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UBS sees record euro debt as state team funds M&A: China Credit
[BEIJING] Euro-denominated bond sales from China will rise to a record this year as so-called national champions hunt for acquisitions in Europe, UBS Group predicted.
Offerings almost tripled to 5.35 billion euros (US$6.1 billion) in 2014 and will surpass that level this year, according to Patrick Liu, the Hong Kong-based co-head of Asian debt capital markets at the Swiss bank. State-backed companies including State Grid of China and shipbuilder China CSSC Holdings have sold 3.1 billion euros since Dec 31, seven times the amount in the same period last year, according to data compiled by Bloomberg.
"We are advising issuers to consider euro bond sales," said Mr Liu. UBS was the biggest foreign underwriter of China's onshore bonds last year. "While interest rates in Europe are declining toward zero, European investors are eager to buy bonds from China and other emerging-market nations that offer higher yields." China's buying spree in Europe, encouraged by the government's "going out" policy to expand overseas markets and secure commodities abroad, has included investments in Italian energy grids, a Maltese utility and a Dutch insurer. Chinese companies announced a record US$20.3 billion of acquisitions in Europe last year, as the yuan, which fell to the lowest against the dollar since October 2012 today, strengthened 11 per cent against the euro in 2014, the most since 2010.
The debt to finance some of the acquisitions appeals to yield-starved European investors as the region's central bank keeps benchmark interest rates close to zero. The Chinese borrowers include large state-owned groups dubbed national champions that the government began forming in the 1990s by consolidating smaller enterprises and listing them on exchanges.
China Construction Bank, China's second-biggest lender, is planning to issue bonds denominated in either dollars or euros, a person familiar with the matter said last week. Industrial & Commercial Bank of China, the nation's biggest lender, sold 600 million euros of perpetual securities in December.
For Chinese companies, raising debt in euros provides a cheaper way than sourcing funds at home. The coupon on the seven-year euro notes sold in January by State Grid, the nation's China's biggest power distributor, was 1.5 per cent, compared with 4.45 per cent on its three-month yuan notes issued domestically that same month.
"It's cost-efficient to issue euro-denominated bonds," said Yves Jacob, the head of debt capital markets for the Asia- Pacific region at Societe Generale SA.
State Grid bought a stake last year in Italy's CDP Reti, an energy-grid holding company. Shanghai Electric Power purchased 33 per cent of Enemalta Corp., the main electricity provider in the Mediterranean island nation of Malta. Anbang Insurance Group, the insurer that acquired New York's Waldorf Astoria Hotel, won Dutch government approval earlier this month to buy the insurer Vivat.
The European Central Bank has started buying bonds, helping to cut borrowing costs. The average yield on corporate notes in euros fell 89 basis points in the past year to 0.95 per cent, according to Bank of America Merrill Lynch indexes. That compares with 3.05 per cent for company debentures in dollars.
'Investment Opportunities' Baoshan Iron & Steel, China's biggest publicly traded steelmaker, sold 500 million euros of three-year securities with a 1.625 per cent coupon earlier this month, Bloomberg-compiled data show. The notes carry an A- rating from Standard & Poor's. While still lower than rates onshore, the coupon surpasses the average 0.87 per cent on bonds in euros with similar ratings and maturities.
European investors favor Chinese euro bonds, particularly those from well-known companies, because "Chinese spreads are wider for the same rating than issuers from other countries," Societe Generale's Jacob said. "There is a global search for yields." Chinese companies' sales of offshore dollar and euro- denominated bonds may increase as much as 15 per cent this year, according to UBS's Liu. The majority of offerings will still be in dollars, Mr Liu said.
President Xi Jinping said in November China's overseas investment will total $1.25 trillion over the next 10 years and the government will spend US$40 billion to revive the ancient Silk Road, which connected the country to Europe through Central Asia.
"Chinese companies have found many good investment opportunities as the European economy slows," Mr Liu said. "If Chinese companies have demand for euros for mergers and acquisitions in Europe, euro bond sales would be a good and cost-saving option."