Tianjin Rail Transit made its debut in the international bond markets on Wednesday, defying a tepid market environment to raise $500m from a dual-tranche deal.
Bankers hope the Reg S deal will encourage more of China’s municipal government-backed issuers into the offshore market.
The loss making company made its entrance on an ostensibly difficult day. Stock markets across Asia fell throughout Wednesday, and the iTraxx Asian investment grade index was trading slightly wider in the afternoon.
But with the aid of a local government guarantee, Tianjin Rail appeared insulated from the weak tone: the company’s bankers managed to build an order book that stood at $3.6 billion by the time price guidance was revised.
The execution of the deal was undoubtedly helped by the fact that Tianjin Rail had a firm cap on how much it wanted to borrow: investors were told early on that the company would issue no more than $500m of bonds. This encouraged bankers to aggressively tighten pricing from initial guidance.
The bookrunners approached investors with initial guidance at 190bp over Treasuries for a three-year tranche and 210bp over Treasuries for a five-year tranche. This was then tightened in more than the customary 25bp to between 162.5bp and 167.5bp over Treasuries for the three-year tranche and between 182.5bp and 187.5bp for the five-year tranche.
Both A3/A- rated tranches priced at the tight end of final guidance, leading to a $200m three-year tranche and $300m five-year tranche.
Slow and steady
Bankers now hope more municipal government-backed issuers will follow Tianjin Rail, although China’s state-backed companies can be rather slow moving. The accounting and documentation hurdles they need to clear before coming to the international debt markets — even before they start to argue with their bankers about the appropriate timing for an issue — have kept expectations in check.
But for many provincial governments, the international bond markets can provide bragging rights.
It will never provide the cheapest funding option for these borrowers. But at the very least, it can provide a special type of brand-building exercise.
“These companies have very strong ratings, and this is a good way for them to get that rating out there,” said a China DCM banker away from the deal.
Tianjin came to the market around six weeks after Yunnan’s provincial government issued a $300m bond that closed 10 times oversubscribed.
Tianjin Rail’s deal was issued in the name of Rail Transit International Investment Company, with a guarantee from Tianjin Rail Transit Group (Hong Kong) and a keepwell agreement, liquidity support deed and equity interest purchase from Tianjin Rail Transit Group. It is wholly owned by Tianjin’s municipal government.
Some analysts questioned the pricing even at the more generous end of initial price guidance, pointing to the increasing number of defaults among state-owned enterprises in China’s onshore debt market. It will not have helped that one of those troubled companies, Bohai Steel Group, is also owned by the Tianjin municipal government and was reportedly unable to meet its interest payments earlier this year.
However, as Standard & Poor's pointed out in its rating release, Tianjin Rail provides an essential public service and plays "an important role executing the Beijing-Tianjin-Hebei integration strategy that the Chinese central government has set forth."
Deutsche Bank, HSBC and DBS Bank were the joint global coordinators of the bond. Joint bookrunners were BOSC International, CCB International, ICBC International, Standard Chartered and Wing Lung Bank.
