Loans Suffer Largest Loss to Bonds in Cnooc Sale: China Credit

Cnooc Ltd.’s $4 billion bond sale marks the biggest defeat for the Chinese corporate dollar loan market as companies sell six times more notes in the U.S. currency this year to refinance debt.

The nation’s largest offshore energy explorer undertook a record offering of securities to replace part of a loan used to acquire Nexen Inc., which operates in Canada’s oil sands, data compiled by Bloomberg show. The company paid 3 percent to sell debt due 2023, 87.5 basis points less than a year earlier, after 10-year Treasury yields last week fell to the lowest since December. Chinese borrowers are paying an average 45 basis points less than in 2012 for dollar loans.

Chinese and Hong Kong issuers sold $18.8 billion of dollar-denominated bonds to refinance debt this year, more than six times similar issuance for the same period last year, meeting demand from global fund managers seeking higher yields in emerging markets. The companies signed $12.2 billion of syndicated loans, as banks showed caution ahead of tighter regulatory requirements on capital.

“Borrowing costs have declined significantly so bond sales allow a strong company like Cnooc to issue debt, and secure cheap and long-term financing,” said Singapore-based Leong Wai Hoong, who buys investment-grade and high-yield Asia dollar bonds at Nikko Asset Management Co., which manages about $154 billion. “Bank loans are usually available for shorter-tenor debt, where the principal must be repaid gradually.”

Maturing Loans

Some $25.2 billion of loans to companies in China and Hong Kong mature this year, 76 percent more than in 2012, data compiled by Bloomberg show. That’s on top of $52 billion in dollar bonds those companies are due to repay before January.

Sinochem Group, China’s biggest supplier of chemical products, planned to use part of a $600 million perpetual bond it sold last month for “short-term loan refinancing,” a person familiar with the matter said at the time. China Petroleum & Chemical Corp., known as Sinopec, is using some of the $3.5 billion it raised from a four-part bond offering to “repay certain bank debt,” according to an April 19 Hong Kong stock exchange statement.

“It makes sense for corporates to have longer tenor and non-amortizing debt as part of their capital structure alongside loans,” said Justin Crane, the Singapore-based global head of loan syndicate and distribution with Standard Chartered Plc. “At some point, interest rates will go up so it’s understandable why corporates are taking the opportunity to issue bonds and lock in these low rates for the next seven to 10 years.”

Falling Costs

Yields on 10-year Treasuries reached the lowest this year last week as the Federal Reserve reiterated its commitment to asset purchases aimed at spurring economic growth. Yields slid to 1.61 percent on May 1, the least since Dec. 11, Bloomberg Bond Trader prices show. The central bank pledged to maintain its bond-buying at a pace of $85 billion a month, and said it would raise or lower the level of purchases as economic conditions evolve.

Chinese companies pay an average of 5.4 percent to sell dollar debt as of May 3, after costs fell 391 basis points, or 3.91 percentage points, in 2012, according to JPMorgan Chase & Co. indexes. Yields declined 8 basis points in April, the most since November.

Cnooc’s 10-year bonds yielded 139 basis points more than Treasuries as of 12:15 p.m. in Hong Kong, according to Royal Bank of Scotland Group Plc quotes, after pricing at a spread of 155 basis points.

Loan Margins

“The bonds rallied post-issuance even though the company tightened price guidance substantially,” said Chia Tse Chern, head of Singapore and Asia fixed income at UOB Asset Management Ltd. “U.S. Treasury yields are now near a five-month low and market appetite for highly rated credits is strong.”

Loan costs have also fallen, although by a smaller amount. The nation’s borrowers have paid an average interest margin of 272.1 basis points more than the three-month London interbank offered rate this year, compared with 303 basis points in 2012, the data show.

Cnooc paid less than half that for the $6 billion 12-month bridge loan it signed in February as part of its $15.1 billion purchase of Nexen, its largest overseas acquisition. The margin was set at 80 basis points more than Libor for the first six months of the facility, and was to increase in steps to 120 basis points, the data show.

“Cnooc indicated shortly after taking on a loan to purchase Nexen that it planned to refinance it,” said Gourav Dhavale, a Hong Kong-based Asia credit analyst at Nomura Holdings Inc. “It would be logical for them to find ways to fund that now, given the decline in borrowing costs.”

Falling Risk

Onshore borrowing costs are also falling. Yields on China’s benchmark 10-year government bonds fell 11 basis points last month, the most since May 2012, according to Chinabond. The notes paid 3.42 percent as of May 3, near the lowest level in eight months. Similar-maturity top-rated corporate bonds pay 5.11 percent, six basis points less than at the end of March, Chinabond indexes show.

Bond risk for the nation dropped last month. The cost of insuring China’s debt against non-payment with credit-default swaps fell 2.5 basis points in April and was at 70 basis points as of May 3, according to data provider CMA. The yuan gained 0.15 percent to 6.1556 per dollar in Shanghai last week. It was trading at 6.1576 as of 12:03 p.m. in Shanghai.

Investor Demand

Cash inflows into global bond funds beat equity funds by the widest margin since late October in the week to April 24, taking in a net $7.58 billion, according to data provider EPFR Global.

Demand from investors for Cnooc’s notes exceeded $23.8 billion, according to a person familiar with the matter. The explorer’s 10-year bonds generated the most interest, with the company selling half of its $4 billion offering at that tenor.

Cnooc also priced $750 million of 1.125 percent securities due 2016, $750 million of 1.75 percent five-year notes and $500 million of 4.25 percent debt due in 30 years, data compiled by Bloomberg show.

“Cnooc was always likely to refinance with bonds,” said Mark Reade, a Hong Kong-based credit analyst at Credit Agricole CIB. “Regardless of price, one thing the bond market does provide is long maturity debt. While banks may be willing to lend up to five years, bond markets allow corporates to lock-in record-low funding levels for up to 30.”