Euroweek debt capital markets, July 21

Euroweek DCM, July 21 2011

SRI LANKA

The Democratic Socialist Republic of Sri Lanka has issued its fourth dollar benchmark in the global bond markets since 2007, reflecting renewed appetite for the country in the wake of the conclusion of its long civil war. On July 20 it raised US$1 billion in a 10-year global bond, paying a fixed rate yield of 6.25%.

That price is equivalent to 332.2 basis points over 10-year Treasuries, and represented a tightening from initial guidance of 6.5%. The pricing was a more than 40 basis point improvement over Sri Lanka’s previous 10-year bond offering, in September 2010, which launched at 373.1 basis points over treasuries. Moreover, the conditions within which this deal came are arguably more volatile than those that existed in September 2010.

“I was pleased and, I have to say, pleasantly surprised by the market,” says someone close to the deal. “We thought we had a window to issue before some big event risk, and results were better than we expected. Sri Lanka has paid no new issue premium and is marginally through where fair value is, even on the most aggressive stance. It’s a great result for the central bank.”

It’s not a bad result for existing investors, either, since earlier bond deals improved in its wake. The 2020 bond was trading at around 101 before the terms of the new deal were announced, and at the time of writing was at 102 and seven eighths. The new bonded traded well in the aftermarket too, and was at 101 and three eights yesterday afternoon.

The deal, led by joint bookrunners Bank of America Merrill Lynch, Barclays Capital, HSBC and the Royal Bank of Scotland with Bank of Ceylon as co-manager, was helped considerably by a credit rating upgrade by Fitch to BB- that came in the middle of a roadshow. Moody’s and Standard & Poor’s have also moved Sri Lanka to a positive outlook. Correspondingly, $7.5 billion of orders came in from 315 accounts. The roadshow had taken in Singapore, Hong Kong, several US cities and London.

Partly, the deal’s success reflects appetite towards emerging market sovereigns in general, which have obviously become more appealing compared to several developed country peers. Funds are continuing to flow into emerging market bond funds, and the idea of getting paper in a newly-upgraded sovereign with some scarcity value – on average, it has issued once a year since rejoining international markets in 2007 – was attractive.

The deal’s distribution was well diversified geographically. The USA was the largest component, at 43%, followed by Europe at 30% and Asia at 27%. Fund managers accounted for 86% of distribution, with banks and private banks 8%, corporates 3% and insurance companies 3%. Those close to the deal say the fund managers were largely real money. “The quality of the book was among the highest I have seen for quite a long time,” says one.

SMBC

Sumitomo Mitsui Banking Corporation has raised US$2 billion in a three tranche fixed and floating rate bond issue.

The deal, which priced on July 18, was made up of US$1.1 billion of 2.9% senior bonds, due 2016; US$400 million in three-year senior bonds, paying 1.9%; and US$500 million of senior floating rate bonds, due 2014. The floating rate bonds will pay three-month dollar Libor plus 0.95%, payable quarterly.

Although SMBC has launched a number of fixed rate yankee bonds in recent years, with similar three- and five-year fixed rate bonds last July and then again in January, this latest issue marks the first time the issuer has added a floating rate instrument. This broadened the investor base. “With a five year bond you’re talking about asset managers, banks, insurance companies and so on, but with floating rate bonds there is a different investor base,” says someone close to the deal. “Specifically, money market funds and bank treasuries. Those are the core buyers for three-year floating rate. There is minimal contamination between the investor bases.”

Despite volatile conditions, the deal attracted $5.8 billion in total demand, according to someone close to the deal. The deal featured six joint bookrunners: Goldman Sachs, Citigroup, Barclays, Deutsche, SMBC Nikko Capital Markets, and Credit Suisse. On Friday New York time, with the European debt situation worsening, they opted to monitor headlines over the weekend to assess whether further volatility was likely, then decided on Monday morning Tokyo time to launch. Pricing appears impressive compared to established international financial credits active in the yankee markets; while JP Morgan increased a five-year senior deal by $500 million and paid 160 basis points over treasuries, Sumitomo paid 150 over for the same tenor.

