BOC Aviation sold a $750 million five-year bond on early Tuesday morning, pricing it inside its existing curve and the curve of other larger, global airline leasing companies, thanks to renewed investor assumptions that the US Federal Reserve remains cautious about raising interest rates.
This is the first time BOC Aviation tapped US onshore investors or the 144A space. The offer priced at Treasuries plus 170bp, which is 20bp tighter than its initial price guidance area, according to a term sheet seen by FinanceAsia. The bond has a coupon of 3%.
Rated BBB+/A-, the airline leasing company priced at much tighter levels compared to its outstanding dollar bonds maturing in 2019 that were trading at a spread to US government bonds, or a G-spread, of 173bp prior to announcement of the deal, according to source familiar with the matter.
BOC Aviation’s bond also priced competitively versus US-based Air Lease’s existing SEC-registered paper — which are generally tighter versus 144A offerings — that were trading at a G-spread of 159bp prior to announcement.
“The issuer probably priced a little bit inside of where Air Lease would’ve come in 144A format,” said the source, adding that orderbooks reached a whopping $5.5 billion from over 280 accounts around the globe. “The issuer is large and global and it needs a diverse investor base to reflect the nature of its business.”
The offering comes shortly after BOC Aviation’s two-notch rating upgrade by Standard & Poor’s from BBB to A- last week, as well as its global roadshow across Asia, Europe and the US, which began on March 18.
Moreover, investor sentiment for Asian bonds was well supported by dwindling market volatility following last Thursday’s Federal Open Market Committee meeting, whose tone was more dovish than expected.
Officials opened the door to a rate increase as soon as June, while indicating in their forecasts they will go slow once they get started. But the US Federal Reserve’s FOMC committee wants to be “reasonably confident” inflation is rising toward its 2% goal before moving.
The new signals were contained in a policy statement that ended an era by dropping an assurance that the Fed will be “patient” in raising rates.
Keep calm and carry on
Analysts advise investors not to fret about the outlook of Asia’s credit markets in the wake of a US rate hike as the asset class is likely to remain resilient.
Asian corporate funding costs tend to be driven more by local policy cycles than the Fed, although both matters, said Morgan Stanley in a report on March 19. This is because only 28% of funding is done in US dollar, roughly matching companies’ dollar earnings.
“Asian central banks cutting rates should drive funding costs lower and prompt corporates to switch marginal funding back onshore,” said Viktor Hjort, credit analyst at Morgan Stanley.
Nonetheless, US investors nabbed up half of BOC Aviation’s bond, while 39% of the paper went to Asian investors and the rest to European accounts. Fund managers subscribed to 72% of the bonds, banks 13%, insurance and pension funds 12% and private banks 3%.
Proceeds of BOC Aviation’s bond will be used to fund new capital ventures, as well as refinancing and general corporate purposes, according to a source close to the deal.
The offering is trading at Treasuries plus 160bp, having tightened 10bp from when it priced, on Tuesday morning, according to Bloomberg data.
BOC Aviation is a 100% owned aircraft leasing subsidiary of Bank of China with a portfolio of 250 planes (230 owned, 20 leased). The company’s average lease term is 7.5 years and its average fleet age is just 3.2 years.
BOC International, Citi, HSBC and JP Morgan were the joint bookrunners of BOC Aviation’s deal, which is part of its newly established medium-term note programme launched in March.
