CITIC Ltd:New issue thoughts,5Y FV at 125bp &10Y at 155bp

According to Bloomberg, CITIC Limited is conducting a new senior dualtranchebond issuance denominated in USD. The deal will form part of CITIC’sUSD9bn MTN programme. According to the source, IPG for the 5-year tranchehas been set at T5+150bp while for 10-year one it is T10+180bp. We expectthe total issue size to be in USD1-1.5bn range with the primary use ofproceeds being the refinancing of USD1.1bn bond due on 21-Jan-18.

    We believe that the FV for the upcoming new 5Y and 10Y issues of CITICLimited should be ~T5+125bp and ~T10+155bp. We remind investors that wecurrently have a Sell recommendation on the existing CITLTD bonds due in2023, 2026 and 2027 that are quoted at 115.1/122bp, 98.8/144bp 99.7/147bpbid-price/G-sprd respectively. In our view, CITIC Ltd is arguably the only largercredit in China IG space that has a material negative fundamental pressure.

    The company has already been downgraded by S&P to BBB+/Stable in Sep-17while Moody’s maintains it on A3/Negative. We believe that a ratingsdowngrade by Moody’s is quite likely in the next 3-6 months. CITIC Bankcontinues to determine CITLTD’s credit profile given that it accounts for ~90%of group’s assets and ~80% of the consolidated net income. The bank hasbeen already undergoing material de-risking given the capital constraints,deteriorating asset quality and drive by the government to reduce “shadowbanking” exposures. We expect these pressures to remain acute in 2018. InJul-17 CBRC approved RMB40bn convertible bonds issuance for CNCB thathas not been completed yet. We estimate that even if these bonds were issuedand converted into equity today, CNCB’s CET1 ratio would have improved to~9.3-9.4%, which is ~200bp below the current average for big-5 banks inChina. The key question then is whether CNCB would pursue de-risking evenafter the issuance of CBs, or would it resort to debt markets to replenish itsAT1 and T2 capital buffers, further pressuring its NIM.