Improving sentiment, driven by dovish comments from the European Central Bank (ECB) on Thursday and a rate cut by the People's Bank of China on Friday, enticed two new issuers into the G3 bond markets on Monday.
China's Beijing Automotive Group (BAIC) executed a debut euro-denominated transaction building on the success of last week's issue from Dongfeng Motors, while the Philippines' Rizal Commercial Banking Corp (RCBC) completed its largest dollar bond on record.
Both deals came on the back of secondary market outperformance, which saw spreads tighten by about 5bp to 10bp across the board on Friday and a further 2bp to 4bp on Monday.
Sales desks flagged activity by both real accounts and the street. But as Morgan Stanley noted in an email to clients at Monday's Asian close, "Aggressive bids are being met with decent offers so it feels like the market wants to consolidate a bit from here."
BAIC parks behind Dongfeng
China's fifth largest automobile company by sales completed an €500 million ($567 million) five-year transaction during the European afternoon that was able to benefit from a very clear pricing benchmark set one week earlier by the country's second largest auto company.
Pricing of an A3/A-/A- rated deal in the name of BAIC Inalfa Hong Kong Investment was fixed at 99.261% on a coupon of 1.9% to yield 2.057%. This equated to 216.4bp over Bunds and 180bp over mid-swaps.
Initial guidance had come at 200bp over mid-swaps, before being tightened to between 180bp and 185bp over.
At the time of pricing, Dongfeng Motor's A/1/A/A rated €500 million ($567 million) three-year 1.6% deal was trading at 1.28% to yield 156.9bp on a G-spread basis and 123.5bp on an asset swap basis. It priced at 181.5bp over Bunds and 150bp over mid-swaps.
Syndicate bankers estimated the curve between three and five years was worth about 15bp to 20bp and the difference in credit ratings a further 20bp to 25bp, which means BAIC has offered a roughly 15bp to 20bp new issue premium.
The order book closed around the €1 billion level.
"Owning a big stake in Peugeot definitely worked in Dongfeng's favour when it came to investor recognition," one banker commented. "However take-up of BAIC's offering shows that European investors are becoming increasingly comfortable with Chinese credit.
"Each new deal brings in about two to four new investors who haven't purchased Chinese euro-denominated paper before," the banker added. "Existing investors are also going in that little bit deeper each time as well."
Bankers concluded that lack of supply from Western European names is also currently aiding the appeal of Chinese euro-denominated credit.
Like Dongfeng Motors before it, BAIC's deal offers a big pick-up to comparably rated European names.
The 100% Beijing government owned group has joint ventures with Hyundai and Daimler. The latter's own October 2020 bond was trading at Monday's close on a G spread of 93.3bp and asset swap spread of 56.4bp.
The German company has the same ratings as BAIC, although it is on positive outlook from Moody's.
However, in its rating release the agency highlighted that BAIC's baseline credit rating is Baa3, with a three-notch uplift to A3 relating to its systemic importance to the Beijing government.
On a stand-alone basis, BAIC has worst credit metrics than both Dongfeng Motor and Daimler. At the end of 2014, Debt to ebitda stood at 3.1 times compared to Dongfeng Moto's roughly 0.9 times and Daimler's one times.
Ebitda to interest expense was similarly a lower three times at the end of 2014 compared to Dongfeng Motor's 11.5 times and Daimler's 16.58 times.
Standard & Poor's commented that BAIC's funds from operation (FFO) to debt has consistently come in around the 20% level. It said it could lower the rating if the group's metrics fail to improve as expected, or it embarks on debt-funded acquisitions.
Conversely, it said it could be upgraded if it is able to push its FFO to debt up above 45%.
At the end of 2014, BAIC had total debt of Rmb30.57 billion ($4.81 billion), Ebitda of Rmb9.78 billion and cash of Rmb36 billion.
Joint global co-ordinators of the bond deal are DBS, UBS, JP Morgan, BoCom Hong Kong and CCBI, with joint bookrunners comprising ICBC Singapore and Wing Lung Bank.
RCBC rides rating momentum
The Philippines' ninth largest bank by assets also completed an upsized $320 million February 2021 deal on Monday after attracting an order book of roughly $1.3 billion.
A relatively strong order book was aided by the fact that the country's banking sector has been the best performing of all Asian countries in the secondary bond markets this year, with RCBC also benefiting from a ratings upgrade in May, which lifted it into investment grade territory for the first time.
The bank is now rated Baa3/BB thanks to Moody's two-notch upgrade.
The bank's existing $243.43 million 4.25% 2020 bond was bid at 3.23% on Monday compared to 3.833% at the beginning of the year. After raising $200 million in January, the bank returned with a small $43.43 million fungible issue one month later so it had matching funds to redeem an existing note, which matured that same month.
Pricing of the new deal, which was originally sized at $300 million, came tight to its outstanding paper and was priced at par on a coupon of 3.45%. Bankers estimated there was a new issue premium of zero to 5bp after accounting for 20bp on the maturity curve between the January 2020 deal and new February 2021 deal.
By geography Asia ex Philippines took 70%, the Philippines 13% and EMEA 17%. By investor type fund managers accounted for 57%, public institutions 18%, banks 16% and private banks 16%.
RCBC also has a 5.25% 2017 bond outstanding, which was bid Monday at 2.4% on a price of 103.5% and Z-spread of 141bp.
Its nearest comparable is the Philippines largest bank by assets, BDO Unibank, which has a 4.5% 2017 bond outstanding. This was trading Monday at 102.75% to yield 2.34% bid, or 147bp over on a Z-spread basis.
Both Moody's and Standard & Poor's have noted that RCBC has improved its credit metrics by bolstering its capital adequacy ratio (CAR) in order to win new business in the SME and retail sector where its main focus lies.
Earlier this year, Taiwan's Cathay Life closed the purchase of a 20% stake for Ps17.92 billion ($400 million). This helped boost the Yuchengco family-owned bank's CAR to 16.88% as at end June.
At the end of 2014, the bank had assets of $10.05 billion and reported net income of $94.6 million.
According to S&P Capital IQ, total debt stood at $1.47 billion at the end of June, of which $760.5 million derives from a revolving facility, $500 million is in the form of bond issues and $212.9 million in subordinated debt. Cash and equivalents amounted to $885.5 million.
Joint global co-ordinators for the new bond deal are Bank of America Merrill Lynch, HSBC and JP Morgan.
