Euroweek debt capital markets, October 28 2011

Euroweek debt capital markets roundup, October 28 2011

SUN HUNG KAI

Asia’s dollar markets have re-opened in style, with new deals from Sun Hung Kai Properties, Korea Development Bank and Bank of East Asia this week following on from last week’s $1 billion benchmark from Korea National Oil Corp (KNOC), the first dollar benchmark from Asia in six weeks.

Last night a 5.5 year deal, expected to raise at least $500 million, was approaching completion from KDB. Earlier in the week, a $500 million five-year issue from Sun Hung Kai Properties, the Hong Kong developer, had become the first dollar corporate bond transaction in Greater China for three months. Several Korean benchmarks are now expected to follow.

The KDB deal, lead managed by Bank of America Merrill Lynch, Credit Suisse, Daiwa, Goldman Sachs, KDB Securities and Mizuho, was last night expected to price at around 300 basis points over five-year US treasuries. Credit analysts considered that attractive, and noted that if guidance tightened to 280-290 basis points over, it would represent fair value. KDB’s most recent issue was a $750 million print of five-year paper in March. Since KDB is expected to be privatised with an IPO in 2012, it is understood that all its foreign currency bonds will become explicitly guaranteed by the government, potentially making the issue more attractive. “KDB started out very aggressively but the market put them right big time,” said one rival banker. “Now they look in good shape.”

One of the most notable elements of the Sun Hung Kai deal was that it carried only one bookrunner, Standard Chartered, despite being a significantly-sized transaction. Market talk suggested that HSBC had originally been on the deal before withdrawing, but in fact Euroweek understands HSBC was never appointed and had not put itself into contention in light of potentially low fees. This deal could have been considerably bigger – it is understood the final book size was around $1.5 billion, with the book covered inside an hour – but Stanchart had told investors it would be no larger than $500 million.

Being well covered, the deal priced at the tight end of a 245-250 basis point guidance range, helped by anchor orders. The deal carried a 3.5% coupon, reoffered at 99.901 to yield 3.522%. A total of 103 orders were placed, with Asia dominating allocation: those close to the deal said Hong Kong and China accounted for 60%, Singapore 30%, and Europe and the Middle East 10%. Fund and asset managers were the main source of interest, accounting for 70% of allocation. Analysts put the new issue premium at 25-30 basis points. The notes were issued off a $4 billion MTN programme and were rated A1/A+ (Moody’s/S&P).

A third deal, a lower tier two subordinated bond for Bank of East Asia, was also expected to price last night. At 10.5 years non-call 5.5, this Regulation S bond would have the longest duration of the three. Citigroup, Deutsche Bank and UBS were bookrunners on the proposed deal, which was being discussed at around 500 basis points over 10-year Treasuries on Thursday evening, give or take 12.5 basis points. The size was not clear at press time but those close to the deal said it would be a “benchmark” transaction.

Sun Hung Kai, KDB and last week’s KNOC benchmark suggest there is still life in the Asian dollar investment grade debt market after a previously moribund six weeks. Several Korean borrowers are believed to be looking at new issues, among them Shinhan Bank and Hana Bank. Indeed, some analysts are already worrying about oversupply from Korea, suggesting as many as seven Korean issuers (in addition to KDB) should be expected to launch in the near future given their 2012 maturity schedules and several recent investor roadshows.

Yesterday, markets appeared to be cautiously positive about announcements from the Eurozone, which is like to prompt many investment bankers to seek an issuance window in coming weeks before any new wave of uncertainty has a chance to afflict the markets.

DALIAN/ICBC

The changing dynamics of the dim sum bond market were thrown into stark relief this week with a RMB400 million issue from Dalian Port. The trade followed widespread discussion of a RMB1 billion deal during its roadshow, and came at the wide end of pricing. Yet just as that trade suggested a fading of the dim sum market, Industrial and Commercial Bank of China (Asia) set about launching the first issue of subordinated paper into the offshore renminbi market.

The Dalian Port deal was being closely watched by the market as a litmus test of how expectations have changed between investors and issuers. “It’s a matter of issuers coming to terms with having to offer a higher yield than they used to,” said the portfolio manager of one offshore RMB fund. Recent deals from both Khazanah and CNPC, while able to raise the funds they wanted to, had had to increase the coupon they were paying to get the deal through, he noted. “You are no longer at the stage of ICBC issuing two-year bonds at 1.1% and the market lapping it up. Going forward issuers will have to offer something more commensurate with their risk. Demand is no longer overwhelming supply.”

This portfolio manager did not buy into the Dalian issue. “There’s nothing particularly wrong with the credit. At the right price for the right ticket size, it will make sense for some managers. But the days of everyone buying into every issue without assessing credit risk, just because they have to hold something, are gone.”

In Dalian Port’s case, it had to pay 5.8% to get its three-year deal away – guidance had been 5.75%, plus or minus 5 basis points – and then got less than half of what its bankers had initially indicated on a Hong Kong and Singapore roadshow in early October. The total book was just over RMB450 million from “over 20” accounts, according to someone close to the deal; 93% of it eventually went into Hong Kong and just 7% into Singapore. 40% of the deal’s distribution went to banks, 28% to private banks, 20% fund managers and 12% others. The issuer is quite familiar to international investors, having listed in Hong Kong in 2006 and then Shanghai late last year.

