Zhejiang Provincial Energy sold a $300 million three-year bond on Tuesday, raising it hot on the heels of China’s better-than-expected manufacturing numbers.
The offering, which is Zhejiang Provincial Energy’s inaugural issuance in international debt capital markets, was issued by its subsidiary Zhejiang Energy Group. The Reg S-registered bond was supported by keepwell and liquidity support deeds, and an equity interest purchase undertaking from the parent. As such, it has an expected ratings of A2 and A from Moody’s and Fitch respectively.
Given its state-owned status and relatively strong credit ratings, the borrower was able to tighten pricing by a hefty 30bp from an initial price guidance of Treasuries plus 160bp area, according to a source close to the transaction. Its yield is 2.351%, while the coupon is set at 2.3%.
"This bond opens the door for issuers from other provinces as well and is part of a new trend of introducing new good quality credits to the space," said a banker close to the deal. "The more investors become familiar China, the more they will look to areas where they haven’t previously looked at, including Chinese provinces."
Zhejiang Energy's bond was oversubscribed by seven times -- an orderbook of $2.1 billion from around 150 accounts, more than half of which went to fund managers, added the source.
Investors like the fact that the offering is relatively short in tenor, which should provide protection against rising US Treasury yields, said an Asian fixed income trader. Also, China’s state-owned enterprise reform programme translates into negligible default risk in the short-to-medium term.
“We would have been tempted to chase it [at] even tighter [spreads] if Longyuan Power Group had not today flagged an upcoming deal, which will no doubt come with a juicier spread,” said the trader, adding that Longyuan is also planning a dollar-denominated three-year offering.
Agricultural Bank of China and Goldman Sachs are the joint global coordinators and bookrunners of Longyuan’s proposed BBB-rated bond. Other bookrunners include Bank of China, Citic Securities, HSBC and Wing Lung Bank.
The announcement of these two bonds comes on the back of positive economic data from China. The HSBC China Flash PMI (Purchasing Managers Index) unexpectedly rebounded to a three-month high of 50.5 in September from 50.2 in August, easing market concerns on the growth outlook of the world’s second largest economy after the US.
Comparables
The closest comparables for Zhejiang Energy’s bond is State Grid Corporation of China (rated Aa3/AA/A+) and China Guangdong Nuclear’s (rated A3/A) existing notes maturing in May and October 2018, which were trading at a G-spread of 95bp and 128bp respectively, prior to the announcement of the offering.
Other comparables include Shanghai Electric Group’s outstanding paper expiring in August 2019, where were trading at a G-spread of 105bp, according to sources familiar with the matter.
Proceeds from Zhejiang Energy’s bond issuance will be used for trading, investment and other general corporate purposes.
Zhejiang Provincial Energy Group is the largest power generator in Zhejiang province, which is located on eastern coast of China. The company has a totalled installed capacity of 24 gigawatts, representing 50% of the province’s installed generation capacity.
The company was established in 2001, is 100% owned by Zhejiang Provincial Government and is the province’s largest SOE in terms of assets and profit. In financial year 2013, the entity generated revenue of Rmb77.3 billion ($12.6 billion), which is a 15% year-on-year increase.
JP Morgan and Standard Chartered are the joint global coordinators and bookrunners of Zhejiang’s deal. Other bookrunners include BNP Paribas, Citi and HSBC.
