Asian borrowers on a roll

Asia bond markets saw a whopping $6 billion in issuance overnight from the likes of Tata Steel, Greenko and China Exim Bank as investors look to put money to work.

The low rates environment is not only encouraging Asian issuers to tap bond markets at favourable levels but it’s also pushing investors to put their money to work, resulting in more than $6 billion worth of deals.

On Friday morning, six deals priced — three from China and India respectively — ranging from transactions in the high-yield and investment-grade space, and equally split between Reg S-only and Reg S plus 144A offerings.

From the Chinese space, the Export-Import Bank of China priced a $3 billion dual-tranche offering, China Railway Construction raised a $800 million perpetual bond callable in year five and property company Modern Land sold a $125 million five-year note.

From India, steelmaker Tata Steel priced a $1.5 billion dual-tranche bond, green energy player Greenko raised a debut $550 million five-year note callable in year three and communications services company Global Cloud Xchange sold a maiden $350 million five-year paper callable in year two.

“Global bond yields are still pretty low and tightening cycles are not going to be as aggressive in the case of the Fed,” Kenneth Akintewe, Asian fixed-income portfolio manager at Aberdeen Asset Management to FinanceAsia. “You still have the ECB [European Central Bank] biased to ease policy, which can support markets, nevertheless given valuations across asset classes and the extremely low levels of volatility, investors do appear to be getting more concerned about a potential correction in markets.”

Treasury 10-year note yields traded at almost the lowest level since May at 2.47% on Thursday as investors bet an uneven economic recovery won’t push the Federal Reserve to accelerate interest rate increases.

The US central bank may keep interest rates at zero for longer than anticipated as inflation stays muted and the jobs recovery remains slow, the International Monetary Fund said on Wednesday.

At the beginning of June, the ECB lowered the eurozone base rate to a record low of 0.15% to boost demand for loans. Also, it installed, for the first time, a negative rate (-0.1%) on bank deposits parked at the ECB, an unprecedented move as it effectively penalises banks for parking surplus funds with the central bank rather than lending to other financial institutions.

“From a debt perspective, we have not seen a significant outflow of money from fixed income in Asia,” said Paul Au, co-head of Asia DCM at UBS at a press briefing in Hong Kong on Thursday. “From a house view perspective, [interest rates] will be stable for the rest of the year,” he said, adding that short-term interest rates will only start increasing in the second or third quarter of 2015.

Emerging bond markets took in $29 billion in June, the highest monthly total since April 2013, the Institute of International Finance, a global financial industry group, said in its monthly report.

DCM experts are confident that the annual total volume for dollar-denominated deals in the Asia ex-Japan space will exceed last year’s record-breaking number of $148 billion, according to Dealogic data. Year-to-date volumes have already reached $127.2 billion.

Chexim, China Railway bonds

The Export-Import Bank of China (Chexim) sold a jumbo dual-tranche $3 billion bond that’s split equally between five- and 10-year offerings — each of them obtained an orderbook that’s in excess of $4.7 billion and $5.5 billion from more than 190 and 230 accounts respectively, according to a term sheet.

Both tranches received overwhelming responses from institutional investors — more than 90% of which came from mostly fund managers, followed by banks and insurers.

This enabled the issuer to tighten pricing by 25bp for both tranches from an initial price guidance of Treasuries plus 115bp for the five-year and Treasuries plus 145bp for the 10-year, said a source familiar with the matter.

China’s overall red tape-easing landscape has provided an ideal backdrop for issuers to tap offshore markets, fixed-income experts said. “The recently released new government initiatives to accelerate the interest rate liberalisation and the overall financial reform should open doors for more Chinese firms to diversify and explore their funding options offshore,” Steve Wang, fixed-income analyst at Bank of China International.

Early July, the People’s Bank of China removed the ceiling on foreign currency deposit rates across the city for what it described as small accounts, a step towards easing interest rate controls across the nation. The trial starts with institutional accounts and individual accounts will be added later based on “market conditions”, it said in a statement.

ANZ, Bank of Communications Hong Kong, Barclays, Credit Agricole, HSBC, ICBC International, JPMorgan and The Royal Bank of Scotland were the joint bookrunners of the 144A/Reg S-registered transaction.

China Railway Construction’s $800 million perpetual offering also received a good response from investors, obtaining an order book that is nearly nine times oversubscribed from about 240 investors in the Reg S-only space. Fund managers subscribed to 82% of the notes.

As a result, the issuer was able to tighten pricing of the bond — callable in year five — by 30bp from an initial price guidance of 4.25% area.

From the first call date and onwards, the rate resets every five years to a new fixed return equal to the prevailing five-year US Treasury benchmark rate plus an initial spread of 225.1bp and a margin of 500bp payable semi-annually, according to a term sheet.

“Despite our general caution when it comes to perpetuals — due to extension risk — and longer-dated state-owned enterprise exposure — due to uncertainty created by SOE reform — whichever way we cut it we think this bond looks cheap,” Mark Reade, fixed-income trading desk analyst at Mizuho Securities said.

“That’s especially the case given this bond’s 500bp step-up suggests a high probability that it will be called in 2019,” he added. “And in the unlikely event that it is not, the US Treasury reset provides some added protection against rising rates.”

Citi and HSBC were the joint global coordinators and bookrunners of the deal. Other bookrunners include BNP Paribas, DBS and UBS.

 

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