The deal also involved a late change in the lead manager structure. Bank of America Merrill Lynch, Bank of Communications and Deutsche Bank ended up as joint global co-ordinators, with BNP Paribas, CCB International and UBS joint bookrunners and lead managers. Bank of Communications and CCB had not been part of the team at the time of the roadshow.

The ICBC deal will be a particular test for the RMB market to price, as it breaks considerable new ground. Not only is it the first subordinated bond in offshore RMB, it is also the first Asian bank to issue a Basel-3 compliant lower tier two instrument. It is rendered compliant through a mechanism called a non-viability loss absorption clause, or NVLA. “This says that the instrument must either be converted to equity or written down to zero in the event a bank becomes non-viable,” says someone close to the deal, saying that the HKMA would determine that non-viability. Since ICBC Asia is not listed (although it once was, before being taken private), in this deal the bond would be written down to zero if such a non-viability event happens, rather than converting to equity. However, given the size of parent ICBC, this is not expected to put off investors; Fitch rated the structure A- this week.

It will, however, require some explaining to investors. It will be led by HSBC and ICBC International as global co-ordinators, with Bank of China (Hong Kong), Credit Suisse, DBS Bank and Goldman Sachs as joint lead managers and bookrunners; they have been meeting investors and explaining the structures head of a likely launch next week. “It’s different to what investors are used to, but we’ve had conversations with investors over the last six months and sensed there was interest for a subordinated bond in RMB from one of the quality banks,” says someone close to the deal. “There will be an investor education process.”

Bankers are divided on what might happen next in the dim sum issuance market, with a great deal dependent on global sentiment. This week some managers said they still expected RMB30-40 billion of issuance in the fourth quarter of the year. “There are lots of Chinese banks, Chinese quasi-sovereigns and multinationals planning to issue,” said one. Another added: “Our pipeline is robust and not just with the top-rated names. There are several strong high yield issuers ready to go as well.” But others feel appetite has flagged and that the market is winding down for the end of the year.

On the plus side, mainland-incorporated companies can now issue dim sum bonds, and several are already showing signs of preparing to do so; last week Baosteel Group received approval to raise up to RMB6.5 billion in Hong Kong.

Also, there still appears to be life in the certificate of deposit market. This week Standard Chartered led a nine-year CD deal – the longest in this market to date – from China Development Bank Hong Kong. It carried a 3.3% coupon.

WOOLWORTHS

Woolworths has underlined the strength of the Australian corporate sector with an A$700 million issue of unsecured, subordinated notes, upsized from a planned A$500 millon.

The transaction was made up of an A$675 million issue alongside a shareholder offer for up to A$25 million which will not close until November 17. Like many Australian corporate debt securities, it was structured as a hybrid, in that the notes will rank below senior debt but ahead of common equity, and will qualify as 50% equity credit, bolstering debt leverage ratios. Despite that, they are fundamentally debt securities, with a 25-year maturity and a coupon of 3.25% – the tight end of a 325-250 basis point guidance range over three-month BBSWs. Overall yield will be just short of 8%, a rate that proved extremely attractive to both institutional and retail buyers. After five years, the notes can be redeemed; if Woolworths does not call them, their rate will step up by one percentage point. Also after five years, the subordinated notes will no longer count as equity credit, making it extremely likely Woolworths will call them then.

JP Morgan, NAB and UBS are joint lead managers on the deal, which concludes Woolworths’ fundraising requirements for the year.

A corporate issuer raising a large volume of funds and then upsizing the deal on the back of demand is something of a rarity in today’s developed world markets. “If you are a quality issuer in this market – and a quality issuer exposed to an economy that is still in very good shape – you are going to do well,” says one fund manager in Sydney. “There hasn’t been a lot of corporate issuance so there is a lot of underlying demand.” Australian funds remain picky, though, he said. “Australian issuers issuing into Australia will find a good reception for their issues, but that won’t be universally true,” he said. “If a troubled European financial came here they wouldn’t get the same reception as Woolworths, or even an Australian bank, because the credit quality is very high here. There is a lot of demand for spread product – but high quality spread product.”

The sentiment was underlined by a successful A$200 million five-year MTN issue from Airservices Australia through ANZ and Commonwealth Bank of Australia on Wednesday. This deal, which raised a A$700 million order book, was also increased in size from a planned A$100 million. These bonds were AAA rated, reflecting government ownership, and hence priced something like an agency, at just 110 basis points over asset swaps.

BRIEFS:

Philippine Long Distance Telephone (PLDT) is expected to issue Ps5 billion of notes through HSBC and First Metro. In a filing to the stock exchange it said it will use the money for capital expenditure, network expansion and to refinance debt.

Daejeon Riverside Expressway Funding is to refinance a Y13 billion samurai which matures in November. The new deal is expected to have one, two and five year tranches of Y4 billion apiece for a total Y12 billion. Mitsubishi UFJ Morgan Stanley has been mandated as sole lead and the deal is scheduled to price around November 2.