Euroweek Debt capital markets, December 2 2011

Euroweek, December 1 2011

ICBC

A long-awaited deal from ICBC successfully cleared the market late on Wednesday, enticing investors with the first true exposure to a mainland Chinese bank in an international bond market.

The US$750 million 10-year senior unsecured bond, issued by a vehicle called Skysea International Capital Management, was guaranteed by ICBC’s Hong Kong branch. This is a crucial distinction: Hong Kong is a full branch and represents exposure to the parent, whereas all other deals from mainland Chinese banks in the dollar markets have been through subsidiaries such as ICBC Asia or Bank of China (Hong Kong), giving exposure instead to Hong Kong subsidiaries. “This transaction provides the market with the very first direct exposure to the Chinese banking space,” said someone close to the deal. “All the other names are quasi, pseudo Chinese banks.”

Perhaps for this reason, the deal was marked by far higher than usual participation from Asian insurance companies. 95% of the deal went to Asia – Europe and the US represent no happy hunting ground at the moment – with insurers representing 33% of the book. “It’s not common at all to allocate one third into insurance,” said one banker. “They are buy and hold, high quality accounts, so we wanted to give as much bonds to them as we could, and we managed to find quite a number of anchors from insurance companies.”  Banks took 29%, fund managers 25%, private banks 8%, and corporates and others 5%. “It’s a unique opportunity for insurers to get direct exposure to the Chinese banking sector, and there are not many 10 year issues – insurance funds prefer that longer duration to match their liabilities,” the banker said.

For some weeks, market talk has been about ICBC’s willingness, or otherwise, to accept the price necessary to issue in such a challenging market. In the event they came at 310 basis points over Treasuries, inside guidance of 320, and proved popular, with an orderbook of over $2.25 billion from 160 accounts. “The issuer clearly has been very price conscious,” said one banker close to the deal. “They did the roadshow back in October and they have been monitoring the markets. It’s been very volatile.”

UBS, Barclays and ICBC International were joint global coordinators, alongside HSBC and Standard Chartered as joint bookrunners, on the Regulation S deal, which carried a 4.875% coupon with a re-offer price of 97.708%.

This week has looked brighter for debt markets after a miserable and volatile spell, although it remains to be seen how long it lasts. “I think the window has been open since the start of the week,” one banker said. The global joint intervention by central bankers is felt to have had a bigger impact on equity markets than debt markets, but “in the credit market we do feel better as well,” a banker said. ICBC moved in about 10 basis points on Thursday morning from launch, in line with the broader market.

An illustration of the improved conditions was a deal in the market as Euroweek went to press for Hyundai Motor Company, through its Hyundai Capital America vehicle. This 5.5 year 144a/Regulation S deal was capped at $500 million, and expected to raise that amount, in a deal through Bank of America Merrill Lynch, BNP, HSBC, JP Morgan and Morgan Stanley. It was being offered at guidance of 345 basis points over five-year treasuries as of Thursday afternoon, Asia time. The 5.5-year tenor is becoming more commonplace in Asia; KDB launched a $1 billion deal of that duration in October, and a subsequent bond from Bank of East Asia was 10.5 years with a call at 5.5.

Other deals expected from the market do not appear ready to launch. Reliance Industries has appointed Bank of America Merrill Lynch, Citigroup and UBS as lead managers on an expected US$1 billion 10-year; someone close to the issuer said they were “still watching and waiting” last night. And Chinese internet company tencent has completed a worldwide roadshow, concluding in New York, for a Reg S/144a dollar deal of its own through Deutsche, Goldman Sachs, Credit Suisse and HSBC, but yesterday the leads were “continuing to monitor the market”.

DIM SUM

The dim sum bond market continues to break new ground after last week’s landmark Chinese corporate issue from Baosteel. This week brought a new issuer and the first mandate to Latin America, even as the CNH deposit base in Hong Kong declined.

The new issuer was BMW Australia Finance, whose RMB400 million one-year deal was the second from an Australian corporate after Fonterra, which launched a RMB300 million three-year deal in June.

