Cnooc Slashes Costs as Foreign Banks Vie to Lend: China Credit

Cnooc Slashes Costs as Foreign Banks Vie to Lend
Cnooc, rated at Aa3, Moody’s Investors Service’s fourth-highest investment grade, is seeking oil reserves to meet demand in the world’s second-biggest crude-consuming nation. Photographer: Nelson Ching/Bloomberg

Cnooc Ltd., working to complete the biggest overseas takeover by a Chinese company, is slicing borrowing costs by 80 percent as it attracts international lenders seeking exposure to government-backed businesses.

The country’s largest producer of offshore crude oil agreed to pay $15.1 billion in July to buy Canada’s Nexen Inc. and is seeking $6 billion in bank debt to finance the transaction. It’s offering 80 basis points over the London interbank offered rate for the 12-month loan, on which banks have been asked to respond this week. That’s 487 basis points less than China’s 6 percent benchmark lending rate and 332 below the average 4.45 percent Cnooc pays on its bonds.

“Ultra high-grade Chinese companies like CNOOC make strategic acquisitions from time to time, and can always easily achieve very competitive loan pricing,” said Joe Cheung, a vice president in Credit Suisse Group AG’s Asia-Pacific emerging markets financing group in Hong Kong. “Having government ownership and policy support also makes international banks comfortable and confident to lend.”

Overseas takeovers by Chinese companies have climbed 19 percent to $60.4 billion this year as borrowing costs have fallen, according to data compiled by Bloomberg. Cnooc is looking offshore for cheaper funds, as global lenders vie for business with some of the world’s most active acquirers.

‘More Opportunities’

“Now that state-owned enterprises in China are stepping out onto the world stage there are more opportunities for international banks to build relationships with them,” said David Yim, head of debt capital markets in Hong Kong at The Royal Bank of Scotland Group Plc.

Cnooc, rated at Aa3, Moody’s Investors Service’s fourth-highest investment grade, is seeking oil reserves to meet demand in the world’s second-biggest crude-consuming nation. People’s average use of the fuel in China leapt 90 percent in the decade through last year. Buying Calgary-based Nexen will hand Cnooc control of oil and gas assets in the North Sea, the Gulf of Mexico and in Nigeria, as well as oil-sands reserves at Long Lake, Alberta, where the Beijing-based company already produces crude in a joint venture with the explorer.

The number of non-Chinese lenders among the top 25 arrangers of syndicated loans in the country rose to 17 this year from 13 in 2009, led by Mizuho Financial Group Inc. and Credit Suisse, Bloomberg-compiled data show.

Offshore Advantage

Cnooc joins Bright Food Group Co., Dalian Wanda Group Corp. and China Three Gorges Corp. in acquiring assets offshore as growth at home slows. China’s gross domestic product expanded 7.6 percent from a year earlier in the second quarter, down from 8.1 percent in the first three months, according to official data. The International Monetary Fund estimates economic growth will slow to 7.8 percent this year from 9.3 percent in 2011.

The cooling economy has prompted China’s central bank to cut reserve requirements and pump record amounts of funds into the financial system. While that has lowered borrowing costs, regulations mean top-rated companies may still have to pay more to source money than they would offshore, according to RBS’s Yim.

“The interest rate for yuan loans onshore is regulated so in a way, if you’re a good-quality Chinese company, you’re probably paying more than what your company’s credit should command,” Yim said. “Besides, the offshore U.S. dollar market is a lot deeper and more liquid than the U.S. dollar market onshore in China.”

Cheaper Borrowing

The average margin over Libor is 265 basis points, or 2.65 percentage points, for U.S. dollar-denominated loans in the Asia-Pacific region outside Japan that were signed this year and mature before January 2016, Bloomberg data show. The Chinese central bank’s best lending rate is 6.4 percent for similar-maturity debt, rising to 6.55 percent for longer than five years and falling to 6 percent for 12-month loans.

Lenders don’t have to charge 100 percent of the rates set by the central bank. The PBOC has taken steps to liberalize interest charges, widening the permissible lending-rate discount to 30 percent in July and trimming interest rates further after cutting them the previous month for the first time since 2008.

Even with a 30 percent discount applied to the central bank’s benchmark rate, the starting margin Cnooc is offering for its $6 billion loan is still 307 basis points lower. Cnooc is considering eventually refinancing the bridge loan with proceeds from a bond sale, two other people familiar said Sept. 11.

Default Swaps

Michelle Zhang, a Beijing-based spokeswoman for Cnooc, said the company is “currently in the process of external financing for the Nexen deal” and declined to comment further.

Elsewhere in China’s credit markets, the yield on 10-year sovereign bonds was little changed at 3.48 percent yesterday, Chinabond data show.

Credit-default swaps insuring China’s sovereign debt against non-payment for five years decreased 1.3 basis point to 80.3 yesterday, according to data provider CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the privately negotiated market.

Credit-default swap indexes are benchmarks for insuring bonds against default and traders use them to speculate on credit quality. A drop signals improving perceptions of creditworthiness, while an increase suggests the opposite.

‘Natural Progression’

The yuan touched 6.2580 per dollar yesterday in the spot market, the strongest level since the government unified the official and market exchange rates at the end of 1993, China Foreign Exchange Trade System prices show. Twelve-month non-deliverable forwards declined 0.1 percent to 6.3619 as of 10:37 a.m. in Hong Kong, a 1.4 percent discount to the onshore rate of 6.2726, according to data compiled by Bloomberg.

The loan to Cnooc comes as syndicated lending in Asia slows as companies face rising borrowing costs and opt for more private, so-called bilateral facilities and bonds. Loans have fallen 30 percent from the same period last year to $251.1 billion, the lowest amount for comparable periods since 2009, Bloomberg data show.

State-owned enterprises in China are expanding overseas and trying to diversify their funding sources, according to Atul Sodhi, Hong Kong-based head of Asia-Pacific loan syndication at Credit Agricole SA.

“Chinese companies are also wanting M&A advice and, as they get bigger, are looking beyond loans and bonds to other financial products,” said Sodhi, who is also chairman of the Asia-Pacific Loan Market Association. “Having foreign lenders in their relationship circle is a natural progression.”

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