Asian bond markets re-opened after the summer break on Wednesday with a debut issue for the Shanghai Pudong Development Bank (SPDB), plus new deals for the Export-Import Bank of China (Chexim) and Korea Development Bank.
All three issuers took advantage of two days when market sentiment improved considerably and Chinese investors returned to the market following a four-day break.
The positive tone was demonstrated by the performance of the iTraxx Asia ex-Japan index, which finally started to reverse direction. It tightened by almost 10bp over two days to 133/136 at New York's open on Wednesday, although it still has some considerable way to go until it hits the 104/105 level it was trading at in May.
Sales desks reported strong buying demand across the board but particularly for China-related financial paper, which set a very good backdrop for the launch of bonds by SPDB and Chexim. In turn, this was driven by the strong performance of the Shanghai Composite Index, which has risen just over 5% during the past two trading days.
Recent equity trading patterns have tended to show a strong opening to any given week followed by an overall loss by the end of it as growing fears about Chinese growth take hold of investors nerves'. Some equity analysts have also speculated that Tuesday and Wednesday’s positive forward momentum was generated by active China government intervention.
However, as Credit Agricole concluded on Wednesday, margin trading levels in China are now back down to where they were in December. The bank argued that, while the Shanghai Composite Index may continue to slide, it should now do so based on fundamentals rather than the technical pressure of investors unwinding positions.
SPDB debuts in dollars
The Baa1/BBB+ rated bank was the first of the two Chinese banks in the market to take advantage of the issuance window to complete a $500 million Reg S deal that benefitted from the Chinese money flooding into Hong Kong. A three-year issue for its Hong Kong branch came at 99.756% on a coupon of 2.5% to yield 2.585% or 150bp over Treasuries.
Final pricing represented a 25bp tightening from initial guidance around the 175bp level. Bankers reported very little drop off in the order book after guidance was revised, with the final book closing around the $3 billion level.
Syndicate bankers estimated the deal carried a single digit new issue premium relative to fair value. This does not appear that generous in the current uncertain market conditions but is likely to work in the bank's favour if the overall market continues to demonstrate positive momentum.
Fixed-income analysts calculated fair value around the 140bp to 145bp level relative to Treasuries and 130bp to 135bp over on a Z-spread basis. The deal priced on a Z spread of 142bp and G spread of 150bp.
Given it is a debut issue the best fair value measure is the trading level of China Merchants Bank, which has the same Baa1/BBB+ rating. Its May 2018 deal was trading Wednesday on a Treasury spread of 158bp, a Z spread of 121bp and a G spread of 136bp.
One analyst suggested a 10p premium was needed on a Z spread basis. The first 5bp accounts for the fact that SPDB is on negative outlook from Standard & Poor’s. A second 5bp premium is added because of the duration extension from May to September.
On this basis, SPDB priced at a 22bp premium to China Merchants Bank on an absolute basis, or about 7bp to 12bp over against fair value.
The second main comparable is China Minsheng Bank. The one notch lower rated BBB credit also has a May 2018 bond outstanding. This was trading Wednesday on a Treasury spread of 180bp, a Z spread of 137bp and a G spread of 158bp
Given the short tenor, most of the buyers were banks, particularly from China. "They liked it because it's a new name and offers a pick up to the big four state-owned banks," one banker commented.
In total, 93% went to Asia and 7% to Europe, with banks taking 57%, fund managers 26%, insurers 10%, sovereigns 6% and private banks 1%.
Credit metrics
Established in 1992, SPDB is the only national joint-stock bank headquartered in Shanghai and became the 149th licensed bank in Hong Kong when it got its first international banking license in 2011.
In its most recent ratings release this June, S&P said the rating reflected the bank's "national presence and well-recognised brand value, as well as its diverse corporate deposit base, ample liquidity and systemic significance."
However, it added that the negative outlook reflected the bank's rising credit costs and modest capitalization. SPDB's recent first-half results revealed a core CET1 ratio of 8.1%, while credit costs came in at 188bp compared to 114bp for the same period the previous year.
In a research report, Citi attributed this weakness to rising non-performing loans, but also noted that provisioning remained high at 245%. Deutsche Bank also highlighted the bank's strong fee income from retail banking, with bank cards up 223% year-on-year and wealth management up 111%.
S&P concluded that its base case is for a gradual deterioration in credit quality, better than the industry average. It said it may downgrade the rating if the deterioration is on a par with the industry average, but conversely may upgrade the bank's rating if its credit costs improve and key credit metrics stabilise.
Chexim back in dollars
Chexim, the Aa3/AA- rated Chinese policy bank, also returned to the dollar market for the first time in just over a year on Wednesday with a $500 million five-year deal and a $500 million 10-year deal.
The new deal was much smaller than last year's $3 billion two-tranche offering and also attracted a smaller $2 billion order book compared to $10.2 billion in July 2014.
The deal was executed via an issuance vehicle called Avi Funding Ltd and had an unusual structure, which involved the SPV issuing loan-backed medium term notes with the intention of on-lending the proceeds to borrowers in the air transport industry sector.
Principal and interest on those loans will be used to pay the interest and principal on the notes. Some bankers felt this structure put some investors off and accounted for the unexpectedly small demand.
The syndicate went out with initial guidance of 135bp over Treasuries for the five-year and 165bp over Treasuries for the 10-year before tightening to 5bp either side of 130bp for the five year and 160bp for the 10-year.
Pricing for the five-year was fixed at 99.898% on a coupon of 2.85% to yield 130bp over Treasuries.
Some 85 accounts participated with a split, which saw 46% go to Asia, 38% to Europe and 16% to the US. By investor type fund managers took 44%, banks 48%, private banks 3% and insurers/pension funds 5%.
The 10-year came on an issue price of 99.646% and coupon of 3.8% to yield 160bp over Treasuries.
This attracted 75 accounts and an equal $1 billion order book. By geography, 41% went to the US, 36% went to Asia and 23% to Europe. By investor type fund managers took 63%, insurers/pension funds 16%, public institutions 12%, banks 7% and private banks 2%.
Fixed-income analysts calculated that Chexim offered a very healthy 18bp pick up to fair value for the five-year and 32bp for the 10-year.
Where the five-year was concerned, this calculation was based on the need for a 15bp pick-up to account for the additional duration over Chexim's outstanding four-year paper and a 5bp premium because of the deal's unusual structure. This results in fair value around the 112bp level on a Z-spread basis and 118bp over Treasuries.
For the 10-year analysts suggested the additional duration needed 5bp over the bank's nine-year paper and the structure 5bp. This leaves fair value at 128bp on a Z-spread basis and 128bp over Treasuries.
On Wednesday, Chexim's 2.5% July 2019 bond was trading at 73bp over Treasuries and 92bp on a Z-spread basis. Its 3.625% July 2024 bond was at 118bp over Treasuries or 128bp on a Z-spread basis.
Last July, the five-year priced at 90bp over Treasuries and the 10-year at 120bp over.
Syndicate
Joint global co-ordinators for SPDB's bond are: Citi, Agricultural Bank of China, CCB International, HSBC and SPDC. Joint leads are: ANZ, BoCom Hong Kong, Guotai Junan International and Haitong International.
Joint global co-ordinators for Chexim's deal are: Bank of China, Barclays, BoCom Hong Kong, HSBC, JP Morgan and Mitsubishi UFJ. Joint leads are: ANZ, ING and Westpac.
This story has been updated since first publication to include distribution statistics
