Air China Prefers Bonds as Debt Beats Stock Sales: China Credit

Air China Ltd. (753) has scrapped a planned share sale and is preparing its first debt offering in more than three years, capping a 10-month period in which bond sales were almost 25 times greater than stock issuance.

The country’s biggest carrier by market value will offer 6 billion yuan ($961 million) of seven-year securities on Oct. 31, according to a company filing. It last sold 3 billion yuan of 3.48 percent 2014 paper in March 2009, according to data compiled by Bloomberg. China National Aviation Holding Co., the parent of the carrier, also plans to sell 1 billion yuan of three-year notes on Oct. 29.

Premier Wen Jiabao’s calls to expand the market drove a 64 percent increase in bond sales to 3.18 trillion yuan, while equity issuance dropped 55 percent to 129 billion yuan as the world’s second-largest economy slowed. Yields on top-rated companies’ 10-year notes fell 12 basis points to 5.06 percent this year, as the country’s benchmark stock index shed 4.5 percent. They dropped 47 basis points to 1.62 percent in the U.S., according to Bank of America Merrill Lynch indexes.

“Air China’s moves show a trend that the bond market has become increasingly popular for fundraising over the equity market,” Zhou Meng, a Shanghai-based analyst at Shenyin & Wanguo Securities Co., said in a phone interview on Oct. 24. “It’s a good time for airlines, shipping companies and rail builders to tap the bond market as borrowing costs are lower.”

Encouraging Bonds

Air China announced the planned sale two days after scrapping a planned private stock offering. It has also yet to complete a 1.05 billion yuan share sale to its state-owned parent and the timing for a second non-public equity offering isn’t “ripe at the moment,” it said in a filing to the Shanghai stock exchange on Oct. 22. The Beijing-based carrier will use proceeds from the notes to repay bank loans and replenish working capital, according to separate company filings.

“The bond market has demand as the risk appetite is pretty low now with stocks falling,” said Li Jun, a strategist at Central China Securities Co. in Shanghai. “On top of that, the central government has encouraged bond sales to increase the proportion of direct financing.”

Equity sales in China have shrunk this year as the benchmark Shanghai Composite Index is heading for a third- straight annual loss.

Shares Slide

Shares of Air China have slumped 20 percent this year in Shanghai as high fuel prices have added to investor concerns.

The carrier won’t resume discussions on the planned share sale within three months, it said the Oct. 22 filing, without identifying the size or potential buyers. Air China company secretary Rao Xinyu declined to comment on why it canceled the plan in an e-mailed response.

The yield on Air China’s Sept. 2015 notes has climbed 17 basis points this month to 6.44 percent, compared with the benchmark government bond yield’s 9 basis-point increase to 3.55 percent.

Five-year credit-default swaps protecting sovereign notes fell 1 basis point to 73 on Oct. 24, according to data provider CMA. The contracts pay the buyer face value in exchange for the underlying securities if an issuer fails to adhere to its debt agreements.

Air China’s long-term debt is 1.3 times its equity, higher than an average for its peers of 0.92 times, according to data compiled by Bloomberg. The carrier plans to spend 57.1 billion yuan in the three years through 2014 on aircraft, construction of bases and pilot training, it said in the prospectus posted on China.money.cn on Oct. 24.

Transportation Debt

Companies in China’s transportation sector have opted to tap the bond market because it is difficult to attract equity investors as earnings drop on the economic slowdown, Shenyin & Wanguo’s Zhou said. China Shipping Development Co., a unit of the nation’s second-largest shipper, sold 2.5 billion yuan of bonds in August.

Guo Shuqing, the head of the China Securities Regulatory Commission, has taken steps including setting up an office to study new products and unveiling a plan to allow small and medium-sized companies to sell lower-rated debt.

“Bond fundraising will continue to exceed stock sales next year because developing the bond market is on top of the agenda of the CSRC,” Chen Li, head of China equity research at UBS AG, said in an interview in Shanghai on Oct. 24.

Chinese airlines had sharp drops in first-half earnings on a slowing growth in travel demand, higher fuel costs and currency fluctuation. Air China, China Southern Airlines Co. and China Eastern Airlines Corp., the nation’s top three airlines, all said profit declined by more than 65 percent in the six months to June.

Yuan Rises

All three, which are due to announce third-quarter results by month-end, may see business “stabilizing” as negative factors such as currency fluctuation are dissipating, according to Davin Chunpong Wu, a transportation analyst at Credit Suisse Group AG in Hong Kong.

The yuan appreciated 1.1 percent against the greenback in the third quarter, after a 0.93 percent drop in the first half, according to China Foreign Exchange System. The currency climbed to a 19-year high yesterday, strengthening 0.10 percent to close at 6.2417 in Shanghai, according to China Foreign Exchange Trade System. Airlines are substantial dollar borrowers and a stronger yuan can help pare the repatriated value of dollar-denominated debts built up from buying planes and fuel overseas.

“The worst for the industry is over,” Wu said in a phone interview in Hong Kong yesterday. “If Air China had planned to sell shares to investors, rather than to its parent company, it wouldn’t need to offer huge discounts for the sake of raising money. With bond issuance, share price volatility isn’t a factor.”

To contact Bloomberg News staff for this story: Jasmine Wang in Hong Kong at jwang513@bloomberg.net

To contact the editors responsible for this story: Neil Denslow at ndenslow@bloomberg.net; Shelley Smith at ssmith118@bloomberg.net

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