Shenzhen Expressway, a Chinese toll road operator, and Korean natural gas company Korea Gas (Kogas), pushed out aggressively priced bonds on Monday, taking advantage of buoyant credit conditions.
Sales desks reported secondary market spread tightening of about 6bp across most investment grade credits on Monday, although Morgan Stanley noted that much of the re-pricing came from brokers and was drawing out profit takers rather than new buyers.
But the favourable market backdrop enabled the two new credits entering the primary market to attract strong order books.
Shenzhen Expressway built up a peak order book of $3.5 billion and Kogas an even more impressive peak order book of $6 billion at final guidance before the US opened. The latter did particularly well thanks to a combination of limited quasi-sovereign issuance so far this year, combined with heavy redemptions, which has resulted in significant pent-up demand.
Shenzhen Expressway
Baa2/BBB/BBB rated Shenzhen Expressway printed a capped $300 million five-year deal. The Reg S transaction was fairly unusual since the bond deal is a direct obligation of Hong Kong and Shanghai-listed Shenzhen Expressway Company Limited.
Chinese state-linked entities typically opt for BVI entities backed by keepwell deeds and liquidity support agreements, which make their offshore bonds structurally subordinate to their onshore ones.
Shenzhen Expressway’s structure enabled it to price more aggressively, although brokers were divided over what cost saving this represented.
Having initially marketed the deal at 230bp over Treasuries, the syndicate fixed pricing at 99.46% on a coupon of 2.875% to yield 2.992% or 200bp over Treasuries.
One syndicate banker argued that the bonds came more up to 10bp through fair value. “The bonds are issued directly by the onshore entity, which should give investors more confidence,” the banker said.
Other non-syndicate brokers suggested fair value around the 208bp mark.
One close comparable is A3/A rated Tianjin Rail Transit Group, which has a 2.875% May 2021 bond outstanding. This was trading Monday on a mid-yield of 3.01%, or G-spread of 213bp.
Shenzhen Expressway has come 7bp wider than Tianjin Rail but it has a two to three notch lower rating. However, Moody’s has accorded Tianjin Rail a significant ratings uplift from its baseline credit assessment of Ba2 because of its government support.
By contrast, Shenzhen Expressway’s parent, Sasac-owned Shenzhen International Holdings, has a one-notch lower rating of Baa3.
Other comparables include Baa1/BBB+ rated Anhui Transportation's 2.875% June 2018 bond and Baa2/A- rated Guangzhou Communications' 3% June 2018 bond. These were respectively trading on G-spreads of 205bp and 210bp on Monday but incorporate keepwell deeds and liquidity support agreements.
Syndicate bankers said a three-year maturity extension out to 2021 would bring both bonds out to around 230bp to 235bp over.
Global coordinator for Shenzhen Expressway’s deal was BOC International, while Daiwa Capital Markets joined as a lead manager.
Kogas
The state-owned utility returned to the international bond market almost a year to the day with a $900 million dual-tranche issue on Monday.
The 5- and 10-year deal was launched with indicative pricing, which initially stepped up 10bp between the two tranches but ended up with pricing flat to one another.
A $500 million five-year bond was priced at 99.786% on a coupon of 1.875% to yield 90bp over Treasuries. It had initially been marketed at 110bp over.
Final demand came in at the $2.1 billion level with participation from 145 accounts. By geography 40% went to Asia, followed by 38% to the US and 22% to Europe. By investor type, funds took 69%, insurers 11%, banks 9%, central banks 8% and private banks 3%.
A $400 million 10-year tranche was priced at 99.334% on a coupon of 2.25%. This also yielded 90bp over Treasuries compared to indicative pricing at 115bp over.
This tranche attracted a smaller $1.9 billion order book with 95 accounts. A much higher proportion of the deal went to Asia - 86%, followed by 9% to Europe and 5% to the US. Insurers took 61%, asset managers 29%, banks 8% and private banks 2%.
Benchmarking should have been fairly straightforward since the Aa2/A+/AA- rated credit has a 3.5% July 2025 bond and a 3.5% July 2026 bond outstanding.
Both were bid on G-spreads of 89bp on Monday according to syndicate bankers. The two deals have consistently traded up over the past year, with the July 2025 deal rising from a mid-price of 99.95% one year ago to 110.25% on Monday.
By contrast, the group’s 4.25% November 2020 bond was bid at 79bp over on Monday. This suggests the new five-year tranche has offered a healthy new issue premiium compared to the 10-year, which has offered none.
However, bankers believe the Kogas curve may invert similarl to slightly higher rated Korea Oil. The latter has an April 2021 bond, which was trading at 95bp over on Monday and an April 2026 bond trading at 91bp over.
Korean quasi-sovereign spreads have been inverted for more than a year due to strong demand at the longer end of the curve from Korean insurance funds, which do not have enough longer-dated paper to purchase in the domestic market.
Joint global co-ordinators were Citi, Credit Suisse, HSBC, JP Morgan and Societe Generale.
