A huge number of first-time Mainland-based issuers have accessed Asia’s debt capital markets in recent days ahead of China’s upcoming Golden Week holiday, which begins on October 1.
Just this week alone, Asia’s G3 — dollar, euro and yen — bond market has seen Jiangsu-based securities firm Huatai International Finance, power generator Zhejiang Provincial Energy, Hangzhou-based Geely Automobile and China’s largest semiconductor foundry SMIC (just to name a few) raise inaugural debt offerings.
“Most of the regular, big Chinese dollar bond issuers probably expected US Treasury yields to rise in the first half of the year, so a lot of them [sped up] their issuance plans early on in the year,” said Mark Reade, Asian fixed income analyst at Mizuho Securities to FinanceAsia. “We are getting more opportunistic issuances now as there is still a lot of liquidity out there.”
According to Dealogic data, Chinese borrowers raised $4 billion or 65% of total G3 bonds in Asia ex-Japan this week, the largest volume since the week of July 21, when the market saw $5.2 billion worth of issuance from Mainland issuers.
Out of the $4 billion includes Bank of Communications’ $1.2 billion 10-year and €500 million ($637 million) 12-year Basel III-compliant tier-2 offerings, which came on Wednesday and Thursday respectively. The financial institution is the first major Chinese bank to issue the bank capital note from its head office, and also the first ever Asian bank to raise a new-style euro-denominated bond.
Winners and losers
Given the overwhelming supply, not all Chinese issuers were winners despite the number of diverse landmark deals that came to market.
Geely Automobile, for example, raised a $300 million five-year bond on Wednesday, the first debt issuance from a Chinese domestic automotive manufacturer. Investors welcomed the deal, which was over seven times oversubscribed, as it added to the diversification of the high-yield sector that is dominated by Mainland property companies.
However, Geely’s not performing too well in secondary markets, having dropped from par to a cash price of 99.5, according to Bloomberg data.
Other Chinese borrowers who issued inaugural bonds this week are trading pretty flat, including the likes of Zhejiang Provincial Energy’s $300 million three-year note, which increased slightly from its reoffer price of 99.853 to cash bid price of 99.949. Huatai International Finance’s $400 million five-year paper increased slightly from par to a cash bid price of 100.1, according to Bloomberg data.
“This is not a surprise given the recent bond tide in the markets,” said an investor. “The market still digesting the recent deluge of Chinese financial sector supply — not helped by BoCom’s whopping $1.2 billion Tier 2 deal — and China’s Golden Week holidays just around the corner, which could prompt the street to de-risk.”
Even BoCom’s landmark offering is not doing so well in secondary markets due to concerns over its point of non-viability (PONV) triggers — an occurrence where investors could lose all their money if regulators decide the bank cannot survive. The bank’s dollar bond has slumped from a reoffer price of 99.434 to 99.12.
The standout performer of the week happens to be a non-Chinese investment grade issuer. Hana Bank’s $300 million 10-year Basel III-compliant Tier 2 note, which priced on Thursday. The note traded 19bp tighter from its final pricing of Treasuries plus 195bp, according to a Hong Kong-based bond trader.
This is because, Hana Bank’s Basel III bond is one of the most investor-friendly bank capital notes that Asia has ever seen, sources close to the deal said.
Under the terms of the proposed bond, full and permanent cancellation will occur upon designation of the bank as an insolvent financial institution pursuant to Korea’s Act on Structural Improvement of the Financial Industry. Most importantly, pre-emptive capital injections are not considered PONV trigger event — which provided strong support for the deal.
Weak high-yield
Market sentiment in the high-yield sector has been fragile, and this not only applies to Asia, but globally, credit analysts say.
High-yield bond funds posted $3.2 billion in outflows in the week ending September 17, marking their biggest withdrawals in six weeks, while funds that mainly hold US Treasuries posted $2.9 billion in outflows, their biggest in 13 weeks.
Funds that hold investment-grade corporate bonds, which sport higher-quality credit ratings than high-yield debt, remained a refuge with inflows of $3.1 billion, marking their 39th straight week of new cash. Emerging market debt funds attracted $100 million, marking their fourth straight week of modest inflows.
“Investors are giving up game, especially when US Treasuries hiked quite aggressively a few weeks ago,” said a Hong Kong-based credit analyst. “But, the good support for investment grade will continue.”
The US benchmark 10-year Treasury yield closed higher on Wednesday, at a yield of 2.57% underscoring concerns about the Federal Reserve's earlier than expected rate hikes. But the yield has since declined to 2.52% on Thursday, according to Bloomberg.
