Bonds made in China expensive for issuers

Thu Jun 14, 2012 3:51pm BST

* Asian context raises borrowing costs

* Issuer ratings, quality irrelevant

* China links especially dear

By Christopher Langner and Neha D'Silva

SINGAPORE, June 14 (IFR) - This Wednesday Tingyi added the food and beverages sector to the line-up of outstanding bonds from companies with operations in China. In the process, the issuer also underscored how Asian corporates, especially those with assets on the mainland, still have to pay a hefty premium over their Western counterparts, regardless of whether their credit metrics are better or not.

"There tends to be a gap between Asian credits and their US counterparts," summarized a senior DCM banker in Hong Kong.

Tingyi's deal is a case in point. The company owns some of the best-selling noodle brands in China, indisputably the largest market for the food staple in the world.

It also has recently signed a joint venture with Pepsico for soft drinks, not to mention that it distributes Japanese beer brands from Asahi in China, which also happens to be the largest market worldwide for beer.

Tingyi's revenues grew 18% last year over 2010, according to the company's financial reports, compared to expected growth of just 2% for some of the best known food companies in the US, such as Kellogg.

Furthermore, Tingyi's net debt is 1.38 times Ebitda, while the same ratio for Kellogg is 2.5.

Western investors know that food and beverages is a defensive play in times of crisis - given that no matter how cash-strapped people are, they still have to eat and drink.

So they have been actively buying bonds from the sector, driving yields on the likes of Kraft, Kellogg and Heinz close to their historic tights.

Tingyi was the first from the sector with Chinese operations to tap the bond market and, as would be expected given all its positive fundamentals, books on the transaction were 6.5 times subscribed.

However, to generate so much demand, Tingyi had to pay a huge premium on its US$500m Reg S deal versus Western companies in the sector.

The Baa1/BBB+ rated 3.875% five-year bond priced at a spread of 325bp over US Treasuries. Meanwhile, Kellogg's recent five-year bond was trading at 107bp over and Heinz at the tenor was inside 90bp over, having priced at +115bp and +70bp respectively.

Kellogg is rated Baa1/BBB+, while Heinz is a touch lower at Baa2/BBB+.

CHINA EXTREME, BUT NOT ALONE

"Anyone who looks at this deal from a global perspective asks himself: why are they paying so much," said the portfolio manager for a large real-money fund in Singapore.

The answer, spoke bankers with one voice is the "Asia premium." Companies from the region, even those with high ratings and stellar credit-metrics, continue having to pay more for debt. One banker pointed out that bonds of South Korean utilities trade, on average, 200bp wide to Western counterparts.

If there is a premium for being based in the region, then there is an additional toll for doing business in China. China Resources Gas (Baa1/BBB+), for instance, in March priced a 4.5% 10-year bond at spread of 260bp over Treasuries. Those same bonds were trading in the 275bp area last week.

Meanwhile, US-based Devon Energy, which has the same rating as CR Gas, trades some 140bp inside the Chinese quasi-sovereign.

To be sure, one banker suggested such premium is not exclusive to China. "I would call it an emerging markets premium," he said.

Indeed, it is common knowledge that even single-A rated companies from South-American or Eastern European countries trade at a premium to their counterparts in central Europe or the US. However, that relationship is exacerbated in the case of China.

Take Petrobras, Brazil's state-owned oil company. It is rated Ba2/BBB/BBB, or at least one notch below Devon Energy and CR Gas. Yet, its 10-year bond trades in the 250bp area, 25bp inside CR Gas and only 115bp wide to Devon Energy.

Or to use an example with a closer rating, the 10-year of Pemex (Baa1/BBB), Mexico's state-owned oil company, trades around 230bp, some 90bp wide to Devon and 45bp inside CR Gas.

NOBODY KNOWS

One banker in Hong Kong speculated that part of the so-called China premium is the result of a lack of clarity on recourse to assets in the case of a bankruptcy. "There is no clear dotted line to assets," he said.

Indeed, investors have little precedent on what happens to them in the case of a restructuring of a company with assets on the mainland. The few examples are not very reassuring either, as the ongoing restructuring of timber producer Sino-Forest is proving.

Bankers argued that Tingyi calls Taiwan home and is owned by a tycoon from the island-nation. But, investors know that its operations, revenues and factories are heavily concentrated on the mainland.

As long as China is involved, fixed-income buyers remain suspicious, and that means a premium.

Meanwhile, Asian investors, who are more comfortable with the China environment, continue to enjoy great credits that pay two or even three times more yield than their Western counterparts. (Reporting By Christopher Langner and Neha D'Silva; Editing by Julian Baker)

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