Friday, 19 July 2019

Making waves

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CNOOC’s acquisition of Canada’s Nexen set a new standard for overseas Chinese M&A, coming with a well-thought-out strategy and a sophisticated financing package.

A Chinese group performs at the Sino-US Water Skiing Dual Meet in Nanjing.


A Chinese group performs at the Sino-US Water Skiing Dual Meet in Nanjing.

China National Offshore Oil Corp’s blockbuster purchase of Canadian energy firm Nexen in February was part of the PRC oil giant’s sophisticated plan to gain a foothold in the global energy sector after its 2005 failure to buy Unocal in the US.

The purchase also demonstrated CNOOC’s ability to use the financial markets to its advantage.

CNOOC’s whopping US$15.1bn acquisition of Nexen required the Chinese company to make the Canadian Government comfortable with the purchase – something it failed to do when it attempted to buy Unocal for US$18.5bn. The acquisition also required CNOOC to line up financing to make the sale go smoothly. It achieved both objectives.

The Chinese oil giant showed its muscle more recently, when it orchestrated a somewhat smaller, yet equally interesting, financing exercise for its US$1.93bn agreement with the UK-based BG Group to acquire a 40% stake in the Queensland Curtis LNG project in Australia.

Arranging financing for the Nexen acquisition began in July 2012, seven months before the takeover closed. CNOOC had enough money on its balance sheet to make the purchase outright – Rmb99.19bn (US$15.54bn) of cash and short-term investments as of December 31 2011 – but the world’s biggest energy explorer decided to raise some of the acquisition price through a multi-dollar bridge loan that it would repay later with bonds and borrowings.

CNOOC received financing proposals from more than 30 banks. It ended up arranging a US$6bn 12-month bridge financing with 20 banks, closing the facility in February 2013. The margin on the bridge opens at 80bp over Libor for the first six months, before it steps up to 100bp for the next three months and to 120bp thereafter. There was an upfront fee of 25bp.

With all the loan subscriptions on offer from the banks, CNOOC could have raised as much as US$20bn, but it did not want to add to its gearing and jeopardise its Aa3/AA–/A+ (Moody’s/S&P/Fitch) ratings. The rating agencies had expressed concerns with CNOOC’s debt after the Nexen acquisition was announced.

To repay a portion of this financing, CNOOC sold a US$4bn four-tranche bond in May. It was the biggest conventional G3 offshore primary market issue in Asia since Hutchison Whampoa sold a US$5bn bond in 2003. The offering attracted orders of $24bn.

That was CNOOC’s largest foray in the international bond markets and its first since April 2012. It was also the largest bond from a Chinese state-owned enterprise and CNOOC’s first SEC-registered print.

“Knowing its ongoing financial needs, CNOOC deliberately leaves something on the table when executing deals. That is a smart move as that can keep investors happy and ensure secondary performance.”

The final price of the bond was at the tight end of guidance that had been revised twice. The bonds were priced to yield 95bp over three-year Treasuries, 120bp over five-year Treasuries, 155bp over 10-year Treasuries and 150bp over 30-year Treasuries.

The successful four-tranche print not only rallied in secondary trading, but also prompted the prices of other outstanding SOEs bonds from China to tighten.

Just four months after that, CNOOC was back in the bond market with a US$1.3bn 10-year bond, priced to yield 185bp over Treasuries, and its first euro-denominated piece, a €500m (US$687.5m) seven-year bond priced to yield mid-swaps plus 115bp. Both offerings were to fund the Australian project.

The maiden euro deal was undertaken to mitigate CNOOC’s currency risks because part of the Australian acquisition had to be settled in Eurodollars.

Euro investors flocked to the deal, in part because the seven-year maturity offered yield without introducing too much risk. CNOOC took the oversubscription crown in Europe that week, raking in US$7.8bn from 320 accounts and a final book of €3.2bn.

“It was clearly intended as something of a showpiece for China Inc,” said a syndicate head not involved in the deal.

The euro portion, announced when bookbuilding began on the dollar leg, pointed to the growing attraction of euros for Asian issuers, with decent cost savings still available after swapping back into US dollars.

CNOOC’s successful dual-currency offerings paved the way for another Chinese oil major as, two

weeks later, Sinopec completed a US$3.5bn jumbo financing that included a US$2.75bn US dollar Global, split into tranches of five, 10 and 30 years, as well as a separate euro offering of a €550m (US$744m) seven-year bond.

A few days after CNOOC and Sinopec, Korea Gas also tapped the euro market.

CNOOC has actually tapped the loan market twice this year, raising a total of US$9bn. Aside from the US$6bn bridge loan for Nexen, CNOOC also arranged a US$3bn two-tranche loan in September for its Queensland Curtis LNG acquisition in Australia.

The US$3bn loan had a US$2bn one-year tranche and a US$1bn five-year tranche. Pricing on the loan was heard to yield less than 80bp for the one-year tranche and around 140bp for the five-year.

In addition to its extensive loan and bond financings this year, CNOOC listed its shares on the Toronto Stock Exchange on September 18. The move helped win the Canadian Government’s approval for its Nexen purchase, and expanded CNOOC’s equity investor base.

Market participants praised CNOOC this year for the way it handled its many forays to the markets.

“Knowing its ongoing financial needs, CNOOC deliberately leaves something on the table when executing deals,” one investor said. “That is a smart move as that can keep investors happy and ensure secondary performance.”

Another market player echoed the view, noting that maintaining long-term relationships with investors was important for regular issuers like CNOOC and Sinopec, especially in the wave of going global through numerous overseas acquisitions.

To see the digital version of this report, please click here.

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