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Thursday, 19 October 2017

Hard to ignore

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CITIC’s planned listing is expected to improve its corporate governance as it opens itself up to greater scrutiny. The move is also expected to benefit the market for state-owned enterprises by highlighting the possibilities of this sector for foreign investors.

To see the full digital edition of the IFR Top 250 Borrowers Report 2014, please click here.

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CITIC, the China state-owned conglomerate with businesses across the financial, real estate, manufacturing, telecoms and energy sectors, traces its roots to the early days of the country’s transformation from a command to a free-market economy, having been established by reformist leaders Deng Xiaoping and Rong Yiren in 1978. A radical proposal to overhaul the company will provide a blueprint for China’s state-owned enterprises.

The Chinese authorities plan to list Beijing-based CITIC on the Hong Kong bourse in a deal that will hold the company up to greater market scrutiny, given the greater disclosure and regulatory environment than the SOE faces in China.

CITIC Group will not list through an IPO, but instead Hong Kong-listed CITIC Pacific will buy the parent’s assets for US$37bn. CITIC Pacific will issue US$29bn of shares to help fund the purchase, in the process increasing its market cap around five-fold. The hope is that this will force international standards on the company, although the Chinese government will retain 82%.

“If the transaction is completed, we believe it should help to improve corporate governance for the group. If the CITIC Pacific acquisition does materialise and this is accompanied by a significant equity injection, then we would view it as a clear credit-positive for CITIC Pacific,” wrote Goldman Sachs analysts in a research note soon after the plan was announced on March 31.

From a banker’s point of view it should be business as usual: engage with the company at subsidiary and holdco level and attempt to leverage up banking relationships into the bond cross-sell, of which CITIC and its subsidiaries have become the leading exemplar in Asia-Pacific.

The most notable knock-on effect from CITIC’s restructuring plan was the surge in secondary pricing of CITIC Pacific’s perpetual bonds, which rallied by more than seven points in just five trading days on the view that corporate governance would improve at the group.

CITIC Pacific’s US$800m perp was something of a landmark when it was priced just over a year ago, coming as it did after a string of flops in the perp space. CITIC listened to the market and included an investor-friendly structure comprising a 100bp coupon step-up after 10.5 years and a replacement capital covenant.

Unusual step

Meanwhile, subsidiary CITIC Telecom hit centre stage last year in a classic case of the cross-sell when it took the highly unusual step – for Asia – of issuing bonds to fund an M&A purchase. It issued a US$450m 12-year unrated bond offering to help purchase a 79% stake in Companhia de Telecomunicacoes de Macau, the SAR’s monopoly fixed-line and broadband provider.

The purchase was originally planned to be funded through a US$1.25bn loan and the outcome, involving the partial drawdown of the loan-mired CITIC Telecom, attracted controversy. Rumours abounded that the bond had been hard underwritten by leads CITIC Securities International – handily, a part of the CITIC conglomerate – Deutsche Bank, Standard Chartered and UBS.

Meanwhile, many investor balked at the odd tenor and relatively low yield of 6.1%, which saw the bonds come tight to the most appropriate comp – the CITIC Pacific due 2021s, which offered a 60bp pick-up for a two-year duration shortening.

Still, although the paper barely traded the following day, adding fuel to the talk that it had either been retained in large part by the leads or effectively privately placed with a handful of investors, nevertheless the deal got done.

And done in the “style” that has often been CITIC’s trademark: leveraging off banking relationships to squeeze the last basis point out of term funding and often closing in a less than transparent manner. Indeed, terms on the US$1.25bn loan to fund the CTM purchase were not disclosed, with the seven banks involved – only StanChart participated in both the loan and the bond – refusing to disclose the spread and deal covenants.

Late last year China CITIC Bank brought some confidence back to the nascent Basel III-compliant FIG market in Asia by pricing a US$300m Tier 2 subordinated 10.5-year non-call 5.5 issue that managed to be priced 37.5bp through guidance and rallied in secondary trading, erasing the bad taste left after ICBC Asia’s Basel III-compliant deal that was priced a few months earlier and plunged when free to trade.

From clunker to success

The China CITIC deal demonstrated the CITIC group’s market savvy, with the issuer for once erring on the side of generosity by pricing 110bp back of ICBC’s paper, at Treasuries plus 454bp. This was probably necessary for the deal’s success, given the ICBC clunker.

Meanwhile, the loss-absorption feature, whereby the bonds get partially written down in the event of the financial authorities declaring the bank non-viable, was more investor-friendly than that presented by ICBC, which featured a writedown to zero and the pronouncement of the Hong Kong Monetary Authority and the China Banking and Regulatory Commission on viability; CITIC’s viability is to be decided under the note’s indenture by the HKMA.

China CITIC Bank has established a reputation among Hong Kong banks for leadership in the segment, despite being a medium-sized player. In February, it tapped the local Hong Kong-based Chinese renminbi Dim Sum market with a Rmb1.5bn (US$248m) three-year issue. Funds were earmarked for the bank’s business outside the PRC.

“CITIC is the ultimate China SOE and has shown leadership in tricky debt asset classes,” said a Hong Kong DCM head. ”Its reorganisation should add another layer of comfort to investors and ultimately this will shave quite a bit in basis point terms from its funding rate. That is something that will benefit the entire China SOE complex in spread terms but also in terms of the asset classes tapped.

“CITIC’s bravery on the perp and Basel III opened up the market for a host of other deals and we expect more of this leadership going forward.”

 

 

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