While bankers were disappointed with loan volumes in China last year, one transaction stood out: the $500 million financing for China Unicom. The telecommunications group raised the money via a three-year term loan arranged by Citigroup. This was the first loan capital markets transaction in China for a local entity.
Strong interest in the transaction was apparent from the outset. Initially, the company was looking to raise $300 million. Citigroup devised a successful syndication strategy to enable momentum to be built, via a sub-underwriting phase leading to increased confidence and liquidity when executing general syndication.
The result was a syndication that was oversubscribed in both stages: at sub-underwriting (launched at $300 million and increased to $450 million); and general syndication (launched at $450 million to $500 million).
The rationale behind the deal was to take advantage of an interest rate arbitrage opportunity present when raising US dollars to refinance Chinese renminbi-denominated debt. The US dollar Libor rate in February 2004 was about 1.5%, while the base rate for renminbi debt ranged from 5-5.8%.
This meant that borrowing US dollars to refinance renminbi debt would generate significant cost savings. In fact, China Unicom would save about $20 million a year. In addition, with the potential for the renminbi to appreciate it makes sense for China Unicom to have its debt denominated in dollars.
The dollar loans though could only be borrowed from foreign banks in China, according to regulations. However, onshore foreign banks were keen to lend to foreign investment enterprises, such as China Unicom, in the Asian nation to boost asset levels in their China book.
And although, at an all-in of 50bp over Libor, pricing was at the tight end for a three-year transaction in China, banks wanted to participate given the high-grade quality credit of China Unicom. It also meant that banks could develop a long-term relationship with the borrower. In the end, 13 onshore foreign banks participated in the syndication.
Citigroup's held $48 million. Lead arrangers included Bank of China (Hong Kong) lending $75 million, Bank of Tokyo-Mitsubishi and Sumitomo Mitsui Banking Corp taking $50 million apiece and BNP Paribas, Credit Lyonnais, Mizuho Corporate Asia (HK) and UFJ Bank committing $48 million each.
Participants were Royal Bank of Scotland pledging $25 million and Bank of East Asia, BayernLB and Commerzbank (East Asia) absorbing $20 million each.
China Unicom's transaction might be the last of its kind for a while. A few months after it was put together the Chinese authorities passed measures to prevent more local companies refinancing their renminbi debt through US dollars. Market commentators say that the authorities were concerned that if other Chinese borrowers followed suit then it would increase pressure on the renminbi.
Borrower: China Unicom
Date: February 2004
Amount: $500 million
Pricing: Libor+50
Credit ratings:
Bookrunner: Citigroup
Best project finance loan
Optimal Group of Companies $468 million
Malaysia's Optimal Group of Companies completed one of the most innovative project financings in Asia last September when it successfully put together a unique structure to fund a petrochemical centre.
The Group, through its arrangers, devised a plan that met its complex needs without putting off investors. The final structure saw huge demand, achieved cost competitive financing and broadened the Group's investor base.
The Optimal Group consists of three separate legal entities: Optimal Olefins, Optimal Glycols and Optimal Chemicals. These firms own and operate an integrated petrochemical complex in Malaysia. This complex cost about $1.35 billion and was financed entirely by shareholders' funds. The shareholder facilities, however, required re-financing.
The first criterion was to ensure that a structure was devised that would prevent a credit event occurring in one Optimal company that would then effect the financial standing of the other subsidiaries. The banks decided upon a dual-currency, dual-debt instrument structure.
The ideal currency mix was a combination of US dollars and Malaysian ringgits to create a natural hedge against potential currency fluctuations. The decision was then taken to use the loan market to borrow the dollars and to tap the Malaysian bond market to raise the ringgits.
The ringgit facility was structured as an Islamic bond to appeal to a wider investor base including local funds, corporates and insurance companies. The loan facility was drawn from domestic and international commercial banks. Both financings took place on the same day.
In order to fit the Group's financing needs, the three corporates were structured into two credit entities. The deal raised M$1.27 billion through the bond placement and $468 million in the loans market. Both financings proved successful. The bonds were over four-and-a-half times oversubscribed, while the loans were oversubscribed by more than 30%. Each of the issues was assigned a triple-A rating.
Aseam-bankers Malaysia, HSBC and Maybank arranged the Islamic bonds. HSBC and Maybank were bookrunners for the syndicated loan. "It was a long and difficult process to execute the transaction,' says Gary Lau, treasurer at the Optimal Group of Companies. "But the end result is very satisfying for all parties involved."
Each of the subsidiaries issued different tranches of bonds and loans. Optimal Olefins, which includes ethylene and propylene, raised M$250 million in the bond market through five tranches. The other two entities issued 10 tranches each. Optimal Glycols, which makes products for cosmetics and paints, raised M$453 million. Optimal Chemicals, which makes oxoalcohol, raised M$567 million.
The loan was broken down into three tranches: one for $200 million, one for $150 million; and another for $118 million. The loan was split into five- and eight-year facilities and each achieved competitive pricing. HSBC ended with a commitment of less than $60 million to the loans, which were syndicated among a group of 13 banks.
Borrower: Optimal Group of Companies
Date: September 21, 2004
Amount: $468 million (syndicated loan); M$1.27 billion (bond)
Loan terms: Five years; eight years; eight years
Loan pricing: L+44.5bp; L+70bp; L+70bp
Loan bookrunners: HSBC; Maybank