Qinghai Investment Group, a BB- rated local-government financing vehicle (LGFV), made its first foray into the international bond markets on Wednesday, raising $300 million in an investor-friendly deal.
The company is a state-owned enterprise of Qinghai Province, involving in local infrastructure investments and manufacturing aluminum products. Its 2015 sales rose 9.3% year on year to Rmb 14.1 billion, while its net profit fell by 51.5% to Rmb 44.8 million for the same period, according to the company’s latest annual results posted on the Shanghai Stock Exchange.
"The province's credit weaknesses include its very weak budgetary performance, high debt burden, and very high contingent liabilities," analysts at S&P wrote in a report recently. "We also anticipate extraordinary support from the central government, if needed."
It is the latest in a series of LGFVs to woo international investors since last year amid Beijing's efforts to rein in new bond sales by local governments amid concerns about overall debt levels in the country.
According to Dealogic, LGFVs sold more than $12.4 billion of G3 bonds last year, three times more the amount they raised in 2014. Qinghai Investment Group is the first LGFV to sell a dollar bond this year.
"Most of the offshore LGFV bonds are bought by onshore mainalnd investors, who will repakage them into wealth-management products," a Singapore-based fund manager told FinanceAsia. "There is a arbitrage between onshore and offshore yield."
Despite a poor profit outlook, Qinghai garnered $2.5 billion of orders from 113 accounts, which was little changed from its peak order book, a syndicate banker running the deal said. “Investors see a meaningful pickup over other double B names in the secondary market,” the person added.
The joint global coordinators – China Everbright International and DBS – went out with an initial price guidance at 7.5% area, before pricing the three-year deal at par to yield 7.25%.
In secondary trading on Thursday, the February 2019 deal was quoted on a cash price of 101.3/101.45, as investors seek returns from riskier junk-rated bonds. “The new print enjoys raising money in a conducive market condition globally,” said a syndicate banker.
The closest comparables were Zhenjiang Transportation’s outstanding 5.25% 2019 bond and Yestar Healthcare’s 6.9% 2021 bond. The former was trading on a cash price of 99.25 to yield 5.54%, or on a Z-spread of 382bp, while the latter was trading on 103 to yield 6.14%, or a Z-spread of 417bp.
There is no direct comparable for the new bond, but the fair value should be somewhere in high 5% to mid 6%, according to syndicate bankers’ estimate.
The company issued a 10-year Rmb 600 million ($87.5 million) bond in 2012, paying investors a coupon rate of 7.08%. The Shanghai-traded bond, rated AA by domestic rating agency Dagong, was trading on a cash price of 100.88, according to market data.
Private banking investors took 45% of the deal, funds/insurers 35%, banks 15% and the remaining 5% went to others. BY geography, 90% of the deal were allocated to Asia, with the rest 10% went into European accounts.
Joint bookrunners were Skyway Securities Investment Ltd. and VTB Capital.
