The People's Republic of China has set a new sovereign benchmark in the Samurai market with its first deal in almost five years. Capped at an issue size of Y30 billion ($284 million), the five year deal was heavily subscribed thanks to strong international support from China-related accounts.
In a pattern repeatedly witnessed in the PRC's dollar transactions, Mainland money often proves the vital prop that enables the government to secure tight pricing relative to comparable benchmarks. In this particular instance, such interest was crucial to spur initial momentum and win over Japanese accounts burnt by their exposure to the ITICs (International Trust & Investment Corporations).
One day prior to the pricing of the new sovereign deal, for example, Hainan ITIC became the latest to default on a $6.9 million interest payment for a Samurai bond due 2001. Despite assurances from Ministry of Finance vice minister Jin Liqun that the delay was due to a technical error and payment would be made before the end of the grace period, the failure only served to re-ignite the problem in investors' minds.
The new sovereign deal, led by Merrill Lynch and Nomura was priced at par with a semi-annual coupon of 1.72% to yield 40bp over Yen-Libor, equivalent to about 50bp on a dollar Libor basis. This was the tighter end of a pre-marketed range of 35bp to 50bp over Yen Libor, subsequently narrowed to 40bp to 45bp over.
The two leads retained books of Y14.35 billion a piece, with 10 co-managers and three underwriters allocated retention tickets of Y100 million each.
Distribution figures from one of the leads show that about 40% was placed in Japan and 60% internationally, of which Europe accounted for 20% and Asia 40%. Bankers said that of the international figure, about half of investors derived from Mainland-related accounts.
"International investors definitely initiated interest in the deal," one banker comments. "And once Japanese investors saw how popular it was becoming, they all came in en masse as well. A lot of domestic orders were suddenly placed a day before pricing on Monday."
And a second adds, "The recent problems with the ITIC's have had a negative effect on Japanese sentiment. But thanks to strong support from foreign investors, they turned far more positive on the credit and towards the end of the marketing period understood that there is a clear distinction between pure sovereign credit and that of the ITIC's."
Wide interest reported
In terms of Japanese placement, bankers reported interest across the whole institutional spectrum from Tokyo-based life insurance companies to the regional credit federations. However, because of the relatively small size of the deal, there was virtually no placement to retail.
"China has been absent from this market for a long time," one banker notes. "Over the course of the Asian crisis, its rating has been downgraded slightly and it needed to come back and present its credit to Japanese investors."
Because the deal is viewed by the government as a strategic transaction and does not match a particular funding need, bankers say that proceeds are likely to be retained in Yen for the time being.
Were the deal to be swapped back into dollars, however, it would come slightly outside current secondary market levels because of a still wide basis swap. Bankers add that this factor encouraged greater interest from international accounts, many of whom are still underweight Yen product.
A theoretical swap of the PRC's secondary dollar spreads into Yen, on the other hand, allowed the government to price the deal slightly inside current trading levels.
As one banker explains, "Most emerging market borrowers that come to the Samurai market have to pay a slight premium to the dollar market because Japanese investors are not traditionally so aggressive in taking credit risk. Once a borrower has re-established a strategic presence in the market though, it can then come back a second time and price in line with dollar levels.
"Turkey showed this process in action this year," the banker adds, "launching a first deal in February and then a much tighter priced one in mid-June. What was interesting about the China deal was the fact that there was no need for a premium. It was very successful and a clever strategy."
Yen market popular
Interest rate volatility in the dollar market has made it difficult for emerging market credits to bring successful deals to market for most of this year. Rising interest rates have also made funding expensive on an absolute basis, with headline coupons of over 10% putting many borrowers off.
By contrast, the low coupons available in the Yen market have made the sector extremely popular, with credits like Argentina and Brazil achieving respective launch yields of 5.125% for four year paper and 4.5% for five year paper.
The Republic of the Philippines is now hoping to follow in their wake, mandating Daiwa and Nikko Salomon Smith Barney last month for a Y50 billion to Y70 billion (roughly $500 million to $700m) deal. Should the deal prove successful it may complete the government's official funding target for the year and more importantly, help bolster a reputation tarnished by a poor performance in the dollar market and failure in euros.
Depending on investor demand, the deal will either comprise one five-year tranche, or a split five- and seven-year tranche. Indicative pricing suggests that a shorter maturity will be priced with a 3% coupon and a longer maturity with a 3.5% coupon. On a dollar spread basis, Tokyo-based bankers say that the former translates to spread levels around the 170bp to 180bp mark, well inside current secondary levels around the 220bp to 230bp mark.
Where China was concerned, the Republic has no outstanding benchmarks in the Samurai market and a previous issue by the China Development Bank is so illiquid that it doesn't trade. Indeed, some international bankers have argued that the growing popularity and strength of the Samurai market is ironic given that the sector almost exclusively references pricing against dollars rather than Yen.
"The lack of secondary trading and investors' unfamiliarity with credit tools has long been held as a constraint to more a more vibrant performance," one concludes.
