Bank of China bonds widen amid Greece jitters

Bank of China’s Hong Kong arm priced a $750 million five-year senior bond early Tuesday morning at five-year Treasuries plus 280bp, 10bp inside the initial guidance, which was in the area of Treasuries plus 290bp. 

The bonds traded down in the secondary markets later that morning as the mood in the credit market had turned decidedly negative overnight after news emerged that Greece would hold a referendum to vote on the comprehensive debt package agreed on by European leaders last week — a move that could jeopardise the bailout. European equities closed about 2% lower on Monday night while Dow futures fell some 100 points when Bank of China (Hong Kong) was in the market.

One rival said the bonds were bid as wide as Treasuries plus 302bp on Tuesday morning. But a person familiar with the deal said the widest the bonds traded was Treasuries plus 296bp, or 16bp wide of the issue spread.

The deal printed at the low end of the $750 million to $1 billion expected size, and drew limited participation from US investors. The deal gathered a $2 billion order book from 149 investors. US investors were allocated only 4% of the bonds. European investors took 16% and the bulk of the bonds went to Asian investors, who were allocated 80%. Fund managers were allocated 37%, banks 39%, insurers 8% and private banks 16%.

There was some criticism that the leads — BOCI Asia, Citi and Deutsche Bank — were not doing enough to support the bonds in secondary trading, but one person familiar with the deal said that was not the case.

“Yes, we are supporting the bonds,” the person said. “But the credit markets have widened as have recent new issues such as Sun Hung Kai and KDB, and compared to those, BOCHK is outperforming.”

The iTraxx Asia Investment Grade Index pushed 15bp wider to 195bp Tuesday morning from the previous day’s close before coming back in to 189bp or about 11bp wider.

The Sun Hung Kai 2016s were quoted at Treasuries plus 270bp, about 30bp wider from the previous day, while the KDB 2017s moved about 14bp wider from the previous day’s close.

Five-year US Treasuries rallied 12bp while the deal was being marketed to investors, which meant that the absolute yield on the Bank of China bonds had fallen 22bp (including the 10bp tightening from initial guidance) by the time it priced.

Investors compared the issue to the borrower’s existing lower tier-2 2020s, which were trading at Treasuries plus 310bp before the deal announcement. These bonds widened 20bp to Treasuries plus 330bp when Bank of China announced its senior bond. According to the person familiar with the deal, the borrower paid a new issue premium of about 20bp.

The bonds pay a coupon of 3.75% and the notes reoffered at 99.711 to yield 3.814%. The issue is rated Aa3 by Moody’s and A- by S&P.