CHINA SHANSHUI

China Shanshui Cement completed a RMB1.5 billion CNH bond issue last Friday in a rare example of good news from the Chinese credit space. The deal was completed in a week during which three other dim sum deals were pulled.

The cement group, rated BB/BB- by Standard & Poor’s and Fitch, raised its funds in three-year bonds and paid 6.5% to do so, at the wide end of a 6.25-6.5% marketing range. Bank of China International, Credit Suisse, Deutsche Bank and UBS were joint bookrunners on the deal.

Shanshui Cement may have been helped by the fact that it is a very recent borrower in dollars, having raised $400 million in a five-year deal in May. While some raised eyebrows at it returning to the markets so swiftly, it does appear to have helped the issuer. “The fact that it issued the dollar bond was positive for the credit,” says someone close to the deal. “That bond, vis a vis the rest of the Chinese industrial space, was trading well, and above par; that was a good indicator for credit investors.” During a roadshow in Hong Kong and Singapore, which saw 35 accounts in one-on-ones or groups, few issues were raised about the credit, but rather concerns about market volatility.

Bookrunners said that although the deal could have been completed at a lower size at the 6.25% end of the range, in these markets it made more sense to take funds while they were available.”It was obviously a deal that could have happened at a tighter spread, but in this market the issuer was encouraged to get as much funding done as possible,” says someone close to the deal. “In my view, if you look at the next few weeks, the macro noise doesn’t die down. If there’s a market window, all issuers should go with it.”

The deal went almost entirely to Asia – 99%. Funds accounted for 50% of the deal, private banks 24% and banks 16%. It was approximately twice covered with a book around the RMB3 billion level.

Shanshui Cement was a rare example of braving the markets last week. China Eastern Airlines, China ITS Holdings and Hangzhou ZhongCe Rubber (through its Hai Chao Trading subsidiary) had all planned dim sum bonds, only to postpone or outright axe them. Hangzhou ZhongCe did so despite having a guarantee from China Eximbank, the first such credit enhancement for a dim sum bond.

The dim sum pipeline is modest, with Qingdao Haier Holdings a rare exception, with an expected RMB2 billion bond through HSBC and UBS. For others, there is little appeal in such choppy markets. “The better borrowers are still looking to the dollar market,” says one banker. “If you’re BB or BB-, that market makes more sense; you’re not going to get pricing like in January, but it will be executable. Issuers who don’t have ratings may migrate to the CNH market. But as there are more CNH deals to choose from, investors are going to become more discerning.”

THAILAND

Thai Union Frozen Products Public Co completed a Bt6.75 billion multi-tranche local currency bond in Thai baht this week. The deal, led by HSBC, Siam Commercial Bank and Kasikornbank as joint bookrunners,

The deal reflected continuing enthusiasm for Thai baht bonds, and was notable for including a Bt1.5 billion 10-year tranche alongside a Bt1.95 billion five-year and a Bt3.3 billion three-year. This was the longest tenor the issuer has so far achieved.

The deal priced at a coupon of 5.02%, 4.7% and 4.51% respectively across the three tranches, and was well covered by institutional investors, according to someone close to the deal.

HDB

Singapore’s Housing Development Board upsized a 10-year deal to S$600 million this week, reflecting a taste for emerging market debt provided the credit and territory is strong enough.

The deal, originally planned as a S$400 million print, priced at just 2.815% for 10-year paper, which is 32.5 basis points cheaper than a S$500 million 10-year deal from the same issuer in March. ANZ, CIMB, Citigroup, HSBC, OCBC, Standard Chartered and UOB were lead managers on the deal – a seven-bank lead group for a single-tranche deal equivalent to just under US$500 million.

The bonds went to around 40 accounts and were understood to have included some big orders from foreign accounts based in Singapore. The success appears to reflect growing optimism about local Asian currencies in the face of continuing concern about dollars and euros.