* China nuclear utility to issue first ever dollar bonds
* Large future investments and low cashflow make it a weak credit
* Investors view it as ultra-safe given state support (Updates final pricing of the bonds.)
By Christopher Langner
SINGAPORE, Sept 26 (IFR) - Investors on Thursday were offered the opportunity to lend money for the Chinese to invest in mining uranium in Namibia, a deal that, counterintuitively, may be one of the safest bonds on offer in Asia this year.
China General Nuclear Power yesterday priced a five-year dollar bond at 220bp over US Treasuries, to be issued through the company’s uranium mining and trading subsidiary, China Uranium Development Co Ltd.
Since the Fukushima disaster in Japan in 2011, the credit markets have viewed the nuclear sector with concern. Tepco bonds widened dramatically in the aftermath, and investors have proven resistant to the utility’s return to market. And Germany’s subsequent pledge to shut down nuclear reactors has hit the country’s utilities hard.
So funding for uranium mining in Africa for a Chinese company does not sound, initially, like the most straightforward or safest investment.
Even bankers admit that they balked when they first talked about the deal. “That was one which I remember looking at and thinking: ‘Wait a minute’,” said one banker not involved in the transaction.
When it comes to how safe investors should feel about getting their money back, however, China General Nuclear Power’s bonds may be among the best bets currently available.
Not because China General Nuclear Power is a dream credit with stellar profits and potential - it is not.
On a standalone basis without government support, Moody’s rated it Ba2, below investment grade. Fitch noted that: “Given limited internal cash generation and the large development capex, China Uranium’s stand-alone financial profile is weak.”
One portfolio manager expressed a similar view: “They have huge capital expenditure needs, the sheer scale of what they are doing is off-putting.”
Moody‘s, however, rates the company A3 and Fitch A+, based on its “strategic importance to China’s nuclear energy policy,” as Moody’s put it in a report.
Again, the portfolio manager agreed: in this case, the support from the government of China is the reason why these bonds are actually very safe. “The sector is key for the country,” he said.
Indeed, China General Nuclear Power is one company that every analyst in Asia expects will see full support from the central government. And that is worth more than pristine cashflows, analysts said.
China has much more at stake than its credibility with global bondholders. As one of the fastest growing economies in the world, it has been grappling with the supply of energy to its companies and citizens.
Until very recently, the country found the answer to its growing power demands in coal-fired plants, which were fed by abundant coal reserves in China and its neighbour Mongolia.
As a result, the country surpassed the United States as the biggest emitter of greenhouse gases in 2007, and according to the Asian Development Bank, now has seven of the 10 most polluted cities in the world.
The thickening smog has also led to increased popular unrest. Authorities have responded by increasing the generation of clean energy.
The push has already made China the biggest producer of hydroelectric power in the world. But power consumption - which increased 8.8% in August versus the same month in 2012 - continues to outpace the slow growth of clean energy production.
Hence, fossil fuels, mostly coal, still account for roughly 80% of power generation in China.
Nuclear power is part of China’s push toward cleaner air. The country already has 14.8 gigawatts of installed nuclear generation capacity, according to the National Development and Reform Committee. That, however, met only 1.9% of last year’s power needs.
The government agency recently said it plans to increase that capacity by 20% this year alone, adding 3.24 gigawatts to the grid. It also expects to approve the construction of nine new nuclear power plants, and by 2020, plans to increase that nuclear capacity fourfold.
All these new power plants will need uranium. Lots of it.
And that is where international bond investors come in. The proceeds from the dollar bond will be used for mixed purposes. But the understanding among investors is that it will go to the development of the Husab mine in Namibia, the third largest uranium-only mine in the world, recently bought by China Uranium Development.
China General Nuclear Power said in its presentation to investors that it has secured enough uranium production to fuel 30 plants for 30 years.
The trouble is that China already has almost 20 plants in operation and has some 29 under construction. That means many more uranium mines will need to be bought and developed.
Much of that will be funded with bonds. Since China wants to ensure it has a steady supply of uranium, it is widely expected to ensure that bondholders get their coupon and principal payments safely.
Nuclear bonds from China, may, after all, be some of the safest investments in Asia right now. (Reporting By Christopher Langner, editing by Alex Chambers and Julian Baker)