Content area
Full Text
Tianqi Lithium Corp and CEFC China Energy Co were thrust into the limelight this week after their existing dollar bonds saw big movements in the secondary market — the former following an acquisition announcement and the latter because of an onshore bond default.
China’s Tianqi Lithium said last Friday that it has agreed to purchase close to 62.6m A-shares of Sociedad Química y Minera de Chile (SQM) for $4.07bn in cash, from Canadian fertiliser producer Nutrien. The shares are equal to a 23.77% stake. The deal is expected to be completed in the last quarter of the year, according to a stock exchange filing.
The announcement caused Tianqi’s outstanding $300m 3.75% 2022 bond to slide in the secondary market, from a spread of 205bp over US Treasuries before the acquisition was made public, to 288bp over on the bid side by the end of Tuesday.
“An investment grade-rated bond is trading on cash instead of trading on spread,” said a Shanghai-based trader. “It means that the market is now seeing this as high yield.” He added that the bid price of the paper was 92 — the yield equivalent of close to 5.8%.
That’s not the only trouble for Tianqi. As a result of the acquisition, Shenzhen-listed lithium products supplier Tianqi might actually loose its investment grade rating, warned Moody’s. The ratings agency said the proposed deal carries “enough risk to Tianqi Lithium’s credit quality to jeopardize its investment grade rating” as its leverage could potentially increase from 1.7 times in 2017 to 3.9 times in 2019, a level that is “high for its current rating”. Moody’s put Tianqi’s Baa3 rating on review for downgrade late on Friday.
Excluding the financial impact of the SQM-Tianqi deal, Moody's estimates Tianqi’s leverage would actually improve to about 1.5 times in 2018 and about 0.9 times in 2019. The transaction, however, is viewed as credit neutral to SQM and Nutrien.
“Our review of Tianqi...