Bocom returns with dual currency bond

China's fifth largest lender taps the dollar and euro-denominated bond markets with a more attractive new issue premium than its last foray in July.

Bank of Communications (Bocom) was back in the debt markets on Tuesday executing a new senior deal less than one month after raising $2.45 billion to comply with Basel III regulations.

China’s fifth largest lender by assets attracted a respectable order book of $2.2 billion for a $385 million five-year fixed rate deal and €100 million three-year floating rate note.

Nearly all of the order book was skewed towards the dollar tranche since the euro was only added to meet reverse enquiry demand from Chinese banks.

“They’re eager to buy euro-denominated paper because they want to reduce their exposure to US dollar based assets,” one source close to the transaction explained.

And Chinese companies have stepped in to fill the demand raising the equivalent of $9.65 billion from 16 transactions so far this year according to data provider Dealogic. This far surpasses last year’s $3.32 billion.

Extending a strong appetite for inexpensive funding overseas, China’s financial institutions have also been more active than normal in the dollar bond market, raising $26.3 billion year-to-date, double the $10.6 billion raised over the same period last year.

Bocom’s terms

The A2/A-/A rated group initially went out with guidance of 190bp over Treasuries for the five-year tranche before tightening it to 5bp either side of 170bp. Final pricing was fixed at 99.624% on a coupon of 3.125% to yield 3.207% or 165bp over Treasuries.

The euro-denominated tranche was initially pitched at 120bp to 130bp over three-month euribor before being ratcheted in to 115bp to 120bp over. According to a termsheet seen by FinanceAsia, pricing was settled at 115bp over.

“Institutional accounts dominated the order book as private-banking investors are not interested in deals offering minimal coupon rates in absolute terms,” one banker commented.

A total of 140 investors participated in the two tranches with a split of 95% Asia and 5% Europe for the five-year and 96% Asia and 4% Europe for the three-year. By investor type, the five-year saw 66% go to banks, 18% to fund managers, 12% insurers and 4% corporates and private banks.

The three-year saw 97% placed with banks and 3% with fund managers and private banks.

The closet comparable for the new dollar offering is Bocom's outstanding 3.375% April 2019 deal. This was bid on Tuesday at 2.77%, or a Z spread of 138bp.

One hedge fund told FinanceAsia that fair value for the new deal was roughly 3.2% taking into account the maturity extension and a 20bp new issue premium.

The same fund manager said the April 2019 bonds were trading at 107bp over euribor and placed fair value for the new three-year floater at about 95bp over.

Bocom attracted less demand for the new deal, which has incorporated an attractive new issue premium, than it did for its recent additional tier 1 (AT1) offering in July, which built up an order book of $9 billion, but was priced aggressively. The perpetual non-call five deal carries a coupon of 5% on issue price of par to yield 334.4bp over Treasuries.

After breaking syndicate, it immediately traded down just below par, then managed to hover close to its issue price for a few days before dropping to 99.65% bid towards the end of the month.

On Tuesday it was trading on a mid-price of 99.88% to yield 4.965% or 340bp over Treasuries.

Chinese bank credit has generally remained fairly stable following last week’s currency devaluation. For the week ended August 14, Asian credit spreads as a whole were also largely flat, with the iTraxx Asia investment grade index range bound at 114bp/116bp, according to data from Citi.

Rising NPL’s

Fitch says Bocom may be under pressure to sell non-performing loans at discount prices as bad loans continue to emerge this year.

Battered by a slowing Chinese economy, Bocom's combined non-performing and "special mention" loans represented 3.9% of its gross loans in 2014, up from 2.9% in the end of 2013, according to Fitch.

Joint bookrunners for the bond deal were Bocom Hong Kong branch, Bocom International, ANZ, HSBC and Standard Chartered.

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