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Sinopec comes of age with $6.4bn record

petrochemicals px230 for gc
By Rev Hui
23 Apr 2015

This week's record-breaking dual currency bond from China Petroleum & Chemical Corporation (Sinopec) showed just how far Chinese issuers have come in the international bond market over the past few years. Sinopec managed to print an impressive $6.4bn and by doing so elevated its status to one of the elite borrowers in the region, writes Rev Hui.

Once again, one of China’s state owned oil and gas giants has broken multiple records with a bond issue. And not for the first time, as Sinopec having issued a groundbreaking $5bn bond just one year ago.

For its latest foray, Sinopec went out during the Asia open on April 21 with dollar-denominated tranches of five, 10 and 30 years. Initial price guidance was set at spreads over Treasuries of 145bp, 160bp and 180bp, respectively, by joint global co-ordinators Bank of China, Citi, Deutsche Bank, HSBC and Goldman Sachs.

It followed that up with two more euro denominated portions of three and seven years when Europe opened, receiving bids for those two at 50bp-55bp over mid-swaps and 80bp area, respectively.

While the dollar and euro tranches were executed separately, they were arranged by the same banks and the issuer saw the deal as a single fundraising exercise — albeit one that was very big and drawn out. Bookbuilding lasted until 3am Hong Kong time for the Reg S/144A deal.

The dollar portions were very well received. The order book reached $5.5bn in the afternoon and had passed $10bn by the Asian close. Final guidance was subsequently announced at 130bp (plus or minus 5bp) for the five year, 150bp (plus or minus 5bp) for the tens, and 157bp (plus or minus 5bp) for the 30 year.

By the time books closed in New York, the leads had orders in excess of $15.1bn, with $7bn pouring into the five year, $4.8bn for the 10 year and $3.3bn for the 30 year. 

“It [the order book] was really incredible, because it wasn’t just the Asian guys that were putting bids in. Everyone else was also flooding us with orders,” a syndicate banker close to the deal said.

Impeccable assess

While the reception Sinopec got was impressive, a head of DCM who was involved at a lower level said that was to be expected, given the size of the Aa3/AA- rated firm.

Bank of America Merrill Lynch, China Construction Bank International, DBS, ICBC International, ING, JP Morgan, Mizuho, Morgan Stanley, Société Générale and Standard Chartered were joint bookrunners.

“It’s ranked third in the Fortune 500, so that’s the least you would expect from a company of that size,” the head of DCM said. “What really stood out for me about this deal was how it was able to get both the dollar and euro tranches done in one big sweep. In the past, from Asia, only Hutchison Whampoa was able to pull off this kind of deal smoothly.”

Very few Asian issuers have attempted dual-currency trades with Bharti Airtel, Hutch, Industrial and Commercial Bank of China (ICBC) and Republic of Korea taking that step in 2014.

Bharti though only took home $2bn. While that was by no means a small amount, it pales alongside Sinopec. Korea is also not a good benchmark since it is a sovereign issuer, while ICBC’s $5.7bn triple currency outing was an additional tier one trade instead of a conventional bond.

When it comes to corporates, then, only Hutch has the same scale of access as Sinopec, having printed $5.4bn worth of dollar and euro bonds last October.

But market observers note that size is not the only consideration when it comes to evaluating an issuer’s status as a top borrower. Being able to achieve similar levels of pricing across different currencies is another.

Hutch did that with its October trade and Sinopec has proved that it is capable of the same. Taking advantage of a euro order book that was in excess of €4bn, it priced the euro bonds at the tight end of guidance, which was 50bp over mid-swaps for the three year and 80bp for the seven year.

When swapped into dollars, the three year translates into 110bp over Libor and 130bp over for the seven year. That sits in line with where the new dollar bonds came at and was an excellent result given how aggressively priced the dollar bonds were.

Coming of age

For the dollar tranches, Sinopec paid a new issue premium of 1bp-2bp for the five year and 5bp for the 10 year, while the 30 year came around 15bp inside its curve after pricing them at 125bp over, 145bp over and 152bp over, respectively.

Investors were referencing the bonds against the issuer’s existing 2.75% 2019s, 4.375% 2024s and 5.375% 2043s. Those bonds were quoted at G spreads of 123bp, 139bp and 169bp before the start of bookbuilding.

“Obviously, not every Chinese SOE will be able get such a deal done, but the likes of CNOOC [China National Offshore Oil Corp] and CNPC [China National Petroleum Corporation] probably can,” a Hong Kong based banker said. “And when they do, it will really show how far Chinese issuers have come in the international bond markets that they can now be seen along the same line as Hutch.”

Just how fast Sinopec has been playing catch-up can be seen by the difference in terms of its bond market history. Hutch has been accessing the international bond market for more than two decades, but Sinopec only issued its first dollar bond three years ago.

Even bankers away from the trade were quick to praise Sinopec’s mammoth offering. One Hong Kong based banker said it was very encouraging, given the headwinds the oil and gas sector has been facing.

Sinopec recorded a net loss of Rmb5.3bn ($870m) for the fourth quarter of 2014, its first quarterly loss since going public in 2000 and the company’s management signalled to investors that results for Q1 2015 will only break even at best.

“Under such circumstances, most issuers would have to pay up big time or not get a deal done at all, but Sinopec got a very good one done instead,” the Hong Kong banker said. “It goes to show how much faith investors have in these state-owned champions that they are more than capable of riding through the volatility.”

Pricing

But a syndicate head close to the deal pointed out that if there was one aspect of the trade that did not go according to plan, it was the 10 year. “If you look at how the other two tranches did, it [the 10 year] was a little underwhelming,” he said.

That was because investors were unwilling to take a long term view on oil and gas credits, as a result of volatile commodity prices. The 30 year was able to sidestep that issue, given its attractiveness to insurers.

“The 30 year did a lot better because insurance companies have been very asset-poor this year and are less focused on relative value,” the syndicate head said. “But even though the 10 year priced wider than the rest, it was still a very good outcome for the issuer because every basis point saved with the 30 year was actually worth a lot more than the shorter end of the curve.”

Sinopec sold the $2.5bn 2.5% 2020s at 99.576 to yield 2.591%; the $1.5bn 3.25% 2025s at 99.022 to yield 3.366%; and the $800m 4.1% 2045 at par.

For the euro bonds, the €850m 0.5% 2018s were sold at 99.716 to yield 0.596% and the €750m 1% 2022s were sold at 99.243 to yield at 1.113%.

The dollar bonds were trading around re-offer on the afternoon of April 22, while the euro bonds tightened by around 1bp-2bp an hour into trading in Europe.


By Rev Hui
23 Apr 2015