State-owned companies may turn to fixed income for takeover finance

BEIJING - China's State-owned companies may turn to the global bond market to finance a surge in overseas mergers and acquisitions (M&A) as the yuan appreciates and regulators curb access to domestic bank loans.

Dollar-denominated bond sales by companies backed by an implied sovereign guarantee will more than double to $8 billion in 2011, according to estimates from UBS AG. Non-bank State firms raised about $3.6 billion from the dollar market this year, according to data compiled by Bloomberg.

"Every major company is on a shopping spree," said Steve Wang, head of fixed-income research at BOCI Securities Ltd. "They want to acquire assets overseas when the dollar is still low and the yuan is strengthening," he said, identifying CNOOC Ltd, China Petroleum & Chemical Corp, and China Cosco Holdings Co as potential bond issuers.

"State-owned companies' balance sheets are weighted towards short-term debt provided by Chinese banks, so some are looking to the overseas bond market for longer-term funds," Ronald Tang Wai-Hung, a director of China capital markets origination at Citigroup Inc, said at a conference in Beijing on Nov 17.

More of China's companies will "start to look to access cheap dollar funding, because over the last 10 years Treasury rates have never been so low," said Guy Wylie, head of Asian debt capital markets at UBS.

Benchmark two-year US Treasury notes yielded 0.54 percent as of 12:10 pm in Hong Kong after falling to 0.33 percent on Nov 4, the lowest since 1976.

Sinochem, China's biggest provider of chemical products, sold $500 million of 6.3 percent bonds due in 2040 on Nov 4 priced to yield 228 basis points more than similar-maturity Treasuries, Bloomberg data show.

Credit-default swaps typically decline as investor confidence improves, and rise as it deteriorates. The contracts pay the buyer face-value in exchange for the underlying securities or the cash equivalent should a government or company fail to adhere to debt agreements. Government debt investors usually buy the contracts to hedge against a rise in yields.

One-year interest-rate swaps, or the fixed cost needed to receive the floating seven-day repurchase rate, jumped four basis points to 3.06 percent at 12:23 pm on Thursday in Hong Kong. Five-year swaps gained two basis points to 3.8425 percent. That rate is up from this year's low of 2.68 percent on Aug 12, according to data compiled by Bloomberg.

The mainland's $1 billion of 4.75 percent notes due in October 2013 yielded 1.69 percent as of 12:20 pm in Hong Kong on Thursday, according to Royal Bank of Scotland Group Plc prices.

The yuan has appreciated 2.6 percent versus the dollar since a two-year peg was relaxed in June, and non-deliverable forwards show traders are betting on a 2.1 percent increase in the coming 12 months. It was mostly unchanged at 6.6516 per dollar as of 1:42 pm in Shanghai, according to the China Foreign Exchange Trade System.

Bloomberg News

(China Daily 11/26/2010 page17)