Chu Kong came out with initial price guidance in the 11.5% area on Monday for the three year bond and on Tuesday morning 11.5% was confirmed as the final price. But despite two days of bookbuilding, the transaction was subsequently pulled.
“We decided as a group not to pursue this transaction,” said a banker on the deal. “We planned to do a small deal so didn’t want to do something that would trade badly. We are looking at alterative solutions with the issuer.”
A senior official in the investor relations team at Chu Kong confirmed that the deal would have been too costly for the issuer.
“We wanted to widen our investor base but the reason we don’t go for this costly dim sum bond issue is because we have another alternative funding plan,” she said, though declined to give any further information.
No details were given about the size of the orderbook.
The outcome was not looking positive when final guidance was announced, with a banker on the trade at the time telling Asiamoney's sister publication, EuroWeek Asia, that investor response had been mixed.
Bankers both on and off the deal are in no doubt that poor credit fundamentals held the issuer back.
Chu Kong Petroleum issued a profit warning the day after it finished roadshowing for its debut bond on January 24. The banker said at the time that the warning had been issued in the spirit of transparency and that it wasn’t a surprise to investors who he said were more concerned with prevailing market conditions than the credit itself.
The profit warning had been driven by weak downstream demand caused by onshore regulatory problems which have now been cleared. It was hoped that the turnaround story may help sell the credit to investors with the company expecting strong demand in coming years.
Bankers away from the deal also said that with a market cap of only HK$2.6bn ($335m), the size of the company also added to its problems as potential illiquidity in the secondary market would put investors off.
“It was always going to be tough for them,” said a banker away from the deal. “With unrated credits like this, investors have to put in a lot of work. For such a small company, the issue size was likely to be $500m max which means that the bonds would not be very liquid. Investors would not be able to use the work they’ve done on the bonds in the future. It’s not really worth their while.”
However, while there hasn’t been a high yield name to enter the dim sum market since Modern Land in January, there is still plenty of investor appetite for CNH, particularly investment grade names, he added. China Modern Land priced a Rmb1.1bn ($180m) 11% three year in January this year.
Chu Kong Petroleum’s bond is the second this year to be pulled at execution stage. In January Powerlong Holdings was forced to pull a deal at the execution stage last week, after initial guidance of 9.875% area failed to whet investor appetite.