Bank of China was the main focus of global bond markets on Wednesday, executing a multi-currency bond that was dubbed the Silk Road bond in honour of the country's One Belt One Road initiative, which the bank is using the proceeds to fund.
In its roadshow presentation Bank of China said it aims to lend $20 billion to One Belt One Road-related projects this year and a total of $100 billion over the coming three years.
The initiative (comprising the Silk Road Economic Belt and 21st Century Maritime Silk Road) is the centrepiece of President Xi Jinping's foreign policy. Through it China hopes to project and enhance its growing power as well as the internationalisation of its currency by recreating the ancient land and maritime routes that once dominated world trade from the second century to mid 15th century AD.
In November 2014, Xi announced that China would commit an initial $40 billion to establish a fund to finance Asian infrastructure development and strengthen trade networks between Asia and Europe through the building of new roads, as well as cross-border power generation and optical cable networks.
Bank of China told investors it wants to become the "go-to" bank for Chinese enterprises involved in the Belt and Road projects. On Wednesday it raised $3.55 billion from one four-pronged bond and a further Rmb3 billion ($489 million) from a Formosa bond in a first step towards this goal, although the proceeds were somewhat smaller than expectations for up to $7 billion.
Launching such a symbolic trade on the day Greece faced one of its most pivotal moments with its creditors was also something of a gamble. And the irony was not lost on investors given that the mighty Greek and Roman empires originally lay at one end of the Silk Road, which began in the modern day city of Xian at the other.
However, in a sign of how global power is tilting east, Bank of China ploughed on regardless, believing that Asian markets are strong enough to partially insulate themselves from events in Europe.
In one sense the A1/A rated credit was correct since it was still able to amass an order book of $13.34 billion. However, it would have almost certainly built up even more momentum had the secondary market not softened on Wednesday.
Asian sales desks reported that real money accounts remained sitting on the sidelines as they have done for the past two weeks as the Greek crisis reaches its head. News that the country and its creditors had rejected each other's revised restructuring plans helped push the iTraxx Asia ex-Japan index back out 2bp on Wednesday.
The market tone was also not helped by the initial secondary market performance of the three credits that braved the Asian primary market on Tuesday - search engine giant Baidu, Korean policy bank Kexim and Asian telco SingTel. All three sought and achieved aggressive pricing but consequently traded out by about 3bp to 5bp the next day.
Nevertheless, bankers reported that Bank of China was extremely pleased with the response to its deal. It has not only raised significant new funds but also stretched out its maturity profile and created liquid benchmarks across the curve at two, three, four, five and ten-years.
"You have to hand it to them," one banker concluded. "No one has ever attempted a four-pronged currency deal like this in one day before. It was a tremendously ambitious undertaking particularly in these market circumstances."
"It showed considerable strength of purpose," the banker added. "No-one knows where the markets will be next week so you really have to take advantage of market windows where you can."
US-dollar tranches
Notwithstanding China's long-term aim to supplant the US dollar with the renminbi as the world's leading currency, it was the US dollar tranches that formed the bedrock of the deal.
The currency accounted for 64.7% of the total raised and just over $10 billion of the overall demand. This had a rough split of $4 billion for the three-year tranche with 240 accounts, $3.5 billion for the five-year tranche with 210 accounts and $2.8 billion for the 10-year with 195 accounts.
The largest tranche was a $1 billion 2018 bond. This was priced at 99.769% on a coupon of 2.125% to yield 2.205% or 115bp over Treasuries.
The tranche was initially marketed at 140bp over Treasuries before being tightened down to between 115bp and 120bp over Treasuries.
By geography 81% went to Asia and 19% to Europe with 37% to funds, 34% to banks, 24% to agencies, 4% to insurers and 1% to private banks.
The second $800 million tranche had a 2020 tenor and was priced at 99.737% on a coupon of 2.875% to yield 2.932% or 125bp over Treasuries. This was first pitched at 150bp over Treasuries before being notched in to between 125bp and 130bp over.
This saw 86% go to Asia and 14% to Europe with 33% allocated to funds, 51% to banks, 10% to agencies, 4% to insurers and 2% to private banks.
Finally, a $500 million 2025 bond was priced at 99.328% on a coupon of 3.875% to yield 3.957% or 157.5bp over Treasuries. This started out at 180bp over before being tightened in to a range around 160bp.
This saw 70% go to Asia, 22% to Europe and 8% to offshore US. Funds were allocated 60%, banks 16%, agencies 10%, insurers 12% and private banks 2%.
The nearest comparable is Bank of China's own outstanding $800 million 3.125% 2019 bond. On Wednesday, this was trading on a G-spread of 118bp.
It means Bank of China has offered a very slim new issue premium of about 2bp to 3bp relative to its secondary market trading levels.
Nevertheless, bankers expect the deal to tighten over the coming weeks as the new liquidity on Bank of China's curve helps bring its trading levels closer to Agricultural Bank of China (ABC) and Industrial & Commercial Bank of China (ICBC).
For example, ICBC has a 3.231% 2019 bond outstanding, which is currently trading on a G-spread of about 101bp, some 14bp tighter than Bank of China's new three-year bond.
"I do think this deal has some juice in it," another banker said. "Over the next few weeks I'd hope to see the three-year tighten in to about 105bp over Treasuries, the five year to around 115bp and the 10-year to around 140bp."
