State Grid Corporation of China made a successful debut in the offshore bond market as it priced on May 15 a multi-tranche offering totaling US$2 billion, demonstrating its status as a leading state-owned enterprise (SOE) in the mainland.

The Reg S/144A deal comprised of five-year bonds amounting to US$500 million, which were priced at 99.843% with a coupon of 1.75% to offer a yield of 1.783%. This was equivalent to a spread of 95bp over the US treasuries, or at the tight end of the revised guidance of 100bp area (+/- 5bp).

The second tranche was for 10 years amounting to US$1 billion, which was priced at 98.982% with a coupon of 3.125% to offer a yield of 3.245%. This represented a spread of 130bp over the US treasuries, also at the low end of the revised guidance of 135bp area (+/- 5bp).

The final tranche was for 30 years amounting to US$500 million, which was priced at 98.082% with a coupon of 4.375% to offer a yield of 4.492%. This was equivalent to a spread of 135bp over the US treasuries, likewise at the tight end of the revised guidance of between 135bp and 140bp.

All the three tranches were holding well in the secondary market in the morning of May 16 as they all tightened by 1bp each.

This was a great outcome for State Grid as the final pricing came well inside its closest comparable CNOOC, China's largest producer of offshore crude oil and natural gas, which priced a four-tranche bond deal totaling US$4 billion two weeks earlier. CNOOC priced its three-year tranche at 95bp over the US treasuries, five-year tranche at 120bp, 10-year tranche at 155bp and the 30-year tranche at 150bp.

The CNOOC bonds have tightened in the intervening week in the secondary market and on May 15, the five years were quoted at 105bp, the 10 years at 140bp and the 30 years also at 140bp. So what the arrangers did was to announce the State Grid deal with fairly aggressive initial guidance at 110bp area for five years, and 145bp area for both 10 years and 30 years.

"Even with fairly aggressive starting point, we saw a strong response to the deal with the order book garnering a total of US$10 billion across all tranches," says a banker familiar with the transaction. "This was a good outcome and one that really drove home the strength of the issuer on a standalone basis and also its rarity value. The fact that it was able to pierce through CNOOC in terms of the final pricing was an excellent result."

A significant achievement was posted in the five-year tranche at it marked the first time that a Chinese issuer has printed a deal in this tenor in the US dollar bond market at a double-digit spread over the US treasuries. CNOOC likewise priced at a double-digit spread in its latest transaction, but it was on the three-year tranche.

Before launching the transaction, State Grid held a roadshow to meet investors in Hong Kong, Singapore, London, New York, Boston and Los Angeles. "The response was strong given the profile of the company and the sector it is in," the banker says. The company likewise secured ratings from the three major rating agencies - Aa3 stable from Moody's Investors Service, AA- stable from Standard & Poor's and A+ stable from Fitch Ratings. As the banker points out, State Grid is the first major Chinese SOE to receive ratings from all the three top rating agencies.

The US$10 billion order book came from 380 accounts with the five-year tranche accounting for US$3.2 billion worth of demand from 127 investors. The bonds were allocated 49% into Asia, 37% in the US and 14% in Europe. By the type of investors, funds bought 45%, banks 34%, insurance companies, pension funds and sovereign wealth funds 19%, and private banks and others 2%.

The 10-year tranche garnered slightly more than half of the total demand at US$5.1 billion from 164 accounts with 53% of the paper sold in the US, 37% in Asia and 10% in Europe. Funds again accounted for the bulk of the bonds with 53%, followed by insurance companies, pension funds and sovereign wealth funds with 31%, banks 14%, and private banks and others 2%.

The 30-year tranche had an order book of US$1.7 billion, with 89 accounts participating. Majority of the bonds at 68% were allocated in Asia, while 24% were sold in the US and 6% in Europe. The insurance companies, pension funds and sovereign wealth funds drove this tranche as they accounted for 60% of the paper, while funds took 32%, banks 7%, and private banks and others 1%.

BOC International, HSBC, Goldman Sachs and Morgan Stanley acted as the joint global coordinators for the transaction, as well as joint bookrunners and lead managers along with Citi, Deutsche Bank, ICBC International, J.P. Morgan and UBS.

Established in 2003, State Grid is 100% owned by State-owned Assets Supervision and Administration Commission under China's State Council. It owns and operates the bulk of China's national power grid network, servicing 88% of the Chinese territory with a population of over 1.1 billion.