The pipeline is bursting at the seams and there has already been a large amount of new debt issued in Asia since the beginning of October, putting some pressure on the market. And this week is no exception. Early Wednesday morning Korea Gas and Axis Bank each sold $500 million of investment-grade debt.
The bonds performed relatively flat in the immediate aftermarket. However, taking into account that markets had turned south at the beginning of this week with equities down 1% in Europe on Tuesday and the Asia IG and Asia sovereign indices both opening 1 point wider yesterday, a flat first day of trading wasn’t a bad start.
The market was “having a little bit of a tantrum”, as one banker put it. Plus investors are dealing with an overwhelming amount of new supply.
Korea Gas was first to hit the market with its 10-year 4.25% semi-annual bonds, which are set to mature on November 2, 2020. The notes were priced below par to yield 4.312%, which is equivalent to a spread of 170bp over the 10-year US Treasury yield.
The borrower went out with a whisper early Tuesday morning that the spread would be between 180bp and 190bp. This was revised to 170bp plus/minus 3bp just before Asia closed.
To onlookers this may not have seemed an aggressive pricing strategy. However, when compared to the existing 2014 Kogas bonds ($500 million 6% coupon) on a swaps basis the price proved to be very attractive.
On a z-spread basis the existing 2014s were trading at 175bp at the time of the pricing, while the new 10-year came at 161.25bp, placing it 14bp inside the existing bonds.
According to one banker on the trade, the difference between a five- and a 10-year deal should really be about 30bp. “Therefore looking at this pricing, it is incredibly tight,” he said.
The deal attracted $1.25 billion of demand with orders from 148 accounts. The bulk of the new issue was sold to insurance and pension funds, which jointly took 30% of the deal. Banks took another 28% and fund managers 23%. The remaining 19% was divvied up between central banks, private banks and other types of investors.
In terms of regional allocation, Asia bought 59% of the bonds, Europe 10% and the US 31%.
By midday yesterday the spread had widened by a modest 1bp, which, again, was a reflection of the broader market backdrop rather than the strength of the credit.
Meanwhile, Axis made its debut into the 144A market with a $500 million 5.5-year deal. However, one banker referred to the transaction as “business as usual for the Indians”, given the straight-forward nature of the deal.
The notes pay a 4.75% semi-annual coupon and printed at 360bp over five-year Treasuries to yield 4.834% -- a reoffer price of 99.599. They are rated Baa2/BBB- (Moody's/S&P).
The pricing was benchmarked against Axis's existing September 2015 bonds ($350 million 5.25% coupon) that were trading at a spread of around 330bp at the time the deal was announced and priced. With the new bonds (maturing in May 2016) pricing at 360bp this was viewed as a very decent concession to the September 2015s.
“You’re looking at about 15bp to 20bp of the curve there with the residual being the new issue premium,” said a source.
As well as Axis and Kogas, Sun Hung Kai Properties also priced a $300 million trade early Wednesday morning, while Traveller’s International Hotel Group came to market late last night with a $300 million 6.9% seven-year bond.
The market also received news that Petron and Korea National Oil Corporation will both be pricing bonds. Other deals in the pipeline include Noble Group, Hidili and Sinochem, which are all expected to price over the course of this week and next.
Axis also had to contend with Indian banking sector bonds widening as much as 20bp over the past month. In fact, the existing Axis 2015 bonds had moved out by 30bp in the three weeks before the new notes were issued yesterday. Taking all of these factors into account, there had been a general consensus among investors and bankers close to the trade that a spread of 360bp was a pragmatic value for the new bonds.
A $3 billion orderbook from 230 accounts was a clear reflection to the market that the Axis trade was well received despite the backdrop. As a debut 144A issuer, Axis went out looking for a new investor base in the US and achieved that with 25% of the bonds sold into the US. Another 20% was bought by European investors, meaning the bank was able to place a large portion of the sale outside its conventional home markets.
Fund managers bought 46%, banks 22% and private banks 20%. The remaining 12% was distributed between agencies and insurance accounts.
“Enhancing the company’s market presence and profile was the accomplished objective here,” mentioned one banker. “This was the key message that the borrower wanted to get across.”
Bookrunners for Axis Bank were Bank of America Merrill Lynch, Citi, Deutsche Bank, J.P. Morgan and RBS.
The Kogas trade was led by Bank of America Merrill Lynch, Citi, Deutsche Bank, Goldman Sachs and UBS.
