SGD NEW ISSUE REVIEW: CHINA METALLURGICAL GROUP SGD 2YR PRICE GUIDANCE @ LOW 3% AREA**

 

Issuer:              China Jingye Construction Engineering (Singapore) Pte Ltd.

Guarantor:            China Metallurgical Group Corporation (“MCC”)
Guarantor Rating:    Baa3 (Positive) by Moody’s / BBB- (Stable) by S&P
Expected Issue Rating:Baa3 by Moody’s
Status:              Fixed rate, senior unsecured
Format:              Reg.S, registered form
Issue Size:          SGD benchmark
Tenor:                2 Years
Price Guidance:      low 3% area
Use of Proceeds:      For overseas business operations, repayment of foreign  currency loans, other indebtedness and working capital                          purposes
Terms:                SGX listing; SGD250k/1k denoms; English Law
Clearing:            Euroclear/Clearstream
JGCs:                BOC International, DBS Bank Ltd.
JBRs and JLMs:        BOC International, DBS Bank Ltd. (B&D), ICBC Singapore
Timing:              As early as today

China what? This is probably not a name that would ring a bell for investors.  But this is a very large Chinese SOE that is mainly in the engineering and construction business but is also involved in other industries too.  Here is a detailed description:

China Metallurgical Group Corporation is a state-owned enterprise in Beijing, China, engaging in EPC (engineering, procurement and construction), natural resources exploitation, papermaking, equipment fabrication, real estate development. It is one of the largest equipment manufacturers in China, and the only central-owned enterprise that is authorized to run pulp-making and papermaking businesses in China and overseas.

Given its multi-industry nature, finding direct comparable is obviously a challenge.  The leads have provided the comps below:

*** COMPS ***

FRASERS CENTREPOINT TURST    (*/BBB+/*)        2.90%  APR 19s    100.00  2.90%  SOR + 96
MAPLETREE GREATER CHINA COMMERCIAL TRUST    (Baa1/*/*)        3.20%  APR 21s    100.10  3.18%  SOR + 91                                                 Lend Lease    (Baa3/BBB-/BBB-) 4.625%  JUL 17s    103.60  2.90%  SOR   +143

Looking at Lend Lease which has a similar rating and tenor, the new China Metallurgical Corp bonds do look fair to slightly attractive in the low 3% area.

Another comparable worth looking at are their USD bonds.   The closest one is a bond issued by MCC Holding HK Corp Ltd which is directly wholly-owned by Metallurgical Corporation of China Ltd (MCC, unrated). MCC is a key subsidiary of China Metallurgical Group Corporation which is the guarantor for the new SGD issue.

MCC Holding HK Corp Ltd (A1/NR) 2.625% 16 June 2017 at a price of 100.75 swaps to an SGD credit spread of SOR+125 bps.  At low 3% (assuming 3.25%) the new SGD bond is coming at around SOR+185 bps.  Do note however that the USD bonds are rated A1  because they benefit from a Standby Letter of Credit (SBLC) issued by Bank of China.   Is a 60 bps pick up for a 5-notch rating drop (equivalent to an SBLC) fair?  It does not sound overly generous to me.  But then again, a rated IG name with the backing of the Chinese government and offering 3% for 2 years doesn’t sound like the worst bond investment you will ever come across.  With a chronic shortage of rated bonds in the SGD space, this deal should be well anchored by institutional investors.