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Shipbuilder introduces new euro bond asset class
Chito Santiago 1 Mar 2015

China’s largest shipbuilding group, China State Shipbuilding Corporation (CSSC), further illustrates the growing interest of Chinese issuers in the euro bond market as it priced on February 11 a €500 million (US$575 million) offering, incorporating a standby letter of credit (SBLC) structure.

The Reg S three-year bonds had a coupon of 1.70% and were priced with a spread of 155bp over mid-swap. This was at the tight end of the final price guidance of 160bp (+/- 5bp) and 25bp inside the initial guidance of 180bp area. The bonds further tightened in the secondary market by another 20bp on February 13.

The transaction is CSSC’s inaugural euro issuance and the first ever euro-denominated bonds using the SBLC structure. The company in 2013 tapped the US dollar bond market for US$800 backed by the same.

The SBLC structure is a credit enhancement mechanism where the bonds are ranked equally with the unsecured obligations of the SBLC provider, which for the CSSC deal is Bank of China, London branch.

“The SBLC structure is new in Europe and one of our key objectives is to make sure investors understood the robustness of the structure and be comfortable with it,” explains Yves Jacob, managing director and head of debt capital markets for Asia-Pacific at SG Corporate and Investment Banking, one of the joint global coordinators and bookrunners for the transaction. “We had full disclosure of the structure and at the end of the day, investors were receptive to the transaction.”

Jacob says without the SBLC, it would have been challenging for CSSC to tap the euro bond market since the issue is unrated. “Demand for unrated credit in Europe is quite limited,” he adds.

In marketing the deal, issued through CSSC indirect wholly-owned subsidiary CSSC Capital 2015, the company held a five-day roadshow beginning February 2 visiting investors in London, Munich, Frankfurt and Hong Kong, as well as hosting several investor calls. It then picked the right window and announced the transaction with an initial price guidance of 180bp area over mid-swap.

The offering quickly garnered anchor orders from Asia, with the European investors – despite their unfamiliarity with the structure – receptive to CSSC’s credit story. As the books reached €2.8 billion prereconciliation, the arrangers tightened the guidance to 160bp (+/- 5bp).

The quality and the size of the final book allowed CSSC to print a €500 million issue at the tight end of the revised guidance with the final pricing representing a level of premium that was comparable to similar SBLC transactions executed in the US dollar bond market.

Jacob reckons the euro bond market will certainly take an increasing share of the overseas bond issuances by the Chinese issuers. “Given that the universe of Chinese issuers is now so big in the US dollar bond market, this is the time to diversify their funding sources so as not to be exposed to the volatility of one single market,” he says. “We are now in the cycle of tighter liquidity in the US as a consequence of the tapering.”

But funding diversification is not the only reason for tapping the euro bond market – it is also about cost. “We are at a point where the euro bond market is increasingly becoming competitive for non-European issuers,” Jacob points out. “The reason is two-fold. The increasing gap in interest rates between the euro and the US dollar is becoming obvious. And we are witnessing a new trend, which is the divergence in credit spreads. Since late last summer, the credit spreads in the US have been widening, while the euro credit spreads have been tightening. This trend will continue in 2015 and credit spreads will be increasingly attractive for issuers that have the ability to access the euro bond market.”

In picking the issuance window, the arrangers noted the active issuance activity in the euro bond market so far this year. “We’ve seen a very strong issuance activity in the [euro bond] market in January – the strongest January since 2007 – and the market has digested those deals well,” says Jacob.

And this was underpinned by the fact that two Chinese issuers, State Grid Corporation and CCB Asia, had earlier managed to access the market, which Jacob says, has comforted the issuer that this was the right strategy. State Grid priced on January 19 a two-tranche issue comprising of €700 million for five years and €300 million for 12 years. CCB Asia followed on February 4 with a €500 million deal for five years.

The CSSC deal attracted the participation of 160 accounts with 50% of the bonds distributed in Asia, 23% in Germany, 11% in the UK, 6% in Switzerland, 4% in France and 6% in other jurisdictions. Majority of the orders came from banks with 58%, followed by funds with 31%, insurance companies and pensions 5%, private banks 3% and other investors 3%.

In addition to SG CIB, Bank of China and Barclays acted as joint global coordinators of the transaction, as well as joint bookrunners along with Agricultural Bank of China, NZ, Bank of Communications (Hong Kong), CCB International and ICBC. 

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