Last week (August 24), United Overseas Bank (UOB) China successfully priced a senior unsecured Rmb1 billion ($146 million) issuance in the China Interbank Bond Market (CIBM), under the Bond Connect scheme.
The issuance marked the fourth time that the Singapore-headquartered bank had tapped the Yuan-denominated market, following its debut onshore financial issuance in 2018, its first Panda bond issuance in 2019, and a UOB China Tier 2 bond in the same year.
With a three-year tenor and a coupon rate of 2.88% — equivalent to 50 bps over the corresponding China Development Bank bond reference yield, the issuance achieved the lowest ever absolute yield among all onshore foreign banks’ senior unsecured offerings to date, according to a memo shared by BNP Paribas.
FinanceAsia spoke to managing director and head of Group Central Treasury at UOB, Chin Chin Koh, about the issuance, and to discuss the trends that her team is witnessing across the onshore market.
“Unlike offshore markets (for example denominated in USD, EUR etc.) where spreads are generally widening, the onshore CNY market continues to see ample liquidity which exerts a downward pressure on absolute yield.”
“The lower yield environment provides cost effectiveness for selective high-quality credits due to the scarcity of quality assets as a result of regulatory clampdowns on specific sectors (such as property and technology), since last year.”
"Sweet spot"
Koh explained that bank treasuries are the primary investors in the onshore market, which has grown to be the second largest bond market worldwide, with a depository balance over Rmb130 trillion.
“High quality Singapore credits like UOB, as well as onshore financial bonds issued out of UOB China, often offer spreads which are considered too tight, and have a duration too short for assets managers and insurance companies, who tend to have higher absolute yield hurdle and a preference for longer duration of over three years,” she explained, deeming the three-year tenor the team’s “sweet spot”.
However, in spite of China’s easing of monetary policy compressing spreads and to some extent, dampening investor appetite among those with yield hurdles, Koh remains optimistic when it comes to funding opportunity offered by the onshore market.
“We still see good support from both new and existing investors who are keen to deploy cash into high quality credits,” she said, even amid concerns over China’s property sector and the continued, sporadic waves of Covid-19 in the country.
Indeed, the orderbook attracted new participants, with a 40:60 new to existing investor split. Koh confirmed that the issuance was 1.4x oversubscribed within four business hours of book building, and drew participation from both Asian internationals (10%) as well as domestic bond buyers (90%).
“Generally, since Q4 last year, the market is seeing lower offshore accounts participation in onshore CNY bonds due to lower spreads versus comparable offshore USD bonds on an after-swapped basis. However, we believe that the trend of internationalisation of Rmb bond market remains intact, and high-quality global credits from familiar names, like UOB, still appeal to new global investors.”
With participation from both UOB’s global Group Treasury Unit (CTU) and members of the onshore UOB China team, including CFO, Brian Zhu, Koh confirmed that proceeds of the bond will be used to diversify funding, optimise balance sheet structure and support the connectivity strategy for the UOB China branch.
“Since the establishment of the Group Central Treasury Unit in 2013, UOB has been actively developing our wholesale funding capabilities and market access into the key international currency markets and local currency debt markets,” she said, adding that this includes expanding the bank’s investor base globally, across the US, Europe, Australia, Greater China and Southeast Asia.
“The Group takes keen interest in the development of the local debt capital markets where we have key operations in, and this latest onshore financial bond issuance demonstrates our commitment as a repeated issuer in this market.”
The road ahead
Turning to the themes likely to shape the landscape of Asia’s capital markets across coming months, Koh shared, “The withdrawal of fiscal measures and the raising of interest rates globally to curb inflation, coupled with geopolitical tensions, will continue to drive volatility and uncertainty in most global markets, leading to widening spreads due to investors’ demand for higher risk premiums, preference for shorter tenors and better credits.”
“Separately, there might be pockets of bright spots brought about by megatrends, such as sustainability, which is seeing growing interest from investors for ESG and green bonds.”
The Rmb1 billion transaction was arranged by lead underwriter and bookrunner China Securities, with the support of joint lead underwriters BNP Paribas (China) Limited, Bank of China, China Merchants Bank, and HengFeng Bank. Fangda Partners and EY China acted as the legal and financial advisors, respectively.
