China Development Bank pushes tenor in dim sum market

Chinese policy bank China Development Bank (CDB) established a new 15-year benchmark in the offshore renminbi bond market on Thursday night, when it priced a Rmb1.5 billion ($237 million) bond.

The guidance was issued at 4.2% to 4.3% and the bonds priced at the tight end at 4.2%. The bonds were issued at par. Barclays Bank and Citigroup were joint global coordinators and bookrunners. HSBC, Deutsche Bank, Standard Chartered and Royal Bank of Scotland are also joint bookrunners.

The deal represents yet another milestone in the growth of the dim sum market, which is dominated by short-tenor bonds geared towards investors who want exposure to renminbi appreciation.

Pushing on tenor was a challenge, but in the end, a highly-rated quasi sovereign credit like CDB was the right name to pull it off. Although the issue is not rated, the policy bank is rated Aa3 by Moody’s, AA- by S&P and A+ by Fitch.

“People were pretty sceptical we could get a 15-year tenor done,” said one person familiar with the deal. “The deal establishes an important benchmark and it is a decent size for the dim sum market.”

China Development Bank attracted an order book of Rmb2 billion and there was significant participation from insurance funds, which were allocated 75%. Asset managers were allocated 15% and the remainder went to other accounts. About 90% of the bonds were allocated to Asia and the remainder to Europe.

Investors were told on Wednesday that CDB would issue either a 10-year bond or 15-year bond, or both, but eventually it chose to just launch a 15-year bond.

“We felt that investors who were keen to buy the 10-year bonds would also be buyers of the five-year bonds and as such we did not want to cannibalise demand for the auction,” the first person said.

“There was more interest from investors for a 15-year bond than in the 10-year bond as they saw relative value,” said a second person familiar with the deal. “From CDB’s point of view, they would rather do a 15-year bond too, as it sets a new benchmark for the market and they want to be seen as a market leader,” he added.

CDB will auction its three- and five-year bonds to institutional investors today, with Bank of China acting as the issuing and lodging agent through its Hong Kong branch. It is raising the funds to expand its lending business in Hong Kong and wants to keep the funds offshore.

The bank has outstanding 15-year onshore bonds, which are also yielding about 4.2% as its onshore yield curve is flat compared to the offshore yield curve. However, the pricing was said to be competitive.

“Relative to Agricultural Development Bank of China [ADBC], which paid 3.5% for five-year paper, I think CDB got a good deal, paying 70bp more for a 10-year extension,” said the first person familiar with the deal.

ADBC priced that deal — a Rmb3 billion multi-tranche bond — earlier this week. The Rmb2.1 billion two-year bond offered a coupon of 3%, the Rmb550 million three-year bond a coupon of 3.2% and the Rmb350 million five-year tranche a coupon of 3.5%. Bank of China and Standard Chartered were joint global coordinators and bookrunners.

More mainland banks are expected to issue directly in the dim sum market. This week, China’s National Development and Reform Commission gave approval to 10 banks to issue Rmb25 billion worth of dim sum bonds. The total amount was less than what some market participants were expecting, though it is possible that more quota could be released in the second half of this year.

The banks are China Development Bank, Export-Import Bank of China, Agricultural Development Bank of China, Industrial & Commercial Bank of China (Asia), Agricultural Bank of China, Bank of China, China Construction Bank, and the China units of Bank of East Asia, HSBC Holdings and Bank of Communications.