Friday, 14 December 2018

Gargantuan reputation

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Sinopec earned its chops this year with a record-breaking dual trancher. But was this as good as it gets as China looks to reform its bloated SOEs? The prospect of being broken up heralds a new issuance landscape for the China state-owned oil industry.

Sinopec has earned a reputation in the offshore G3 markets for producing deals of huge sizes and the ability to tap opportunistically, with bulky prints being the modus operandi. It has benefited from its perception among foreign investors as a sovereign proxy, but change awaits as China seeks to reform its creaking state-owned enterprises.

Hong Kong, Shanghai and New York-listed China Petrochemical Corp, Sinopec for short, broke records last year by printing the largest US dollar bond from a Chinese SOE and the biggest seen from Asia in 11 years.

Coming in at US$5bn in multi-tranche Global format, the deal underlined the overwhelming appetite for investment at the top level of China Inc, despite fears of an economic slowdown in the country and in the knowledge that China’s domestic debt is at stratospheric levels.

In an approach that showed a keen sense of market timing and imagination, the oil giant tapped this issue barely two months later, adding US$1bn through fixed and floating-rate notes totalling US$600m and US$400m of the original 10-year, which was tapped at a symbolically “look at me” price some four points above the original print.

Such was the demand for high quality debt and duration last year, when fears of Federal Reserve normalisation and the great global debt unwind were off the radar.

A similar exercise in the production of the debt markets leviathan was pulled off this year when the company printed in April a US$6.4bn five-tranche Global that included five, 10 and 30-year US dollar pieces and three and seven-year euro tranches.

Solid demand for the paper was uncovered onshore in China, in Taiwan and South Korea in the hope of booking foreign exchange gains on the back of expected local currency declines versus the US and European units.

But the backdrop to this deal was less quiescent. Markets are more testy towards the impact of Fed rate rises on the mountain of global debt that has built up since the financial crisis, prodded by quantitative easing in the US, Japan and the European Union.

This was the perception among many market participants when Sinopec priced the deal, although there’s no denying that the European central bank’s unleashing of liquidity earlier this year with its QE programme helped propel the deal’s euro tranches.

Since Sinopec’s last jumbo foray, there have been two PRC debt defaults – from SOE Baoding, a military contractor, and Kaisa Group Holdings, a property developer – and the level of local government debt in China as well as the perception of a less than pristine corporate governance culture at the SOEs means that business as usual in the international debt capital markets for Sinopec might be a challenge.

The received wisdom in China now, something voiced even by communist party mouthpiece the People’s Daily, is that the country needs to reduce the number of its SOEs, from the current 112 down to the 30–40 range.

The aim is to reverse the spiral of return on assets at the bloated, poorly run SOEs, where ROA has declined by about 30% over the past eight years. A favoured conceit is the idea that Sinopec and its oil major peer PetroChina should be forced to merge.

“There is a need to reform the SOEs, and in this regard it’s likely that China will become Asia’s leading source of debt restructuring over the next few years,” said a Singapore-based syndicate head.

“As far as Sinopec is concerned, it might go off with little fanfare. Indeed, last year when the company restructured its fuel marketing division, the market was agog with admiration and the company’s share price went through the roof.”

In March last year, Sinopec unveiled a plan to restructure its fuel marketing division and sell up to 30% of the subsidiary’s assets to private investors.

The inefficiencies of state fuel price controls and high costs at the division helped explain why Sinopec was trading at a discount to other oil majors such as ExxonMobil in terms of price to estimated profit of around five times. The move to rationalise the fuel marketing division was seen as a stratospheric shift in strategy at Sinopec and more in line with the kind of radical market-based approach seen at large Western firms.

Perhaps less happily for shareholders, Sinopec appears to have been caught up in Chinese Premier Xi Jinping’s drive to weed out irregularities in the country’s machines of state. Last December, Xue Wandong, president of Sinopec’s Oilfield Services Corp, was sacked and placed under investigation for unspecified reasons. This came just after talk that SOSC was planning a US$1.5bn IPO in Hong Kong.

“The Chinese authorities don’t like to see an ‘SOE discount’ in relation to the large Western companies and are doing all they can to rationalise the operations of the big SOEs and clean up corporate governance to gets their stats up with their international peer group. That can only be good news for shareholders and debt holders in the long run,” said the syndicate head.

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