UBS Sees State Firms Doubling Dollar Bond Sales on M&A Plans: China Credit
China’s state-owned companies may turn to the global bond market to finance a surge in overseas acquisitions as the yuan appreciates and regulators curb access to domestic bank loans.
Dollar-denominated bond sales by companies backed by an implied sovereign guarantee will more than double to $8 billion in 2011, according to estimates from UBS AG, which helped Sinochem Group sell 30-year notes in the U.S. currency this month. Non-bank state firms raised about $3.6 billion from the dollar market this year, according to data compiled by Bloomberg.
“Every major company is on a shopping spree,” Steve Wang, head of fixed-income research at BOCI Securities Ltd., said in a phone interview from Hong Kong. “They want to acquire assets overseas when the dollar is still low and the yuan is strengthening,” he said, identifying Cnooc Ltd., China Petroleum & Chemical Corp., also known as Sinopec, and China Cosco Holdings Co. as potential bond issuers.
Overseas investment by Chinese companies jumped to $57 billion last year from $27 billion in 2007, according to the nation’s commerce ministry, amid increasing demand for resources and raw materials in the world’s fastest-growing economy. While the yuan appreciated 2.66 percent against the dollar this year, making foreign acquisitions cheaper, regulators imposed a 7.5 trillion yuan ($1.1 trillion) cap on bank lending after a record 9.59 trillion yuan of loans last year fueled concern that the money would fuel asset bubbles.
China’s biggest banks are poised to reach their quotas and will stop expanding their loan books, four people with knowledge of the matter said on Nov. 23. The yuan-denominated corporate bond market expanded 54 percent to $546 billion in the year ending June 30, helping fund enterprises in a nation that’s relied on state bank lending for three decades, the Asian Development Bank said in a report last month.
China will control the pace of bank lending for the remainder of this year as it will be difficult to stay within the government’s 7.5 trillion yuan target for new loans in 2010, Hu Xiaolian, a deputy governor of the People’s Bank of China, said in a statement posted on the central bank’s website yesterday.
PetroChina Co., the nation’s biggest oil and gas producer, said March 29 it plans to spend at least $60 billion in the next decade on overseas acquisitions. This month Chesapeake Energy Corp., the second-biggest U.S. natural gas producer, completed the sale of a $1.08 billion stake in its Eagle Ford shale project in Texas to Cnooc Ltd.
“State-owned companies’ balance sheets are weighted towards short-term debt provided by Chinese banks, so some are looking to the overseas bond market for longer-term funds,” Ronald Tang Wai-Hung, a director of China capital markets origination at Citigroup Inc., said at a conference in Beijing on Nov. 17.
More of China’s companies will “start to look to access cheap dollar funding, because over the last 10 years Treasury rates have never been so low,” said Guy Wylie, head of Asian debt capital markets at UBS in Hong Kong.
Benchmark two-year U.S. Treasury notes yielded 0.54 percent as of 12:10 p.m. in Hong Kong after falling to 0.33 percent on Nov. 4, the lowest since 1976.
Sinochem, China’s biggest provider of chemical products, sold $500 million of 6.3 percent bonds due in 2040 on Nov. 4 priced to yield 228 basis points more than similar-maturity Treasuries, Bloomberg data show. Dow Chemical Co., the world’s second-biggest chemicals maker, has 9.4 percent debentures maturing in 2039 that traded at a spread of 212 basis points that day, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.
Companies with state links will benefit after Moody’s Investors Service raised China’s sovereign rating to Aa3, its fourth-highest level, from A1 on Nov. 11, according to Wang at BOCI Securities. Cnooc was raised to Aa3 the same day.
Jiang Yongzhi, a spokesperson for Cnooc, and Huang Wensheng, a spokesperson for China Petroleum, couldn’t be reached for comment yesterday on their borrowing plans. A person at China Cosco’s main office in Beijing, who declined to give his name, said no one was available for comment.
Elsewhere in credit markets, five-year credit-default swap contracts on China’s bonds fell 1.4 basis points to 64.2 basis points yesterday, CMA prices in New York show. The contracts declined about 15 percent in October following a drop of 19 percent in September.
Credit-default swaps typically decline as investor confidence improves and rise as it deteriorates. 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.
One-year interest-rate swaps, or the fixed cost needed to receive the floating seven-day repurchase rate, rose four basis points to 3.06 percent as of 12:23 p.m. in Hong Kong. Five-year swaps gained two basis points to 3.8425 percent. That rate is up from this year’s low of 2.68 percent on Aug. 12, according to data compiled by Bloomberg.
China’s $1 billion of 4.75 percent notes due in October 2013 yielded 1.69 percent as of 12:20 p.m. in Hong Kong today, according to Royal Bank of Scotland Group Plc prices. Brazil’s $1.25 billion of 10.25 percent notes maturing in June 2013 yielded 1.6 percent, according to Collins Stewart Plc prices, while Russia’s $2 billion 3.625 percent due April 2015 yielded 3.25 percent, RBS prices show. India hasn’t sold any dollar bonds. The four nations comprise the so-called BRIC group of emerging economies.
The yuan has appreciated 2.6 percent versus the dollar since a two-year peg was relaxed in June, and non-deliverable forwards show traders are betting on a 2.1 percent increase in the coming 12 months. It was mostly unchanged at 6.6516 per dollar as of 1:42 p.m. in Shanghai, according to the China Foreign Exchange Trade System.
The yuan-denominated 3.28 percent government bond due August 2020 yielded 3.9 percent, Interbank Funding Center data show. China raised its one-year lending and deposit rates by a quarter of a percentage point on Oct. 19, the first increases since 2007.
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