Geely Automobile raised a maiden $300 million five-year bond on Wednesday, the first debt issuance from a Chinese domestic automotive manufacturer.
Investors welcomed the issuance as it added to the diversification of the high-yield sector, which is dominated by Mainland property companies. Geely’s bond — callable in year three — obtained an order book of over $2.2 billion from more than 220 accounts, according to a source familiar with the matter.
The 144A/Reg S-registered offering also priced at 5.25%, which is much tighter than its initial price guidance around the high-5% area.
“This is the first US dollar bond issuance from a domestic China automotive OEM (original equipment manufacturer) and that shows how Asia’s bond market has developed as well as the auto industry in China,” said the source.
The source adds that the borrower is establishing a new funding platform as it seeks to expand and grow the business both domestically and in emerging markets.
Geely is China’s 10th largest passenger vehicle manufacturer by unit sales with a 2013 market share of 3.4%. The company’s current focus is low-priced small sedans and sport utility vehicles marketed under the Emgrand, GLEagle and Englon brands, albeit its plans to consolidate these three brands and its dealer network — currently 838 shops.
In financial year 2013, exports contributed to 22% of Geely’s total unit sales with the company’s key export markets including Russia (27% of export units), Ukraine (16%), Saudi Arabia (12%), Iran (11%) and Egypt (10%).
As of September 5, the property sector dominated the G3 high-yield space, accounting for 53.3% of the total for Asia ex-Japan ($19.5 billion), according to Dealogic data. This is followed by the steel industry, which accounted for 15.2% of that total.
Promising industry
Standard & Poor's believes a Chinese automaker could emerge as a global brand within the next decade, given the speed of sales growth. In particular, the central government's support for the development of electric vehicles could help local players close the gap on global competitors.
"China's players still have a long way to catch up with their global competitors,” said S&P credit analyst Sangyun Han. “But their strengths and development are likely to help them to accelerate on their path to becoming a global automotive powerhouse over the next decade.”
Moody’s in a recent report concurs with this evolution. China will continue to drive global auto sales growth over the next 12 to 18 months, while shipments of US-made vehicles will slow, said the rating agency.
Auto sales in China grew 8% in the first seven months of this year, and should meet Moody's full-year growth forecast of 8.1%. Growth is likely to moderate next year, three years out from 2013's rebound, but will continue in the medium term, spurred by China's relatively high economic growth and relatively low vehicle penetration.
Growth in US unit shipments, meanwhile, will slow from 4.3% in 2014 to a modest 1.5% during 2015, Moody’s adds.
Despite such a promising outlook, Geely posted revenue of Rmb10.2 billion ($1.7 billion) in the first half of 2014, which is a 32% decline year-on-year as the company’s earnings were adversely impacted by restructuring of the firm’s dealership network and a slowdown in export sales. This is not surprising given the manufacturer’s major export markets include Russia and the Ukraine.
That said, Mizuho’s Chinese auto analyst, Ole Hui forecasts a revenue and earnings rebound in financial year 2015, with revenue increasing by 10% year-on year.
Comparables
The nearest comparables for Geely’s bond were Jaguar & Land Rover (Ba2/BB/BB- rated) and General Motors’ (Ba1/BB-/BB+) existing notes expiring in December 2018 and July 2019, which were trading at a G-spread of 220bp and 190bp respectively.
This translates into a yield of around the low-6% level, said a source familiar with the matter, indicating that Geely’s new bond ended up pricing tighter than these larger global automobile manufacturers.
Geely’s new issuance has expected ratings Ba2/BB+ from Moody’s and S&P respectively, with the proceeds to be used for refinancing, business expansion and general corporate purposes.
Asian investors subscribed to 55% of the notes, followed by Europe 22% and the US 23%. Fund managers bought 70% of the paper, followed by private banks 22%, banks and insurers 6% and others 2%, according to a source.
Citi, Deutsche Bank and JP Morgan were the joint bookrunners of Geely’s bond.
