As the May 1 holiday nears, Asia’s debt capital market is closing out its busiest month on record with a flourish after CLP Power, Korea Land and Housing, and State Grid raised a total of $4.5 billion on Monday.
Borrowers are keen to make use of the issuance window before global markets break for Labour Day and before the second half of 2014 when interest rates are expected to rise. Also, February and March were fairly quiet months as a result of the Russia-Ukraine crisis that caused the Asia DCM pipeline to come to a standstill.
“The key uncertainty for the market in the second half is rate expectations, which is going to trend higher and puts fixed income products under pressure,” said a syndicate banker to FinanceAsia. “And if the US economy is doing well, then the expectations of when the Fed will raise rates could potentially be accelerated and that will have an impact on emerging market credit again.”
Analysts at Morgan Stanley, for example, predict that the 10-year US Treasury will hit 3.3% by the end of 2014 while Barclays has a year-end forecast of 3.4%. Currently hovering at around the 2.7% level, the 10-year has been trading within a narrow band of 20bp — between 2.6% and 2.8% — since January, according to Bloomberg. The yield has risen from 1.81% a year ago, though it is still less than the average during the past decade of 3.46%.
With interest rates still at relatively low levels, Asia ex-Japan dollar-denominated bond volume has reached a monthly record high of $31.4 billion for April so far and is 21.2% higher than the last record-breaking monthly number of $25.9 billion achieved in January this year, according to Dealogic data, whereas borrowers raised just $15.2 billion during the whole of February and March.
Dollar-denominated DCM volume in Asia ex-Japan has totalled $72.6 billion so far this year, the highest year-to-date level on record and up from the previous record of $63.2 billion raised in 2013 during the same period.
Syndicate bankers say May issuance will be relatively subdued, noting that the bulk of issuance came to market in April, notably the jumbo multi-tranche deals from Chinese state-owned enterprises. Many corporates will also be in the blackout period.
Oversupply
The recent flood of supply in the Asia-ex Japan dollar market has had a slight effect on secondary market performance, resulting in some of the new issuance underperforming.
For example, Woori Bank’s recent 10-year Basel III-compliant note issued on April 23 has fallen from par to a cash price of 99 on Tuesday, according to Bloomberg data. Cnooc’s triple-tranche offering also sold on the same day is also underperforming with its three-, 10- and 30-year notes hovering around a cash price of 99.75, 99 and 97.81, respectively.
“If we look at some of the new issues they have not rallied as much as some would like them to, but broadly speaking the levels are still holding up fairly well,” said a syndicate banker. “However, it’s much more modest than the days when you would see 10bp to 15bp improvement.”
There are more dollar-denominated deals in the pipeline. Korea Resources is marketing a capped $340 million five-year 144A dollar note on Tuesday. Initial price guidance is at Treasuries plus 140bp area. Bank of America Merrill Lynch, Citi, HSBC are joint bookrunners.
Also, Lenovo, which ended its investor roadshow on Monday, is marketing an unrated dollar-denominated five-year note also on Tuesday. Sources close to the transaction say that there has been a lot of interest from high quality investors and it has set an initial price guidance of Treasuries plus 320bp area.
Citi is the sole coordinator and bookrunner of Lenovo’s potential offering. Other bookrunners include ANZ, Bank of China, Barclays, BofA Merrill, BNP Paribas, Credit Suisse, DBS, Mitsubishi UFJ Securities, Mizuho Securities, Royal Bank of Scotland and Standard Chartered.
SMC Global Power is also marketing a perpetual note that is callable in five-and-a-half years, following in CLP Power’s footsteps. The Reg-S note has an initial price guidance of around the 7.625% area. BofA Merrill, Credit Suisse, DBS, Deutsche Bank, HSBC, Mizuho Securities and Standard Chartered are joint bookrunners.
Chinese property companies have decided to jump on the bandwagon as well. Shui On Land is marketing a four-year note as well as a six-year bond callable in the third year at initial price guidance of 8.75% and 9.75% area respectively, while China Overseas Land is marketing a five- and 10-year note at an initial price guidance of Treasuries plus 270bp and 350bp respectively.
Standard Chartered and UBS are bookrunners of Shui On’s bond, while Bank of China International, Citi, Deutsche Bank, Goldman Sachs, JP Morgan and HSBC are bookrunners of China Overseas’ offering.
CLP Power perpetual bond
On Monday, Hong Kong-based electric company CLP Power sold a $500 million perpetual bond that is callable in year 5.5.
CLP’s Reg-S offering resets at year 5.5 and every six months thereafter at the prevailing six-month dollar Libor rate plus an initial spread of 229.7bp, according to a term sheet seen by FinanceAsia. A step-up of 25bp and 75bp is factored into the reset from year 10.5 and 25.5 onwards respectively.
Towngas’s notes, which are callable in year five and were issued in January this year, were used as comparables, said a source close to the deal. Before announcement, Towngas’s perpetual bond was trading at a cash price of 104 and a yield of 3.9%. After factoring in the nine-month extension, CLP’s bond priced broadly in line with the comparables at a yield of 4.25%, which is tighter than its initial price offering of 4.375%.
Other comparables include CLP’s existing senior debt. The company’s new notes printed slightly more than 100bp above its existing five-year notes, which is the tightest spread on record, adds the source. When Towngas came in January, its paper priced at a yield of 4.75%, which is 160bp above its existing senior bonds.
CLP’s bond received an order book of $1.2 billion from around 100 accounts. Asian investors subscribed to 73% of the paper, while the rest went to Europe, according to the term sheet. Fund managers bought 40% of the notes, financial institutions 16% and private banks 15%, while the rest went to sovereign wealth funds and insurers.
In secondary market, the note has traded up to a cash price of 101-102, said a syndicate banker.
Barclays, HSBC, RBS and UBS were joint bookrunners of CLP’s transaction.
State Grid triple-tranche note
The world’s biggest utility company, State Grid Corp of China, is the latest Chinese state-owned enterprise to issue a $3.5 billion triple-tranche bond on Monday.
The 144A bond — broken down into a five-, 10- and 30-year tranche with a size of $1.25 billion, $1.6 billion and $650 million respectively — attracted huge investor participation due to its rarity.
“There are far fewer bonds out there from the utility space compared to the Chinese oil and gas sector,” said a source familiar with the matter. “As a result, this is viewed as more stable and of higher quality.”
As of April 29, there has only been $13.2 billion of outstanding debt from the Chinese utilities and energy space compared to $37.6 billion from China’s oil and gas sector, according to Dealogic data.
As a result, the five-, 10- and 30-year offerings all ended up pricing 10bp tighter than their initial price guidance of Treasuries plus 120bp, 155bp and 145bp respectively, according to the term sheet. The bond received a total cumulative order book of $8.5 billion from more than 470 accounts.
In the secondary market, State Grid’s five- and 10-year bonds were trading 3bp and 1bp tighter at Treasuries plus 117bp and 154bp respectively, while the 30-year tranche widened by 1bp to trade at Treasuries plus 146bp.
HSBC, Goldman Sachs, Morgan Stanley, Bank of China International, ICBC international were the joint global coordinators and bookrunners of State Grid’s transaction. Other bookrunners include ANZ, J.P. Morgan, Citi, Deutsche Bank, RBS and UBS.
Elsewhere, Korea Land and Housing sold a $500 million 3.25-year bond. The 144A note priced 15bp tighter than its initial price offering of Treasuries plus 125bp, resulting in a yield of 1.994%. BofA Merrill, Credit Agricole, Deutsche Bank, JP Morgan and RBS were joint bookrunners of the transaction.
