Bank of China continues issuance flood

Euroweek, November 2 2011

Bank of China (Hong Kong) continued the flood of new issuance from Asian borrowers in dollars with a US$750 million issue of five-year senior notes last night. But a widening of the deal in the secondary market reflecting a toughening of market conditions in light of uncertain news from Greece. The sense is that the issuer may have been lucky to get a deal out in a window that has now closed.

The bond, led by BOC International, Citigroup and Deutsche Bank as joint bookrunners, tightened from price guidance of around 290 basis points over Treasuries to price at 280 during the US working day on Monday. But in early Asian trading the bond approached 300 basis points – one banker says it was briefly bid as wide as 302 – before settling around a 293 bid by lunchtime, 13 basis points wide of its price at issue.

Those close to the deal feel that the widening of the bond was in line with the broader market, and that the shock announcement yesterday that Greece will seek a referendum on the European rescue package had caused the widening. Relevant benchmarks behaved similarly, as did recent new issues, with KDB – which issued a US$1 billion benchmark last week – having moved from a 272 bid to 295 in a day, and being 14 points wider than its previous close at the time when BOCHK had widened 13. But others in the market grumbled at a deal they feel may have derailed the positive investment sentiment of the last two weeks that had allowed a number of benchmark deals to get away. “Trading 20 basis points wider by the morning is a shock with a new issue,” said one banker. “Yes the market was weaker overnight. But it printed late: it was pretty clear by then the market was heading south and there are ways for banks to defend an issue. It doesn’t help the capital markets to see such execution.”

One very striking element of the deal was its distribution: despite being a Rule 144a/Regulation S combination, 80% of the book went to Asia and just 4% to the USA, with the remaining 16% selling to Europe. (By investor type, the book was more typical, with 37% fund managers, 39% banks, 8% insurance and 16% private banks.)

The distribution clearly reflected the changing macroeconomic mood as the deal was sold. During the early Asian day, conditions appeared reasonably positive, before a more bearish tone caused the European market to open 2% down and the US 1.5% down. “4% going to the US was lower than we would have hoped for, but we had the referendum announcement in Greece,” said someone close to the deal. “Macro dynamics played a big part in the distribution of this deal.” The announcement of another Regulation S deal by ICBC also hit demand; Nomura’s trading desk, for example, was understood to be advising institutional investors to avoid the Bank of China deal in favour of ICBC.

While the deal attracted a $2 billion book, the issuer did not increase the size of the deal, perhaps mindful that it had probably already been lucky generating heavy demand from Asia just before the issuance window closed. “With $2 billion they could have looked for bigger, but they wanted to size it in the context of the macro backdrop we were in,” says one banker.