Singapore dollar tranche
This bond issue built up an order book of about S$1.5 billion and resulted in a S$500 million June 2019 deal, which priced at par on a coupon of 2.75%, equating to 76.2bp over the Singapore Swap Offer Rate (SOR).
A total of 78 accounts participated of which 74% were from Singapore and 26% from Hong Kong, Malaysia and the rest of Asia. Funds accounted for 26%, banks 71% and private banks 35.
The four-year deal had initially been marketed around the 3% level.
Bank of China already has a Singapore dollar-denominated deal outstanding with a similar 2019 maturity. This 3.125% deal was trading Wednesday at 102.40% to yield 2.42%.
This equates to a G-spread of 116bp or 77bp over the Singapore SOR and means Bank of China has priced flat to its curve.
Offshore Rmb tranche
For offshore Rmb investors, Bank of China offered two deals - one through Taiwan's Formosa bond market and one through its Abu Dhabi branch, although this latter step represented a symbolic nod towards the Silk Road theme rather than any specific funding need there.
Bankers said the majority of the 101 investors in the dim sum bond were traditional accounts who placed orders for a total of roughly Rmb3.3 billion. This resulted in an Rmb2 billion deal size with a June 2017 maturity.
The two-year transaction was priced at par with a coupon of 3.6%. It had initially been marketed at 3.75%.
The bank has two existing dim sum bonds, which acted as benchmarks. These comprise an Rmb2.5 billion 3.45% January 2017 deal, which was yielding 3.45% on Wednesday, and an Rmb1.5 billion 3.5% May 2017 deal, which was yielding 3.5%.
The group has, therefore, offered a marginal pick-up for the one-month maturity extension.
By geography Asia took 73%, with the Middle East on 10% and Europe 17%. By investor type, banks accounted for 53%, fund managers 26%, agencies and central banks 17% and private banks 4%.
In Taiwan, Bank of China also raised Rmb3 billion through the Formosa market in an issue, which had four tranches (five, seven, 10 and 15 years) and an equal number of bookrunners (Bank of Taiwan, CTBC, Mega International and Masterlink). Pricing was fixed at 3.95%, 4.15% and 4.40%.
Euro-denominated tranche
The final component of the bond issue was a bolt-on that was built on the back of reverse enquiry demand and launched out of the bank's Hungarian branch, another sop to the Silk Road theme. The order book closed at €1.25 billion.
The bank initially went out with a minimum €300 million issue size but raised it to €500 million and squeezed pricing in from 105bp over three-month euribor to 100bp over. Pricing was fixed at par.
One Belt One Road
In its roadshow presentation, Bank of China said it believed the country's One Belt One Road initiative will "have a significant impact on China's financial services industry by promoting the importance of the Rmb globally and accelerating its internationalisation by expanding the scope and scale of cross-currency swaps and settlement in Belt and Road currencies."
And Chinese banks are certainly starting to make their presence felt on the world stage. Since 2010, overseas loans by Chinese banks have grown by a compound annual growth rate (CAGR) of 23%, rising from Rmb800 billion to Rmb1.838 trillion at the end of 2014.
The country's outbound FDI has also jumped markedly over the past seven years, rising from $26.5 billion in 2007 to $124.6 billion in 2014, placing China third behind the US and Japan.
Likewise, Bank of China's overseas assets have been climbing rapidly, surging 18.1% during 2014 to $745.1 billion. Pre-tax profits from its overseas operations also jumped 29.9% during the year to $8.66 billion.
One of Bank of China's main aims is to support Chinese companies with "Going Global" aims by becoming the main channel for cross-border Rmb payments. In this respect the bank cleared Rmb240.8 trillion in cross-border Rmb currency payments during 2014, up 86.6% on the year and settled Rmb5.424 trillion, up 33.7%.
The bank argues that it is uniquely positioned to capture One Belt One Road business relative to its peers and aims to have branches in at least 50% of countries along both routes within the next couple of years.
If it is successful, Xi Jinping's initiative could create a unified Silk Road for the first time in its history. For the fact is that the term was only coined in 1887 and when the road was first founded almost two millennia earlier people at either end of it had virtually no contact with each other.
The Romans had a very hazy notion of the seres (silk) people, while Han Dynasty court officials referred to the Roman Empire as Da Qin (Great Qin) after China's founding dynasty. Goods rather than people moved along the road and it was eventually closed completely by the Ottoman Turks in the 15th century.
In an unfortunate symbolic twist, Bank of China is now facing a potential indictment in modern day Italy due to the very 21st century and anonymous means of transferring money from one country to another. Earlier this week it was reported that a number of bank officials could be indicted for allegedly helping launder up to €4.5 billion to China from criminal activities relating to prostitution, counterfeiting and labour exploitation.
In a statement, the bank said it had not received any formal prosecution documents but would provide timely disclosure as and when requested.
Syndicate
For its bond deal, lead managers across all tranches and currencies were BOCI, Barclays, Citi, DBS and HSBC.
On the offshore CNH tranche, First Gulf Bank was also a joint lead manager.
On the Singapore dollar-denominated tranche, joint lead managers were OCBC and Standard Chartered.
On the euro-denominated tranche, BNP Paribas, First Gulf Bank, SocGen and UBS were joint lead managers.
On the US dollar tranche, Commonwealth Bank of Australia, Goldman Sachs and JP Morgan were joint lead managers.
This story has been updated since publication with the results of Bank of China's Formosa bond in Taiwan.
