Supply chain manager Li & Fung returned to the international bond markets for the first time in four years, issuing an upsized perpetual non-call five bond thanks to frenzied demand.
The Reg S deal stood its ground in the market on Thursday as the issuer was competing with at least five others in the regional G3 market for investor attention. China Development Bank, Bank of East Asia, Golden Wheel Tiandi, Beijing Capital Development, Guangxi Communications and Sirius International also launched offerings, collectively issuing $2.7 billion worth of bonds.
“Investors in Li & Fung’s latest debt are familiar with its credit fundamentals, the structure of the company and its management team,” a syndicate banker said.
The bonds also were priced attractively to global investors looking to secure better yields than on offer in developed markets. Investors may also be eager to take advantage of new issues before the US Federal Reserve raises interest rates in December, as many investors expect. Or investors may be seeking higher yielding securities to make up for poor performance elsewhere.
If US Treasury yields rise, duration will become a greater risk for perpetual bonds with fixed coupons. Higher US rates could flatten the yield curve, in which longer-dated securities (such as perpetual bonds) no longer offer such attractive yields relative to shorter-dated ones.
Institutional investors accounted for nearly 70% of the Li & Fung deal, far higher than its closest comparable, New World Development’s $1.2 billion borrowing in September, in which only 35% was allocated to institutions. One source suggested this is evidence that more funds are keen to add riskier debt to their portfolios.
The final order book closed at $4.4 billion from 214 accounts. Most of it was taken by Asian investors, although European investors accounted for 10% of the allocation. Fund managers accounted for 66% of the deal, while private banks took 32% and commercial banks the final 2%.
Unlike most callable perpetual bonds, there is no step-up mechanism in the latest deal, diminishing the incentive of the issuer to redeem the debt. The coupon is fixed for life.
In addition, the company has an option to defer interest distribution perpetually but subject to restrictions on dividend payments and share repurchases.
The Hong Kong-listed group, rated Baa1/BBB+ by Moody’s and S&P, initially marketed its deal at 5.625%, before tightening it to a range of 5.25% to 5.375%. Final pricing of the deal was fixed at par to yield 5.25%, according to a term sheet seen by FinanceAsia.
Meanwhile, the unrated New World Development’s $1.2 billion 5.75% perpetual bond was trading at a 5.24% on a yield-to-call basis, or a spread to US Treasuries of 395bp. The debt is callable in September 2021.
In the secondary market, the new Li & Fung bond was traded up on a cash price of 100.137, equivalent to 5.219% on a yield-to-call basis.
Joint bookrunners were Citi, HSBC and Standard Chartered.
