and Reform Commission, or NDRC, unveiled its revised set of debt issuance rules.
Beijing-registered companies have rarely issued offshore convertible bonds because of the lengthy and complicated approval process typically involved, an equity-linked banker told FinanceAsia. They are also more inclined to issue domestically since many of their operations are inside the country.
“If Chinese companies issue offshore debt they will have to remit the money back into China for their domestic operations. This adds an extra layer of work for them,” the equity-linked banker said.
Favouring onshore Chinese markets are expectations that the People’s Bank of China will continue to keep policy rates low. Ample liquidity in the local market means companies can execute bigger equity-linked deals too.
Ping An Insurance, for example, sold Rmb26 billion ($4.2 billion) worth of onshore convertible bonds at the end of 2013. That is nearly six times bigger than China Overseas Holdings’s $750 million exchangeable bonds into China Overseas Land & Investment, which were launched at the start of the following year and remain the largest offshore equity-linked issuance by a Chinese issuer since that period.
New Regime
Under the new registration system, however, Chinese corporates may now have more incentives to issue offshore debt.
According to an NDRC statement dated September 15, Chinese companies will no longer be subject to lengthy approval process before issuing offshore debt. Instead they must register pre-deal information with the regulator before the sale and the NDRC will approve within five working days.
They are then required to submit finalised details within 10 days of completing the sale. Details that must be filed include offshore debt type, tenor, coupon, currency, and the planned use of the proceeds.
CRRC's planned convertible bond issue will be its first fundraising attempt since its establishment in June through the merger of train-making giants China CNR Corp Ltd and CSR Corp Ltd.
It is almost certain that most equity-linked bankers will be pitching for the transaction since the Asian ex-Japan market has been virtually silent since Singapore real estate group CapitaLand’s S$650 million ($493 million) 10-year deal in May.
Asian issuers have been reluctant to press ahead with any convertible bond sale as nagging expectations of a US interest rate hike weigh on investor sentiment. Similar to straight bonds, the implied rate of return on convertible bonds decreases during a rate hike cycle.
Year-to-date Asia ex-Japan convertible bond issuance stands at $6.1 billion, the lowest in recent years. According to data provider Dealogic, it totaled $10.4 billion, $19.7 billion, and $16.9 billion in 2012, 2013, and 2014, respectively.
Bank of America Merrill Lynch and UBS, financial advisers to CSR and CNR during the $26 billion mega-merger, are believed to be forerunners for an advisory role for the upcoming CRRC convertible bond issue.
As one of the most outgoing state-owned enterprises, it makes sense for CRRC to issue offshore debt. The company is a flagship entity for the Chinese government as it seeks to extend its influence globally by bidding for major railway projects.
At $1 billion, the convertible bond may seem huge on a standalone basis but CRRC’s mammoth $54 billion market cap means dilution will be kept below 2% even if the issue is fully converted into shares at a later date.
A convertible bond trader in Hong Kong noted that China Unicom’s expected redemption of its $1.84 billion five-put three paper maturing next month will provide more than sufficient liquidity to snap up a deal of that size.
“It is a perfect timing [for CRRC] to execute the deal before the liquidity from the China Unicom redemption flows into the secondary market,” the trader said.
Equity upside?
Although CRRC is unrated by international rating agencies it is expected to be a strong credit thanks to its majority government-owned status. China Railway Construction, another state-owned railway company and a comparable credit, is rated A3 by Moody’s and A- by Standard & Poor’s.
However, it remains to be seen whether the company can attract investors from the equity side because the stock is trading on the Shanghai market at a hefty 34.8 times earnings on a trailing twelve-month basis. It will also be tough for hedge funds to play the volatility because the shares have mostly traded within a HK$10 to HK$12 price range since their debut in June.
Perhaps the main driver for the rolling stock manufacturer is the irreplaceable role it plays in furthering China’s “One Belt, One Road” initiative.
