Sinochem Yields Approach Dow Chemical on M&A Push: China Credit

Sinochem Yields Approach Dow Chemical on M&A Push
The Sinochem Corp. logo hangs on the company's building in Beijing, China. Photographer: Nelson Ching/Bloomberg

Sinochem Group, China’s biggest provider of chemicals products, sold 30-year bonds at yields approaching those of America’s Dow Chemical Co. as investors showed confidence in its push to expand globally through acquisitions.

The state-controlled firm issued $500 million of 6.3 percent securities due November 2040 to yield 228 basis points more than similar-maturity Treasuries in the U.S. on Nov. 4. The 9.4 percent debentures maturing May 2039 of Dow, the world’s second-biggest chemicals maker, traded at a spread of 212 basis points as the Beijing-based company sold bonds, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

“Huge money flows coming into emerging markets such as China are making it possible for companies to sell debt at lower spreads,” said Kenneth Akintewe, who helps oversee $261 billion of global assets at Aberdeen Asset Management Asia Ltd. in Singapore. “It’s also a reflection of investors being more comfortable taking on China risk.”

Falling borrowing costs enable the nation’s companies to be more competitive when acquiring global resources essential for sustaining expansion in an economy that’s averaged 10 percent annual growth for a decade. Sinochem, whose debt is rated two levels above Dow’s by Moody’s Investors Service, has made three acquisitions since May, including an offshore oilfield in Brazil. It failed in attempts to purchase assets in Canada and Australia.

Bond Demand

Sinochem’s $2 billion sale, including the first 30-year debt offered by China since 2003, drew orders for $7.85 billion, according to Citigroup Inc., which led banks including HSBC Holdings Plc and UBS AG that underwrote the sale. The company also sold $1.5 billion of 4.5 percent 10-year notes to yield 208 basis points more than Treasuries.

Long-term borrowing costs for companies in the world’s second-largest economy have dropped faster than for firms in the U.S. The spread on Chinese corporate bonds with tenors of more than 15 years has narrowed 78 basis points since June to 38 basis points, compared with a 20 basis-point decline for U.S. company debt of similar maturity to 198, Bank of America Merrill Lynch indexes show.

Moody’s said last month that it may raise its A1 credit rating for China, after trade surpluses swelled the nation’s currency reserves to a record $2.65 trillion. The U.S. Federal Reserve last week announced a plan to buy $600 billion of Treasuries in an effort to slash unemployment and avert deflation.

Default Swaps

Five-year credit-default swap contracts on China’s bonds fell 6.8 basis points last week 53.5 basis points and 20 basis points this year, CMA prices in New York show. That compares with 42 for U.S. government debt.

The contracts pay the buyer face value in exchange for the underlying securities or the cash equivalent should a government or company fail to adhere to debt agreements. Government debt investors usually buy the contracts to hedge against a rise in yields. A basis point on a contract insuring $10 million of debt for five years is equivalent to $1,000 annually.

The yuan fell 0.2 percent today to 6.6686 per dollar as of 3:41 p.m. in Shanghai and has strengthened by 2.3 percent since China ended a two-year peg to the dollar on June 19. Non-deliverable forwards show traders are betting on a 3 percent gain in the coming 12 months. The Dollar Index, a gauge of the greenback’s strength that is traded on ICE Futures in New York, has lost 1.3 percent this year and sank to an 11-month low on Nov. 4.

Bond Terms

China has four dollar-denominated debt issues outstanding, forcing investors to buy state-owned companies to gain exposure to sovereign risk. The bonds sold last week included a proviso that the government’s stake in the Sinochem unit guaranteeing the notes won’t fall below 50.1 percent, according to Citigroup.

China’s dollar debt has returned 8 percent this year, the least of the so-called BRIC nations, compared with 11 percent in Russia and 14 percent in Brazil, JPMorgan Chase & Co. indexes show. India hasn’t sold any dollar bonds.

The three-month London interbank offered rate for dollars, or Libor, the most widely-used measure of bank lending costs, was at 0.28563 percent on Nov. 5, down from 5.725 percent in 2007 before global credit markets seized up, according to data from the British Bankers’ Association.

‘Cheap’ Funding

“Dollar funding is cheap and if you have some specific need, now is the time to lock some in,” Wai Ho Leong, a regional economist at Barclays Plc in Singapore, said in a telephone interview. “I’m sure it’s to meet a specific need such as expansion abroad as you wouldn’t want to raise funds just to park it in your portfolio.”

The three-month Shanghai interbank offered rate for yuan loans climbed 24 basis points in the past month to 2.844 percent as of 3: 29 p.m. in Shanghai. The yield on the 3.28 percent yuan-denominated government bond due August 2020 has risen 19 basis points over the past week to 3.8 percent as of 3:35 p.m. in Shanghai, Interbank Funding Center data show.

Sinochem sold 30-year bonds at a narrower spread than India’s biggest company by market value. Reliance Industries Ltd., rated Baa2, paid a 240 basis-point spread last month when it issued $500 million of 6.25 percent 30-year notes.

Dow, based in Midland, Michigan, has seen its ratings lowered five times by Moody’s since 1994 to Baa3, the lowest investment-grade, from A1, the fifth-highest, because of asbestos claims and higher costs. In 1991, Dow sold $300 million of 9 percent 30-year notes due April 2021 at a yield of 88 basis points more than similar-maturity Treasuries.

Potash, Nufarm

Sinochem failed in its bid to acquire Potash Corp. of Saskatchewan Inc. earlier this year, and was also unsuccessful last year in an attempt to buy Nufarm Ltd., Australia’s largest farm chemicals supplier. Hu Hongjun, a spokesman for Beijing- based Sinochem, declined to provide additional details on the bond sale when contacted by phone.

The last issuer to sell 30-year debt was state-owned Cnooc Ltd., the nation’s biggest offshore oil explorer. In 2003, it issued $300 million of 5.5 percent securities due May 2033, Bloomberg data show.

Elsewhere in China credit markets, the Export-Import Bank of China plans to sell as much as 5 billion yuan of bonds in Hong Kong, according to a statement from the company today. The bank will sell three-year bonds to individual investors to yield 2.65 percent, the statement said.

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