CDB and Zhongrong bonds react to hesitant Fed

Two Chinese companies from either end of the credit spectrum jump into the market after the Fed's dovish policy statement.
The US Federal Reserve
The US Federal Reserve

Two Chinese companies from either end of the credit spectrum jumped into the international bond markets on Thursday following a dovish policy statement from the US Federal Reserve and no new easing measures from the Bank of Japan (BoJ). 

China Development Bank (CDB) returned to the dollar market with a $1 billion three-year transaction three weeks after a $2.72 billion dual currency offering, while high-yield issuer Zhongrong came back with a $500 million deal almost one year after its international debut.

Both deals hit a market that is still in softening mode, with Asian investment grade credit spreads widening 3bp to 5bp on the day after gapping out by as much as 7bp at one point. 

However, sales desks reported more constructive two-way flows involving real money accounts and noted that credit spreads mirrored Treasury movements. 

During New York hours on Thursday, 10-year Treasuries were trading around the 1.55% level, some 76bp tighter than they were at the beginning of the year and far removed from the level analysts thought they would be by now. 

Both the US and Japanese central banks flagged Brexit-linked market uncertainty as one of the major factors influencing their respective decisions to do nothing. However, the Fed also signalled fewer interest rate hikes on the cards, while the BoJ appeared to stay its hand awaiting the Fed's next move.

CDB locks in funding

Syndicate bankers said CDB decided to return to the market so soon after its last deal having decided a combination of rising political risk (possible Brexit) and economic risk (lower than expected non-farm payroll numbers) will make the markets far less conducive later in the year.

The Aa3/AA- rated bank set out with guidance at 105bp over Treasuries for its three-year Reg S deal, before tightening it at final guidance to 90bp. At this point the order book stood at $2 billion.

Final pricing was fixed at 99.796% on a coupon of 1.625% to yield 1.695%. 

Syndicate bankers said it was difficult to pinpoint fair value but suggested the bank had offered a new issue premium of 5bp to 7bp.

CDB has a reputation for making no concession to market conditions, which makes the new issue premium extremely attractive and out of character if fund managers agree it is correct.

In terms of maturity, Chexim has the nearest comparable bond with a 2.5% July 2019 bond outstanding. This was trading Thursday on a mid-yield of 1.68% or Z-spread of 78bp. 

On this basis, CDB has offered a 1bp new issue premium given it priced on a Z-spread of 79bp. But fund managers also need to factor in a liquidity premium since Chexim's outstanding bond was issued two years ago. 

CDB's closest bond is its 2.5% October 2020 issue, which was trading on a G-spread of 86bp according to a syndicate sales note. On this basis, the new bond appears a lot more attractive since it is paying a 4bp premium for a one-and-a-half year shorter maturity. 

On a Z-spread basis, the October 2020 bond was being quoted at 80bp yesterday, while CDB's 2.125% June 2021 bond was at 93bp.

Non-syndicate brokers suggested there should be about 14bp to 16bp on the curve between three and five-years on a Z-spread basis, which would place fair value for the new deal a couple of basis points below where it priced.

Nomura was typical, assigning fair value at 73bp to 78bp over on Z-spread basis and 84bp to 89bp over on a Treasuries basis. It wrote that the prospective bond did not look "very attractive against the backdrop of heavy supply from Chinese financials, weakening fundamentals and jittery market backdrop."

CDB's recent five and 10-year issues have both widened out since launch on a Treasuries basis but faired better on a price and yield basis, although the 10-year is still trading slightly under water.

It was quoted Thursday on a mid-price of 99.38% compared to an issue price of 99.55% and a spread of 144bp over Treasuries compared to an issue spread of 120bp. 

Two Zhongrongs make a right?

In contrast to CDB, Zhongrong needed to offer investors a fairly sizeable premium to its existing paper given it has been downgraded twice in the space of a year by Standard & Poor's and is still on negative outlook.

Counterbalancing this is a lack of paper from Chinese high-yield issues this year and considerable pent up demand for deals, which come at the right price. 

Syndicate bankers said BB- rated Zhongrong built up a peak order book of $775 million, which then closed at the $600 million level. But the company then took most of that off the table with a $500 million transaction that priced at 6.95%. Initial guidance had been pitched at 7.15% before being tightened to 5bp either side of 6.95%. 

A total of 36 accounts participated with a split of 97% Asia and 3% Europe. By investor type, fund managers picked up 40%, banks 47% and private banks 13%. 

"I'd say this was a fairly landmark deal given the size and pricing," said one banker. "It definitely benefited from scarcity value."

The issuance vehicle was Zhongrong International Bond 2016, an SPV that carries a guarantee from Zhongrong International Holdings. This, in turn, is wholly-owned by BB+ rated Zhongrong International Trust, which numbers Sasac as one of its major shareholders.

In line with its 2015 bond, the new deal incorporates a number of safeguards, including a change of control put, plus an interest reserve account holding one semi-annual interest payment and a commitment to maintain a minimum Rmb10 million level of equity attributable to owners.

The parent recently injected Rmb220 million into the SPV to satisfy the minimum equity covenants in the outstanding international bond, which was issued last June. 

This was priced at par with a 6% coupon and was trading Thursday at 99.08% on a yield of 6.499%, according to one non-syndicate broker, or 6.75% according to a syndicate broker.

While the 2015 deal is still below issue price, it has been on an upswing since mid May when it hit a low of 97.15%.

That month the guarantor was downgraded from BB by S&P, which cited thin capitalisation and investment losses. It also said the new deal is "quite sizeable" relative to the guarantor's assets and "very large" relative to its equity size.

It also said the one notch downgrade reflected its belief that the SPV would not automatically be supported by the China Trust Industry Securities Fund in the event of repayment problems given that its business mix falls outside its remit. 

Zhongrong International is the offshore arm of one of China's largest trusts and has three business lines: alternative asset management, capital management and wealth management. 

However, S&P also acknowledged the offshore arm's strategic importance to the group and the bond deal certainly has rarity value given there are no other international issues from Chinese trust companies. 

The size of the order book for the bond deal also probably reflects the mixed ride investors have experienced with recent Chinese high-yield issuers.

Some, such as Oceanwide, have performed well. The unrated real estate developer re-opened its 9.625% August 2020 issue in May with a $200 million tap and the deal is currently trading around the 7.7% level. 

Likewise in late May, BB rated 361 Degrees raised $400 million from a 7.25% June 2021 deal that is currently trading around the 7.035% level.

However, bankers said investors also looked at unrated HNA Tourism, which has a $450 million August 2017 bond outstanding that has gapped out from 9.25% to 10.831% in less than a year.

More recently, unrated Hsin Chong Construction raised $150 million from a January 2019 bond that has widened from 8.5% to 9.858%. 

On Wednesday, baby formula producer Ba2/BB rated Biostime priced a $400 million five non-call two issue at 7.25%. This deal partnered a tender offering for the group's HK$3.1 billion ($400 million) convertible bond offering, which was trading out of the money and has a put option in February 2017. 

Joint global co-ordinators for CDB's bond were: Bank of China, Barclays, BNP Paribas, Bocom (Hong Kong branch) CCB Asia, HSBC, KGI, Mizuho, MUFG and Standard Chartered.

Joint global co-ordinators for Zhongrong's deal were Citi and Guotai Junan, with joint bookrunners comprising AMTD, Haitong International, Huatai Financial and ICBC International. 

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