China National Chemical Corporation (ChemChina) on May 24 priced a US$600 million perpetual capital security, brushing off China’s sovereign rating downgrade as it garnered huge investor demand.

The Reg S perpetual non-call five transaction was priced at par with a similar coupon and re-offer yield of 3.90%, which was in line with the final price guidance and 30bp inside of the initial guidance of 4.20% area. This was equivalent to a spread of 207.5bp over the US treasuries.

The bond performed in the secondary market and was quoted at a cash price of 100.60 in late morning of May 25.

Explaining how the ChinaChem deal navigated the market amid the rating downgrade, a banker familiar with the transaction notes that investors like the ChinaChem credit story and it is a name that is closely followed. The company held a roadshow in Hong Kong and Singapore on May 22 and May 23.

Moody’s Investors Service on May 24 announced that it was downgrading China's sovereign rating from Aa3 to A1, reflecting its expectation that China's financial strength will erode somewhat over the coming years, with economy-wide debt continuing to rise as potential growth slows.

“We saw a bit of a market wobble when the news on the downgrade was released in the morning, but the market environment just came right back to normal,” the banker says. “The deal benefited from the strong indication of interests shown by the investors during the roadshow, which gives ChinaChem the confidence to go ahead with the offering. This turned out to be a right decision and they achieved a pricing that was well through what people thought would be the fair value for this name, which was around 4% or low 4%.”

Indeed, shortly after the deal announcement, the size of the order book amounted to US$1.25 billion and by 2.30pm Asia time, it reached over US$3 billion and later peaked at US$6.9 billion.

The final order book was over US$5 billion with 180 accounts participating. In terms of geographic distribution, 87% of the paper was sold in Asia and 13% in EMEA. By type of investors, asset and fund managers accounted for 77%, banks and private banks 12%, sovereign wealth funds and corporates 7%, and insurance companies and pension funds 4%.

“ChemChina is operating in a space that has not seen much supply year-to-date and that also contributed to the investors’ interest in the deal,” the banker adds. “They want more exposure to the sector that has been relatively underserved in terms of supply.”

The proceeds from the bond, which was issued through CNRC Capitale Limited, will be used to refinance the group’s existing indebtedness and for general corporate purposes.

BoC International, HSBC, J.P. Morgan and Morgan Stanley acted as joint global coordinators for this transaction as well as joint bookrunners, along with CCB International and Natixis.

Moody’s, which assigns a Baa2 rating to the transaction, considers the notes as 100% debt-like securities because they have a high step-up cost of 400bp per annum after the first call date, and a dividend suspension clause that creates an incentive for the company to prepay the securities.

This assessment comes despite the notes demonstrating certain hybrid-like features such as the option of deferred coupons on a cumulative basis, and no put options for investors.

Meanwhile, in a much larger fundraising to finance its acquisition of Swiss pesticides and seeds group Syngenta, ChemChina has raised US$20 billion in perpetual bonds and preferred shares. The company has reportedly restructured the funding of the Syngenta deal to take on more equity and reduce its short-term debt.