China bonds get muted response pre-Fed meeting

Yunnan Energy and Zhenjiang Transportation managed to close dollar bonds this week. But as investors focused on the possibility of a US rate hike, they had to do so without big demand.

A pair of Chinese local government financing vehicles (LGFVs) tapped the international bond markets this week, braving the market ahead of the US Federal Reserve's monetary policy meeting next week.

But with most investors waiting on the sidelines for signals from the Fed, Yunnan Energy and Zhenjiang Transportation struggled to entice investors, who had seen $2.1 trillion wiped off global bond markets in the biggest four-week selloff in the global bond markets since 2009.

The duo's difficulties encapsulate a change in narrative after months in which new-issuer premiums have been small or non-existent. Issuers are having to do more to attract investors after Donald Trump's election in the US sparked fears of higher inflation and steeper rises in the cost of borrowing.

Debt bankers said liquidity in Asia had receded after the November 8 election on expectations that president-elect Trump would bring strong economic growth and higher inflation, in part thanks to a boost in infrastructure spending. That would push interest rates higher — and although it is widely expected that the Fed will hike rates at its December 13-14 meeting, investors will be paying more attention to what Fed chair Janet Yellen says about the pace of future hikes.

"The bond market is taking a breather as investors await more clarity over policy direction from the Fed," a syndicate banker said.

On Tuesday, Yunnan Energy, rated BBB by Fitch, captured more than $600 million of orders at peak level for its dual-tranche Reg S sale, according to a source familiar with the company. That was in stark contrast to its $300 million debut sale in April, when the LGFV attracted more than $3.3 billion of orders, leaving it 10 times oversubscribed.

This was despite the issuer paying "a hefty new-issue concessions to investors," according to a banker familiar with the deal.

Initial guidance for the three-year note was set at 250bp above Treasuries, before narrowing to the 245bp level. Final pricing of the December 2019 $310 million note was fixed at 99.026 on a coupon of 3.5% to yield 3.847%, or 245bp above Treasuries, according to a term sheet seen by FinanceAsia.

The company's outstanding April 2019 bond was trading on a G-spread of 210bp, implying the issuer paid about a new issue premium of around 35bp, according to a syndicate banker.

The five-year note was initially marketed at 270bp above Treasuries, before being tightened to the 265bp area. Final pricing of the December 2021 $130 million note was 98.971 on a coupon of 4.25% to yield 4.482%, or 265bp above Treasuries.

The typical spread between a three-year and a five-year LGFV bond is about 20bp, according to a syndicate banker's estimate, implying the five-year bond could normally be expected to price at about 240bp.

Citi was the sole global coordinator of Yunnan Energy's new deal, while Bank of China, CCBI, China Merchants Securities Hong Kong and HSBC were joint bookrunners.

A day earlier, BB-rated Zhenjiang Transportation garnered $200 million of demand for its three-year debut issue, thanks in part to anchor orders. Zhenjiang raised $140 million through the sale of a three-year note at 5.5%.

The issuer sought to raise $160 million at 5.5% when it released it final price guidance. Initial guidance was set at 5.7%.

Final pricing of the December 2019 Reg S note was fixed at 99.317% on a coupon of 5.25% to yield 5.5%, according to a term sheet seen by FinanceAsia.

A syndicate banker said the pricing of Zhenjiang Transportation was inside the existing curve of Jiangsu Hanrui's comparable $300 million June 2019 bond, which was trading on a yield of 5.731% on Monday. But there were some differences. The Zhenjiang deal was a direct issuance compared with Hanrui's keepwell structure, a person familiar with the deal said.

In the secondary market, the bond was little changed on Wednesday, hovering around its reoffer price.

Barclays was the sole global coordinator, Haitong International, Wing Lung Bank, Shenwan Hongyuan Securities Hong Kong, Huarong International Securities were joint bookrunners.
¬ Haymarket Media Limited. All rights reserved.
Share our publication on social media
Share our publication on social media