Hebei Iron and Steel sold a $500 million three-year bond on Monday night, raising funds for working capital purposes as it looks to beef up its operations overseas.
The Reg S-registered offering priced at Treasuries plus 205bp, which is only 5bp tighter than its initial price offering, according to sources familiar with the matter. It has a yield of 2.829% and coupon of 2.75%.
The issuance window on Monday was somewhat ideal for Hebei Iron, China's second-largest steel producer after Baosteel, as market sentiment gradually recovers after a turbulent week.
But despite the improvement, sources close to the deal said that the recent market volatility has definitely had an impact on the pricing of primary issuances.
"Hebei Iron had to pay a higher new issue premium versus other Chinese investment grade names that came a few months ago because of the recent market volatility," said a source close to the deal. "But the company managed to raise funding at much lower US Treasury yields than a few months ago. This offsets the higher premium."
Financial markets panicked last week on speculation that slowing global growth may restrain the US economy’s recovery.
This combined with political instability in Greece and the rapid spread of Ebola caused equity markets to suffer largely with the Hang Seng Index falling below 23,000 points for the first time since June.
Bond markets did not escape unscathed. Emerging market bond funds with dollar, euro and yen mandates recorded net outflows during the week ending October 15, according to EPFR Global data in a note on October 18.
But since then, Asian credit spreads have recovered some of their recent losses at the close of the week after better-than-expected US data was able to convince investors that there were some economic bright spots, syndicate bankers said.
On Friday, the Asian iTraxx index tightened as much as 6bp from Thursday after Wall Street jitters calmed overnight thanks to data showing a sharp jump in US industrial production last month, which was up 1% after slipping 0.2% in August.
Hebei Iron’s debut in the international debt markets coincides with its ambitions to go global.
In September, the state-owned company said it has signed a deal to take a 51% stake in a venture with the Industrial Development Corporation of South Africa and the China-Africa Development Fund to build what would be the country’s biggest overseas steel mill.
The plant will produce five million metric tons mostly of construction steel when completed in 2019, the company said on its website.
Weak orderbook
The orderbook size for Hebei's debut issuance is by no means large, especially when compared to previous transactions such as ABC's recent $300 million three-year note on October 9, which was six times oversubscribed.
Jiangsu-based securities firm Huatai International Finance's (rated A1) $400 million five-year note raised end-September was close to four times being oversubscribed.
As for Hebei, the issuer's offering obtained a total orderbook of $1.15 billion -- slightly more than two times being oversubscribed -- from 95 accounts, according to a source familiar with the matter, who highlighted that market volatility was the reason for investors' softer appetite.
Asian investors subscribed to 91% of the deal while the rest went to European investors. Fund managers bought 47% of the paper, financial institutions 37%, insurance 10% and private banks 6%.
Comparables
Hebei Iron’s bond is supported by an irrevocable standby letter of credit from the Agricultural Bank of China’s Hebei branch. ABC’s long-term foreign currency deposit credit rating is A1 with stable outlook.
The nearest comparables for the transaction includes Metallurgical Corp of China's existing notes expiring in June and August 2017, which were trading at a G-spread of Treasuries plus 192bp and 179bp respectively prior to announcement of the deal. The former bond is supported by an irrevocable SBLC from Bank of China, while the latter ABC, making it a better comparison.
Established in 2008 with the merger of Tangsteel and Hansteel in Hebei province, Hebei Iron and Steel Group provides smelting and rolling processes for a variety of ferrous metals.
ABC International and HSBC were the joint global coordinators and bookrunners of the offering. Other joint bookrunners include Agricultural Bank of China Hong Kong branch, ANZ, Morgan Stanley and Standard Chartered.
