Bank of China likes to make a bold splash when it accesses the international bond markets and on Tuesday it daubed them green and red with a debut environmentally friendly bond that incorporated dollar, euro and renminbi tranches.
The $3.028 billion transaction comes almost one year after the A1/A/A rated group set the markets alight with its blockbuster $3.55 billion four-currency Silk Road bond.
This year’s deal breaks new ground on a number of fronts.
Firstly, it is the largest-ever G3 currency green bond issue from Asia ex-Japan.
But it is also notable because the renminbi tranche has come through the bank’s New York branch. This represents the first time China has tried to make headway with the internationalisation of its currency in the US: a country that has been understandably reluctant to embrace it for fear of losing the greenback’s exorbitant privilege.
Overall, Bank of China did not quite capture as much demand for its 2016 bond as it did in 2015 across dollar, euro and dim sum tranches.
Last year, it amassed a final order book of $11.87 billion excluding the Formosa bond. This time round, it ended up with final demand around the $7.663 billion mark according to syndicate bankers.
However, it was notable that the weak link was US dollars, although this too was still strong in the context of fragile post Brexit markets, which saw 10-year Treasuries fall to a new 1.37% low on Tuesday.
In 2016, Bank of China ended up with a final order book of $5.6 billion compared with $10 billion in 2015.
But the bank is likely to have been particularly pleased making a little bit more headway in euros and the huge order book it generated in renminbi.
The former closed with $1.3 billion equivalent in demand compared with £1.38 billion last year and the latter with Rmb5.1 billion ($763 million) compared with Rmb3.3 billion ($494 million) last year. At its peak, the renminbi book hit Rmb8.5 billion according to one banker.
The uptick in renminbi orders underlines significant pent up demand for dim sum bonds after a lengthy drought despite a generally poor prognosis for the currency relative to the dollar.
Finally, Bank of China is likely to be happy that it has been able to diversify its investor base with bankers reporing that roughly 20% of the European distribution went to dedicated green bond funds.
In dollars, the Beijing-based lender sold a $750 million three-year FRN, a $500 million three-year fixed rate note and a $1 billion five-year fixed-rate note.
In euros, it raised €500 million from a five-year deal and in renminbi, Rmb1.5 billion from a two-year issue, according to term sheets seen by FinanceAsia.
Initial guidance for the July 2019 and July 2021 fixed rate notes was set at 145bp and 160bp over Treasuries.
Final pricing of the shorter-dated note was fixed at 99.93% on a coupon of 1.875% to yield 1.899% or 125bp over Treasuries.
Final demand came to $2.1 billion from 85 accounts. By geography there was a split of 79% Asia and 21% Europe and the Middle East. By investor type, bank treasuries took 72%, followed by fund managers and insurers on 22%, agencies 5% and private banks and others 1%.
The longer-dated note was priced at 99.836% on a coupon of 2.25% to yield 2.285% or 135bp over Treasuries.
This had $2.3 billion of demand from 170 accounts and the same geographical split as the shorter dated tranche. By investor type bank treasuries took 62%, fund managers and insurers 30%, private banks 5% and agencies 3%.
The $750 million FRN was priced at par to yield 100bp over Libor.
This tranche had $1.2 billion of demand from 115 accounts. By geography there was 80% from Asia and 20% from Europe and the Middle East. By investor type 42% went to bank treasuries, 32% to fund managers, 21% to agencies and 5% to private banks.
The euro deal was initially marketed at 120bp over mid-swaps. Final pricing came at 99.839% on a coupon of 0.75% to yield 0.783%, or 95bp over mid-swaps.
It had $1.3 billion of demand from 135 accounts. Distribution saw 76% to Europe and 24% to Asia. Fund managers took 46%, bank treasuries 34%, agencies 12% and private banks 8%.
Joint global coordinators for the US dollar and euro tranches were Bank of China, Bank of America Merrill Lynch, Credit Agricole and HSBC, while BNP Paribas, China Construction Bank Asia, Commerzbank, ING and SEB were joint bookrunners.
The dim sum bond was initially marketed around the 4% level before being priced at par with a 3.6% coupon.
A total of 88 accounts participated with a split, which saw 79% placed in Asia, 20% in Europe and 1% with offshore US. By investor type funds took 32%, banks 50%, sovereign wealth funds and insurers 17% and private banks 1%.
Healthy new issue premium
The closest comparables for the two dollar tranches were BOC’s recent $600 million 1.875% March 2019 bond and $500 million 2.375% March 2021 bond.
The former was trading at a G-spread of 117bp and the latter at 129bp on Tuesday.
This suggests a healthy new issue premium around the 7bp to 8bp mark for the new three-year tranche and 5bp to 6bp mark for the five-year tranche.
This unexpected generosity is a reflection of post Brexit volatility and contrasts very strongly with the aggression BOC showed in late February when it priced a three-year issue at 7bp through its secondary market curve and a five-year at 5bp through.
Neither tranche has performed particularly strongly, rising slightly below one point in price terms since then.
Where the euro deal is concerned, the main benchmark was Aa3/AA- rated China Development Bank's outstanding €1.5 billion 0.875% 2018 issue and its €1 billion 0.5% 2021 issue. The two were trading on respective Z-spreads of 43bp and 62bp on Tuesday.
For the dim sum tranche, Bank of China has two outstanding deals: a 4% March 2019 bond via its Singapore branch and a 3.85% July 2019 deal through its Paris branch.
Both were trading on a mid-yield around the 3.819% mark on Tuesday, suggesting another generous 20bp pick-up.
Green bond framework
Proceeds from Bank of China’s issue will be used to fund green projects spanning renewable energy, pollution control, sustainable water management and clean transport.
The bank has followed the internationally recognised Green Bond Principles and also paid for a second opinion that certifies use of proceeds.
This was provided by Ernst & Young, which assigned its GB-AAA score.
Under the bank’s guidelines, domestic and overseas branches are responsible for preliminary screening of green projects, which have to be submitted to headquarters for final review.
The bank will maintain a separate ledger detailing all of its green projects and will publish a quarterly report on its website.
It also says unallocated funds can be invested in domestic or international green bonds by other non-financial issuers suggesting the bank will become an important investor for other green issuers in the region.
Yunnan LGFV also brings a bond
A debut $500 million issue by Yunnan Metropolitan Construction Investment Group was also completed on Tuesday.
This BBB+ rated group attracted a respectable peak order book of $1.75 billion, in part propelled by a compelling 16bp premium relative to the group’s nearest comparable. The final order book closed at the $900 million mark.
The three-year Reg S deal was priced at 99.586% on a coupon of 3.125% to yield 3.271%, or 260bp over Treasuries, according to a term sheet seen by FinanceAsia.
Initial guidance was set at 290bp over Treasuries, before being tightened to 5bp each side of 265bp.
The issuance vehicle was Caiyun International Investment with a guarantee from Yunnan Metropolitan.
Distribution stats show that 68 accounts participated with a split, which saw 96% placed in Asia and 4% in Europe. By investor type, funds took 45%, banks 30%, corporates 11% and private banks 14%.
The closest comparables were BBB+ rated Yunnan Investment Group's 3.275% April 2019 bond and BBB rated Yunnan Provincial Energy Investment Group's 3% April 2019 note.
These were respectively trading on G-spreads of 244bp and 253bp on Tuesday.
One fixed income investor described Fitch’s rating uplift as aggressive on the basis of potential downside risk should there be any change in the debt levels or fiscal position of the local government.
This story has been updated with final deal stats.