Air China prefers to issue bonds as debt

AIR China Ltd has scrapped a planned share sale and is preparing its first debt offering in more than three years, capping a 10-month period in which bond sales were almost 25 times greater than stock issuance.

The country's biggest carrier by market value will offer 6 billion yuan (US$961 million) of seven-year securities on Wednesday, a company filing showed. It last sold 3 billion yuan of 3.48 percent 2014 paper in March 2009, according to data compiled by Bloomberg News. China National Aviation Holding Co, the parent of the carrier, also plans to sell 1 billion yuan of three-year notes today.

Premier Wen Jiabao's calls to expand the market drove a 64 percent increase in bond sales to 3.18 trillion yuan, while equity issuance dropped 55 percent to 129 billion yuan as the world's second-largest economy slowed. Yields on top-rated companies' 10-year notes fell 10 basis points to 5.08 percent this year, as the country's key stock index shed 4.5 percent. They dropped 44 basis points to 1.65 percent in the US, according to Bank of America Merrill Lynch indexes.

"Air China's moves show a trend that the bond market has become increasingly popular for fundraising over the equity market," Zhou Meng, a Shanghai-based analyst at Shenyin & Wanguo Securities Co, said in a phone interview last Wednesday. "It's a good time for airlines, shipping companies and rail builders to tap the bond market as borrowing costs are lower."

Air China announced the planned sale two days after scrapping a planned private stock offering. It has also yet to complete a 1.05 billion yuan share sale to its state-owned parent and the timing for a second non-public equity offering isn't "ripe at the moment," it said in a filing to the Shanghai stock exchange on October 22. The Beijing-based carrier will use proceeds from the notes to repay bank loans and replenish working capital, according to separate company filings.

"The bond market has demand as the risk appetite is pretty low now with stocks falling," said Li Jun, a strategist at Central China Securities Co in Shanghai. "On top of that, the central government has encouraged bond sales to increase the proportion of direct financing."

Equity sales in China have shrunk this year as the Shanghai Composite Index heads for a third-straight annual loss.

Shares slide

Shares of Air China have slumped 20 percent this year in Shanghai as high fuel prices have added to investor concerns.

The carrier won't resume discussions on the planned share sale within three months, it said in the October 22 filing, without identifying the size or potential buyers. Air China company secretary Rao Xinyu declined to comment on why it canceled the plan in an e-mailed response.

The yield on Air China's September 2015 notes has climbed 17 basis points this month to 6.44 percent, compared with the benchmark 10-year government bond yield's 11 basis-point increase to 3.57 percent.

Five-year credit-default swaps protecting sovereign notes fell 2 basis point to 71 yesterday, according to data provider CMA. The contracts pay the buyer face value in exchange for the underlying securities if an issuer fails to adhere to its debt agreements.

Air China's long-term debt is 1.3 times its equity, higher than an average for its peers of 0.92 times, according to data compiled by Bloomberg News. The carrier plans to spend 57.1 billion yuan in the three years through 2014 on aircraft, construction of bases and pilot training, it said in the prospectus posted on China.money.cn last Wednesday.

Transport debt

Companies in China's transport sector have opted to tap the bond market because it is difficult to attract equity investors as earnings drop on the economic slowdown, Shenyin & Wanguo's Zhou said. China Shipping Development Co, a unit of the nation's second-largest shipper, sold 2.5 billion yuan of bonds in August.

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