The deal paid a coupon of 2.4% and was re-offered at 2.4%. BNP Paribas was sole bookrunner on the deal.

Further ahead, the Mexican telecommunications group America Movil will hit the road next week for a dim sum bond of its own – the first from Latin America. It is understood the company, owned by Carlos Slim, will meet investors in Singapore on Monday and in Hong Kong on Tuesday, with HSBC as sole arranger.

While demand for these securities has generally outweighed supply in the market’s brief history, in October the CNH base – RMB deposits in Hong Kong – declined modestly. Deposits stood at RMB618.5 billion, down 0.6% from RMB622 billion in September, in a reversal of the often exponential growth in deposits over the last two years that has frequently hit 10% per month. That said, analysts had expected worse, with HSBC calling the decline “not as much as we originally expected” and saying “the fact that CNH deposits and trade settlement activity only declined modestly gives some comfort about the overall resilience of the offshore RMB system, as a vehicle for RMB internationalization.”

The deals follow last week’s RMB3.6 billion dim sum bond from Chinese state-owned steelmaker Baosteel, the largest corporate dim sum bond to date and a clear illustration that no matter how bad the global macro picture may become, there is stout appetite for the right Chinese names in RMB. That deal included three tranches from two to five years, all of them oversubscribed and all at the tight end of guidance. It attracted a total book of almost RMB9 billion from 200 orders.

Baosteel was the first example of a group that are expected to be regular issuers: PRC state-owned companies issuing in their own legal form rather than through an offshore company or vehicle.

GLP

Singapore’s Global Logistics Properties, a company backed by the GIC sovereign wealth fund, launched a S$500 million perpetual hybrid on Wednesday in a deal marketed carefully around its name appeal to Singaporeans.

The deal, which priced at a 5.5% yield, went mainly to Singaporeans – who took 92% of the paper – and within that, mainly private banks, who accounted for 78% of the deal, well ahead of fund managers and banks with 10% apiece. The coupon equates to 420 basis points over five-year swaps.

GLP is considered an exceptionally strong name in Singapore because of its GIC links; its 2010 IPO in Singapore was one of the biggest ever in the city state, despite the fact that its holdings are all industrial and logistical properties in China and Japan with little connection to Singapore. Those close to the deal claim the pricing was as much as 3% lower than would have been achieved in the dollar bond markets, if a deal could have been done at all. “If you look at an investment grade name like China Resources Power as a guide, then [for GLP in dollars] it would be very high single digits now, 8% plus,” says one banker. “In fact this deal couldn’t have been done in dollars at all a couple of weeks ago, or before this week’s central bank liquidity measures.”

From the local investor perspective, perpetuals offer much better yield than many fixed income alternatives in a low interest environment – Cheung Kong was another recent example of a Singapore dollar perpetual issuer. JP Morgan was sole global coordinator, with Citi, Goldman Sachs and DBS joining it as joint bookrunners.

“An insight gained from Cheung Kong was that it was clear private banks were going to be a dominant part of the distribution,” said someone close to the deal. “In this deal, we enhanced the appeal to the institutional investor base, which played a greater role in this than in Cheung Kong.” It was challenging to find a suitable comparable to price from; one approach was to calculate what the borrower would pay for senior debt in Singapore dollars, and then add suitable yield for the paper’s subordination. “Investors were looking for direction from us on pricing,” said one banker. “But Singapore accounts are very happy with 5%-plus yield and a good investment profile. They have money in the bank earning zero: if they want to earn 5%, they can take a flyer on a risky name, or buy subordinated paper from a name they are comfortable with.”

The deal cannot be called in the first five years but is very likely to be redeemed thereafter, as the bonds lose their 50% equity treatment from April 2017, at which point they will no longer be helping the issuer to reduce their debt to equity ratios.  After 10 years there is a 100 basis point step up, but the bonds are highly unlikely to be outstanding beyond that date.