Two Asian companies priced debut US dollar bonds early yesterday morning. Indian public sector enterprise Rural Electrification Corp (REC) raised $500 million through a five-year bond, while West China Cement raised $400 million via a five-year non-call-three.
Both deals offered investors diversification from the existing supply in the market. REC is the first Indian non-bank financial institution to tap the US dollar market, while West China Cement is the first Chinese cement company to sell US dollar bonds.
REC was also the first Indian borrower to tap the dollar market this year. Credit Agricole-CIB, Royal Bank of Scotland and Standard Chartered Bank were joint bookrunners.
The bonds priced at a yield spread of Treasuries plus 250bp, at the tight end of the Treasuries plus 250bp to 260bp final guidance. They tightened 8bp to Treasuries plus 242bp in Asian trading yesterday morning.
The deal gathered an order book of $1.35 billion from more than 150 accounts. The coupon was fixed at 4.25% and the notes were reoffered at 98.971 to yield 4.482%.
REC is a financial institution that finances and promotes rural power projects throughout India. As such, it operates in a sector that is relatively stable and non-cyclical (the power sector).
The comparables for the deal included Indian banks such as State Bank of India (SBI), Bank of Baroda and the Export-Import Bank of India. State Bank of India's July 2015 bonds were trading at a z-spread of 218bp, or at Treasuries plus 215bp.
In contrast, the new REC January 2016s came at a z-spread of 227bp, or about 10bp back from the SBI bonds. A z-spread is a measure of credit spread without the distortion of a yield-to-maturity calculation.
REC is rated Baa3 by Moody’s, which is one notch lower than SBI.
Given REC’s exposure to the power sector, other reference points were bonds issued by state-controlled power producer NTPC and Indian Oil Corp. REC is 66.8%-owned by the government of India and there is an event of default if the government ceases to control more than 50% of the issuer, which should give investors comfort.
However, REC's new bonds are unsecured and hence subordinate to much of the company's onshore borrowings. In a research note published on January 18, Nomura analyst William Mak cautioned investors that roughly 76% of REC’s debt is secured by the company’s mortgage or a charge on its receivables. In addition, a substantial portion of its foreign currency borrowings are guaranteed by the government.
“As such, this new senior unsecured Rural Electrification due 2016 is subordinate to a lot of REC’s onshore and offshore borrowings,” he said in his note.
Mak also highlighted the concern that REC may tap the US dollar bond market again, as long as its funding cost in US dollars remains relatively cheap. REC is a frequent visitor to the domestic bond markets and, according to a banker on its latest transaction, its cost of funding in the US dollar market was roughly in line with its funding cost in the domestic market.
By distribution, Asia took 62% of the deal, Europe 37% and offshore US accounts 1%. Fund managers bought 53%, banks 36%, private banks 5%, insurance companies 5% and others 1%.
Also in the market early yesterday morning was West China Cement. The company priced its $400 million five-year non-call-three with a coupon of 7.5%. Deutsche Bank and ICBC International were joint bookrunners.
Yesterday afternoon the bonds were quoted at 101.125/101.375, more than a point above the par issue price.
The Reg-S/144a deal gathered a strong order book of over $3.5 billion from 230 accounts. By region, Asia took 49%, Europe 24%, and the US 27%. By type, funds bought 76%, banks 10%, private banks 12% and insurance companies/other 2%. The expected ratings are Ba3/BB-/BB.
