Market participants have been awaiting a new sovereign deal from China almost to the day since the launch of its last transaction nearly two years ago in December 1998. Numerous false dawns in the intervening period, however, had led many bankers to automatically dismiss recurrent rumours of the sovereign's return out of hand.
Yet this time round, bankers close to the government, agree that there is a 70% to 80% chance of a deal being printed, with November said to be the favoured month for launch. Certainly if the sovereign is to return this year, it will not want to repeat the mistake of its last deal, which was priced in the middle of December and felt to have suffered from coming too close to year end.
In terms of size and maturity, on the other hand, the new deal is said likely to match the last and will comprise a $1 billion global transaction with a 10 year maturity. It is a strategy based on the fact that the sovereign's yield curve is currently dominated by short dated transactions out to 2004, with gaps at five, seven and 10 years. With intermediate maturities at 2006 and 2008, there is then an even larger gap out to 2027.
"The market desperately needs a new issue from the sovereign, since its benchmark 2008 issue is hardly current," argues one banker. "China's spread have been very range-bound for some months and a new deal could give the credit renewed impetus."
Nevertheless, despite its long market absence, the PRC has managed to just push inside the secondary market spreads of its most comparable regional benchmarks, KCRC (Kowloon Canton Railway Corporation) and MTR Corp (Mass Transit Railway Corporation). According to traders, the Republic's 2008 bond is, for example, currently trading at a bid/offer spread of 170bp/155bp over Treasuries, versus spreads of 195bp/185bp for KCRC's 2010 bond and 184bp/177bp for the MTR's 2009 bond.
Traditionally, the market has taken Moody's view that Hong Kong's sovereign-related credits should trade within the bid/offer spread of the most comparable Chinese benchmark. In practise this has meant that although A3/BBB-rated China can trade either flat or through A3/A-rated Hong Kong, it has tended to trade slightly wider.
Timing of the deal is also being pushed by increasingly positive sentiment towards China's macro picture. WTO accession and the Mainland's restructuring programme have been underpinned by growth figures that have exceeded most economists targets. Having grown by 8.2% over the first half of the year on the back of increased export growth, there is a consensus that the country should average 7.8% growth by year-end, up from 7.1% last year.
Should a transaction emerge, Goldman Sachs, JP Morgan and Morgan Stanley Dean Witter will each have bookrunner's status. The three have held a sovereign dollar mandate since the beginning of the year when Merrill Lynch was replaced by JP Morgan after the bank lost its influential China head Yichen Zhang.
The sovereign has a habit of rotating mandates among the US investment banking fraternity, although in the past it has tended to select two rather than three bookrunners. It's last deal was led by Credit Suisse First Boston and Goldman Sachs and comprised a $1 billion 10 year deal priced at 99.678 with a coupon of 7.3% to yield 280bp over Treasuries.
At the time, the sovereign made clear its intention to launch a maiden euro-denominated offering in the early months of 1999, but dropped the plan after the currency began to falter. This mandate was initially held by Merrill Lynch and Paribas, although the former soon ceded its slot to Deutsche Bank after it decided it would rather lead the dollar transaction.
Since then, it has returned once to the Samurai market, launching a Y30 billion ($284 million) transaction in late June to mark 20 years of borrowing in the currency. Led by Merrill Lynch and Nomura, the five year deal was priced at par with a semi-annual coupon of 1.72% to yield 40bp over Yen-Libor, or 50bp on a dollar Libor basis.
Like most Chinese deals, there was a strong back-stop bid from the Republic itself, with 60% of the deal placed overseas, over which half was said to have been absorbed by Mainland-related accounts.