China Minmetals and China Oilfield Services (COSL) ventured into the offshore bond markets on Thursday amid a crowded pipeline of issuers hoping to tap the market before the summer break.
Bankers said that signs of indigestion are in danger of being magnified by a lack of pricing concessions from Chinese borrowers.
Bank of Communications' additional Tier 1 capital deal, for example, immediately traded down on Thursday, although it was back up to its re-offer by the close. India's Adani Ports, which also raised dollar debt on Wednesday, saw the spread on its five-year deal blow out 6bp to 201bp over Treasuries by Asia's close.
The two new transactions from China Minmetals and COSL were also considered tightly priced relative to outstanding SOE related debt.
"Investors are definitely becoming somewhat gun shy," one banker commented. "It would really help if borrowers were a bit more realistic in their pricing expectations particularly given the amount of paper that's flooding onto the market."
China Minmetals and COSL both opted for exactly the same split five- and 10-year structures for their competing deals. The two also have similar credit ratings, with a number of key differences.
COSL has an A3/A-A- rating and benefits from the halo effect of its parent CNOOC, which owns 50.52% of its equity and is its main customer, consistently accounting for about two thirds of its revenues over the past five years.
CNOOC is a well-known and respected credit within the Asian bond universe. COSL has less name recognition, but unlike China Minmetals had an existing bond to benchmark pricing from.
As a debut borrower China Minmetals has yet to establish a brand name.
The group also has a split rating of A3/BBB+, one notch lower from Standard & Poor's. On a stand-alone basis its credit metrics are much weaker than COSL, with Moody's assigning a baseline credit assessment of Ba2, five notches lower that its issuer rating.
However, Minmetals benefits from full ownership by the State-owned Assets and Supervision Commission (Sasac), which means that its deal is EMBI eligible whereas COSL's is not.
COSL also had to get investors comfortable with recent negative headlines relating to a likely 80% drop in first half profits because many of its oil major customers have scaled back their exploration and production projects. Moody's described the July 11 profit warning as credit negative, but added that it will not immediately affect its stable outlook.
The net result was that COSL priced tighter than China Minmetals, which set out with a 50bp curve between its proposed five and 10-year bonds compared to the former's proposed 35bp curve.
COSL flagged indicative pricing of 210bp over Treasuries for its five-year tranche and 245bp for its 10-year before tightening to a range of 2.5bp either side of 195bp over for the five-year and a fixed spread of 225bp for the 10-year.
A $500 million 2020 bond was subsequently priced at 99.519 on a coupon of 3.5% to yield 3.606% or 192.5bp over Treasuries. It attracted an order book of about $1.3 billion.
The vast majority (93%) went to Asia with 7% to Europe and the Middle East. Banks dominated allocations to 70 investors taking 68% with fund managers on 20%, private banks 4% and others 8%.
A $500 million 2025 bond was priced at 99.388 on a coupon of 4.5% to yield 4.577% or 225bp over Treasuries. It built up an order book around the $1.5 billion mark.
A total of 110 accounts participated of which 94% were from Asia and 6% from Europe and the Middle East. By investor type, insurers dominated on 50% with banks taking 23%, fund managers 22%, private banks 1% and others 4%.
COSL's outstanding 3.25% June 2022 bond was trading on a G spread of 200bp.
The second main benchmark was Aa3/AA- rated CNOOC's outstanding 2.625% 2020 bond and its 4.5% 2025 bond. The former was trading on a G spread of 144bp over and the latter at 160bp over on Thursday.
This means COSL priced 48.5bp wide of CNOOC's five-year and 65bp wide of its 10-year. CNOOC's curve is also a much tighter 16bp compared to COSL's 32.5bp.
"A very strong SOE would have been able to get a much flatter curve," one banker commented. "But COSL's earnings are very volatile at the moment, although it does benefit from having CNOOC as a captive customer and the Chinese government's strategic goals in oil exploration and production."
In order to try to mitigate this downward earnings pressure, COSL told prospective bond investors that it is making Rmb1.5 billion cost reductions and has cut this year's capex back from Rmb8.1 billion to between Rmb6.5 billion and Rmb7 billion.
It is also moving away from an ownership mode to a leasing model for its rigs and drilling vessel fleet.
COSL's deal was launched from a new $3.5 billion EMTN programme. In its rating assessment Moody's said the group has strong enough credit metrics to withstand the earnings pressure.
Net debt to Ebitda currently stands at 2.1 times down from 3.7 times in 2012 and the group maintains an Ebitda interest coverage ratio of 21.7 times up from 17.5 times in 2012.
Joint global co-ordinators were Bank of China, Goldman Sachs and HSBC. Joint bookrunners were ANZ, Citi, Credit Suisse, DBS, JP Morgan and Standard Chartered.
China Minmetals
The A3/BBB+ rated group set out with price guidance of 215bp for its prospective five-year and 265bp for its 10-year.
After building up a $1.25 billion order book, the leads priced a $500 million 2020 bond at 99.501 on a coupon of 3.5% to yield 3.61% or 195bp over Treasuries.
A $500 million 10-year was priced at 99.858 on a coupon of 4.75% to yield 4.768% or 245bp over Treasuries. This attracted an order book of $1.5 billion.
China Minmetals priced 2.5bp wide of COSL on its five-year tranche and 19bp wide on its 10-year.
Bankers noted that the five-year tranche was tight particularly relative to other SOE debt that investors had been looking at. This included Bao Steel, which has a one-notch lower rating of Baa1/BBB+.
The group has a 3.875% January 2020 bond, which was trading on a mid-yield of 3.425% on Thursday.
Bankers added that the 10-year needed to come at a steeper premium because of the higher risks associated with a metals and mining credit. China Minmetals is the Chinese government's key platform for overseas metals acquisitions and is the country's largest metals trader.
It owns the country's largest copper and zinc reserves and when its Las Bambas project ramps up in 2016 will run the world's largest copper project. Moody's said cash flow from this project should help to ease its credit metrics.
Adjusted debt to Ebitda reached 12.6 times at the end of 2014, but is scheduled to fall to about six times in 2017as long as the company does not embark on any more debt-funded acquisitions.
Joint global co-ordinators were Deutsche Bank, HSBC, ICBC and JP Morgan with Citi and MUFG as joint bookrunners.
