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Monday, 18 December 2017

Chalco to pave way for perp return

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CHINA

Steep coupon step-up seen key to rekindling interest in corporate perpetuals

Aluminum Corp of China (Chalco) is poised to issue Asia’s first US dollar perpetual securities in more than five months, in a deal that bankers hope will breathe new life into the undated market.

Leads ANZ, HSBC and Natixis are expected to price the issue this week. It comes after a string of corporate perpetuals traded down in the secondary market soon after pricing earlier this year, forcing potential issuers to rethink their plans.

Citic Pacific offered a US$800m perp non-call 5.5 in mid-May, shortly before markets faltered in the wake of the Federal Reserve’s indications it would scale back its bond purchases. Thai oil and gas company PTTEP took a perp on the road in early May, only to abandon the plan in favour of a US$500m five-year senior bullet.

Chalco’s proposed deal will carry a hefty 500bp step-up if it is not called after year five, one of the heftiest step-ups seen on a perp from Asia. That means the deal will be regarded as debt by the ratings agencies, and count as equity only for accounting purposes.

Investors have favoured steep step-up structures given the likelihood that issuers will call the notes at the first opportunity. The Citic perp is an auspicious comparable, given that it has outperformed other Asian perpetuals in secondary trading, thanks to its relatively aggressive 100bp step-up at year 10.5.

Having priced to yield 8.625%, the Citic paper was last quoted to yield in the high-7% area, something that will not be lost on potential investors in Chalco’s planned deal.

Chalco’s perp will also rank as senior debt, meaning its BBB+/BBB– investment-grade corporate rating should also catch the eye, compared with Citic Pacific’s Ba1/BB. Much of the perp issuance in Asia this year sits in the sub investment-grade bucket.

“The market needs a solid deal from a strong name to reinvigorate its taste for the perp product, and it looks as if this is the right name with the right investor-friendly structure,” said a Singapore syndicate head. “Companies such as PTTEP, which had their eye on bringing a perp and decided to take the vanilla route, should be enticed back into the market if Chalco crosses the line convincingly.”

Challenging sector

China’s aluminium sector, however, has not done well recently. The nation’s producers lost US$1.8bn-equivalent last year, Qin Junman, vice-president of China Nonferrous Metal Industry’s Foreign Engineering & Construction, said last month at an industry conference.

Chinese authorities are sufficiently concerned about overcapacity in the industry that they are reining in the approval of new projects and are aiming to restructure companies that are regarded as over-sized.

China’s State Council on October 15 said it would not approve new projects in steel, aluminium, cement, shipbuilding or glass making, and outlined plans to restructure bloated firms.

Analysts, however, believe Chalco will be immune from this drive to rationalise the industry, and will probably be the one to acquire smaller producers as the drive to reduce capacity kicks in.

“Chalco will be regarded as the most favoured aluminium producer in China amid the move to reduce overcapacity in the industry, so from that point of view I don’t think the background noise adds any hair to the name,” a trader in Singapore said. “From my point of view, a China SOE that enjoys government largesse looks like the right name to reopen the perp market from the region.”

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