October looks set to continue the previous month’s flurry of dollar bond issuance by Asian companies as investors shrug off a US government shutdown, reassured by the still-benign policy backdrop.
Four borrowers – First Gen, ICBC Asia, Korean Western Power and Swire Pacific – are looking to take advantage of a window in the market to take more money off the table after August's relative drought.
Borrowers are primarily experimenting with the long-end of the dollar curve, with Swire Pacific, ICBC Asia and debut issuer First Gen testing investor demand for 10-year bonds. This comes off the back of last week’s overwhelming response for Bangkok Bank’s 10-year tranche and a general improvement in market sentiment.
Asian credit markets have been volatile since Federal Reserve (Fed) chairman Ben Bernanke hinted in May that the central bank might reduce its vast purchases of US Treasuries, spelling an end to low interest rates. However, the Fed reaffirmed two weeks ago that it would not do so for the time being, boosting market confidence and improving investor appetite for longer duration bonds.
“Investors are willing to extend duration closer to their benchmarks in recent weeks and in order to do that, they would have to go and buy longer duration bonds,” said Guy Stear, Asia credit strategist at Société Générale. “We can see a good demand for 10-year issues throughout the month of October.”
More importantly, ICBC Asia is marketing the region’s first ever Basel III-compliant Tier 2 subordinated notes. Meanwhile, Korean Western, subsidiary of Korea Electric Power Corporation (Kepco), sold a five-year bond ahead of a South Korea public holiday on October 3.
Despite niggling concerns related to the government shutdown in the US, the uptick proves there is still appetite and cash for such deals at the right price and for the right name.
“The US budget hasn’t affected markets that much and is considered a ‘non-event’ by a lot of the market participants,” said a Singapore-based debt syndicate banker. “We have been through this before – debt ceiling, people being put on unpaid leave.”
Additionally, issuers are scurrying to make use of Treasury yields that have fallen to seven-week lows. Ten-year US Treasury note yields dropped to 2.59% on September 30, the lowest since August 12, but rose again slightly to 2.65% on October 2 as the US government began its partial shutdown in 17 years. Nonetheless, sources note that these are still acceptable levels compared to a peak of close to 3% during the summer.
Asia’s first Basel III bonds
ICBC Asia is planning to raise around $500 million of 10-year Basel III-compliant Tier 2 subordinated notes, strengthening its capitalisation for future business growth. The bond falls under its $5 billion Medium Term Note Programme and will be callable after five years.
The papers – due to be priced as early as Thursday night – have an initial price guidance of mid-300bp above Treasuries, and will likely set a benchmark for other financial institutions to issue Basel III-compliant bonds in the coming months, according to a source.
The notes will qualify for inclusion in ICBC Asia’s Tier 2 capital and are expected to count as Tier 2 capital for its 100% parent Industrial and Commercial Bank of China (ICBC), according to Fitch in a note today.
ANZ, Bank of America Merrill Lynch, Citi, Crédit Agricole, Credit Suisse, Deutsche Bank, Goldman Sachs, HSBC, ICBC, Royal Bank of Scotland (RBS) and UBS are joint bookrunners of the deal.
Swire Pacific 10-year notes
Swire Pacific printed a sizable $700 million 10-year trade today, leading to the reopening of the Hong Kong corporate in the 10-year space that has been quiet since April.
The Reg S bond received an overwhelming response from the market, with an order book of over $3 billion and more than 225 orders. The note priced 25bp tighter than its initial price guidance of 220bp over Treasuries, and 10bp inside its outstanding 2022s that had a G-spread of 206bp, highlights a source.
“For the right names and credits, investors are still happy to consider investing in longer tenor bonds,” said the source close the deal. “This is true for Swire Pacific given that it is a rare blue chip Hong Kong corporate.”
Asian investors - 83% - took a chunk of Swire Pacific’s bond, with the remainder coming from Europe. Fund managers subscribed to 32% of the note, followed by insurers at 31%, financial institutions 17%, central banks 15% and private banks 5%.
Swire Pacific’s note was trading close to par in secondary markets, hovering around the 195bp-196bp over Treasuries level, add sources.
HSBC and JPMorgan were the joint bookrunners for Swire Pacific’s bond.
First Gen callable papers
First Gen Corporation, the holding company for the power generation and energy-related business of Lopez Group, sold a debut $250 million 10-year bond with a callable option in the fifth year, according to sources.
The unrated Reg S senior unsecured, fixed-rate notes were priced slightly tighter at 6.5% compared to the initial price guidance of 6.625%. It also received an order book of over $350 million from more than 60 accounts.
The closest comparable bond was a $100 million 2021 note issued by its subsidiary, Energy Development Corporation (EDC) that had a yield of 5.8% prior to announcement. After adjusting the curve, fair value for First Gen’s bond is approximately 6.5%, indicating that the new issue priced flat to that.
A bulk of the subscription went to domestic investors with 60%, while 33% came from Asia and 7% from Europe. Banks took 65% of the trade, followed by fund managers with 14%, insurers 11%, and to private banks and others 10%.
“The level of onshore demand that we received for this deal suggests there is a bid for the Philippines issuer base again,” said a source close to the deal. “People now have a more optimistic view about where the Fed is going with their tapering strategy, which should prove supportive for higher beta emerging market credits such as this.”
Other Philippines issuers such as Metrobank, the second largest bank in Philippines, and Meralco, the nation’s largest distributor of electrical power, are considering coming to the debt capital market in coming weeks, adds the source.
The proceeds of First Gen’s bond will be used for investment into power projects and other general corporate purposes. Deutsche Bank, HSBC, JPMorgan were the joint bookrunners of the deal.
Korea Western, meanwhile, tapped the shorter end of the curve, issuing a $500 million five-year bond with a coupon 2.875%. The 144A/Reg S paper received an order book in excess of $2.25 billion from 207 accounts and was issued 20bp tighter than its initial price guidance of 185bp above Treasuries.
BNP Paribas, Citi, RBS and Standard Chartered were joint bookrunners of the deal.
