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China's Everbright Securities made its maiden voyage into increasingly choppy credit markets on Thursday, raising $450 million from a three-year, credit-enhanced deal.
Bankers said robust demand from Chinese commercial banks enabled the Baa3-rated securities group to counter the prevailingly negative market tone with an order book of $1.9 billion from 87 accounts.
The deal came on a bad day for the Asian credit markets, with the Asia ex-Japan iTraxx index widening four points to 125 as investors digested the implications of the US Federal Reserve’s latest minutes. Citing low inflation and the strengthening dollar as two key concerns, the Fed backed away from raising rates in September, though it re-iterated a rate rise is still “approaching.”
Its dovish comments pushed Treasuries back through the 2.10% mark to trade at 2.08% by the time Everbright priced late on Wednesday night.
SMC Power, which had earlier issued a perpetual non-call, 5.5-year deal on Tuesday, immediately struggled on the break dropping nearly two points from par to a mid price of 98.35% by Asia’s close.
Nevertheless, Everbright’s leads felt confident enough to narrow indicative pricing from initial guidance of 210bp over Treasuries to 195bp over. The Reg S bond was issued in the name of Double Charm Ltd, with a keepwell deed provided by Everbright Securities and a standby letter of credit (SBLC) from the Shanghai branch of Baa1/BBB+ rated China Merchants Bank.
Pricing was fixed at 99.789% on a coupon of 2.875% to yield 2.949%.
“Chinese banks flocked into the bookbuild,” said one source close to the transaction. As a result, 96% of the paper went to Asia and 4% to Europe. By investor type, 77% went to banks, 16% to fund managers, 5% to insurers and 2% to private banks.
As an SBLC deal, the main credit comparable was China Merchant Bank’s own senior paper. It has a 2.375% 2018 bond outstanding, which was trading Wednesday on a mid-yield of 2.19%, a G spread of 130bp and a Treasury spread of 155bp.
This means the new SBLC deal has come at a 68.5bp premium to China Merchant’s curve.
Citic Securities also has an SBLC-backed deal with a guarantee from two-notch higher rated Bank of China. This 2.5% 2018 deal was trading on a mid-yield of 2.46% on Wednesday.
Bank of China’s own 2.125% 2018 senior debt was quoted at 2.16%. This equates to a 41.5bp premium between the SBLC and senior bond.
Trading closer to Everbright’s new deal is Haitong International Finance. Its 3.95% 2018 SBLC deal was trading at 2.88% on Wednesday and is also backed by A1-rated Bank of China.
Credit profile
In its rating release Moody’s wrote that “unlike most of the securities companies in China, Everbright Securities’ operations are integral to its group’s core financial business because it forms one of the key subsidiaries in the group’s financial segment.”
It added, “the (stock) market downturn is likely to have a negative impact on revenue growth in the near term.”
The brokerage has also previously been caught in the centre of a fat finger trade when a trader mistakenly placed an order to buy a chunk of exchange-traded funds, pushing the benchmark index up 6% in two minutes. As a result of the trading error, the brokerage paid a record Rmb523 million ($81.79 million) in fines to settle with the Chinese securities regulator.
Moody's said that Everbright’s stand-alone credit has been uplifted by four notches thanks to the strong support of its parent China Everbright Group, which is 44.33% owned by the Ministry of Finance and 55.67% by Central Huijin Investment, the domestic arm of the country’s sovereign wealth fund, China Investment Corp.
In the first six months to June of this year, the brokerage’s net profit jumped almost tenfold to Rmb4.9 billion year-on-year, driven by the speculative frenzy towards China’s stock markets.
The Shanghai and Shenzhen Composite indices have since respectively dropped 28% and 20% from their June 12 peaks, but are both still in positive territory on a year-to-date basis.
In February, Everbright bought a 70% stake in Sun Hung Kai Financial, a Hong Kong brokerage and wealth-management firm for $528 million, allowing the mainland brokerage to bolster its presence in the Territory.
Joint global coordinators for the new bond deal were BOC International, China Everbright Securities (HK) Ltd, Standard Chartered and Wing Lung Bank. CMB International Securities, ICBC, and OCBC were joint lead managers.
