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Bank of China Hong Kong raises $1.6 billion in week of record issuance

Despite volatile markets in Europe and the US, nine bond issuers came to market in Asia last week, including Noble, Chandra Asri, New World, KDB and Star Energy. But Bank of Baroda postponed the launch of its planned deal.
 The Bank of China building in Hong Kong (left)
The Bank of China building in Hong Kong (left)

Asian stocks suffered heavily across the board on Thursday and Friday last week due to concerns that the ongoing sovereign debt problems in Europe could upset the global economic recovery and conditions in the debt markets were volatile throughout the week. In spite of this, Asian issuers managed to price nine deals last week, raising a record $5.4 billion.

Early in the week, Industrial Bank of Korea tapped the market for $350 million and Rizal Commercial Banking Corp raised $250 million. They were followed over the next few days by another seven deals as issuers tried to use the current market window before central banks in the region consider raising interest rates.

The largest deal of the week was Bank of China Hong Kong's $1.6 billion lower tier-2 debut issue, which priced late Thursday. The 10-year notes pay a coupon of 5.5% and were priced at 99.591 for a yield of 5.6%, which is equivalent to 200bp over the comparable US Treasury yield.

Given all the regulatory changes in the bank capital market, with regard to how subordinated debt should be treated, there was a lot of uncertainty from a structural standpoint surrounding this deal. One banker explained that the decision to make it a 10-year bullet deal -- the bonds mature on February 11, 2020 -- was made because the structure would comply with the most conservative interpretation of what the new regulations, issued by the Bank of International Settlements, will require.

The bonds rank as investment grade and received a BBB+ rating from Standard and Poor's, an A1 from Moody's and an A- from Fitch. The Rule 144A/Reg-S deal was arranged by BOC International, Deutsche Bank and UBS.

The final order book amounted to $4.5 billion split over 316 accounts. The majority of the allocation, 57%, went to Asian accounts, including many Hong Kong- and China-based investors, with the remainder evenly distributed to Europe (21%) and the US (22%). Fund managers took 45%, private banks 30%, banks 9%, and corporates 7%. Four percent of the bonds were sold to central banks and 3% to others, while the final 2% was allocated to insurance houses.

Investors were attracted to the deal partly because of the rarity of the assets. Bank of China hasn't issued in the international bond markets since 1994 when it sold a $100 million bond and this was the BOC Hong Kong's first foray into the offshore bond markets.

The BOCHK bonds widened to 218bp over US Treasuries in the immediate aftermarket on the back of a quite dramatic deterioration in the overall market overnight, and by mid-afternoon Friday they were trading at 216bp/214bp. By comparison, investment-grade Asian corporate spreads widened by 11bp over night.

Among other new investment-grade issues, Noble Group's spread over 10-year Treasuries widened by about 25bp to 267bp by mid-afternoon Friday after coming to the market late Thursday with a cash price of 103. The deal -- $400 million of senior 6.75% 10-year bonds -- was a tap of existing bonds issued back in October 2009.

Hong Kong-based Dah Sing Bank suffered a similar fate. Its $225 million 10-year issue (matures on February 11, 2020), which was also printed on Thursday, pays a coupon of 6.625%, and was re-offered at par for the same amount of yield. This was equivalent to a spread of 294.2bp over the 10-year US Treasury yield. At the end of Asian trading Friday, the Dah Sing spread had widened well beyond 300bp.

Europe-based traders noted that spreads on European emerging market sovereigns deteriorated by about 30bp on Thursday night Asian time. This was a significant move and resulted in Asian stocks falling across the board on Friday, in many cases reaching five-month lows.

One banker commented that perceptions over the sanctity of the financial health of these peripheral European governments have weakened. "If a government is being put into question, the effects are going to trickle down the credit spectrum. In this context, corporates and financials offer a less risky option for investors."

Under the current market conditions, Asia is seen as a haven for investors. Therefore we can expect to see a greater allocation across asset classes to US and European investors wanting to get exposure to Asia.

"Risk aversion has gone up in a matter of days", said one banker close to the BOCHK deal. "Look at the movement in currencies, (and) equity markets on Thursday night were the most violent we have seen since April of last year".

Indeed, the markets are going through a significant correction. On-the-margin, though, investors still want to participate because they're looking beyond this period of volatility. That said, if there is an over-correction on the equities side, it will put a hold on everything else.

One casualty was India's Bank of Baroda, which was also expected to price a bond deal last week. But, at the end of its roadshow, the bank announced that it would postpone the pricing of its deal after yield spreads of Indian bonds in the secondary market widened by 20bp to 30bp during the previous week-and-a-half, suggesting the market is getting more distressed. It is expected that Bank of India will make a similarly pragmatic decision to postpone the launch of its planned bond until market conditions have calmed down somewhat. Bank of India will end its roadshow today (February 8).

Despite the massive issuance over the past week, there is no indication that the investor base is getting overwhelmed. One banker said that once these deals are done there will be another period of inactivity in the market.

The mad rush to issue also saw the following four deals price last week:

Chandra Asri, a leading Indonesian petro-chemicals company, issued $230 million of senior secured guaranteed notes with a coupon of 12.875% on Thursday night.

New World Development, a Hong Kong conglomerate, came to market early Thursday with a debut issue of $500 million 10-year Reg-S bonds. The unsecured fixed-rate notes pay a coupon of 7% and were re-offered at par with a spread of 332.1bp over US Treasuries. Immediately after the bonds started trading in Asia they tightened to 325bp. They then rallied to 315bp by mid-afternoon before widening again to 319bp by late afternoon.

Korea Development Bank sold $750 million of 5.5-year senior unsecured notes late Wednesday night, making it the second Korean policy bank to issue US dollar-denominated bonds this year. The deal was priced at 203bp over US Treasuries, but by the end of Asian trading Friday the spread had widened to 213bp.

Star Energy Geothermal was the final deal to be issued last week. The Indonesian independent power producer came to market on Friday night with a $350 million five-year issue with a coupon of 11.5%. The bonds were re-offered at par to yield of 11.5%.

Photo by AFP Photos.

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