State-owned China Development Bank (CDB) returned to the international bond markets on Tuesday night (September 27) with an increased dollar bond and decreased euro-denominated bond.
The 10-year dollar bond was initially slated to raise $500 million, but was increased to $600 million on the back of an order book totaling $1.6 billion. Pricing was fixed at 98.152% on a coupon of 4.75% to yield 4.987%. This equated to 99bp over Treasuries and 54bp over Libor. Fees were 20bp.
The five-year euro-denominated bond was initially sized around the Eu500 million mark, but decreased to Eu325 million. It accumulated an order book of Eu560 million and was priced at 99.974% on a coupon of 3.875% and yield of 3.884%. This equated to 56bp over Bunds and 40bp over mid-swaps. Fees were 15bp.
Bookrunners across both tranches were BNP, Goldman Sachs, HSBC, Merrill Lynch, Morgan Stanley and UBS.
A total of 90 investors participated in the dollar book and 52 in the euro book. By geography, the dollar book saw a split of 55% Asia, 34% US and 11% Europe, while the euro split 52% Asia and 48% Europe.
By investor type, the dollar book saw banks take 52%, funds 39%, insurance companies 8% and other 1%. The euro book split funds 47%, banks 46%, insurance companies 6% and others 1%.
Pricing on each tranche came at the wide end of guidance set last Wednesday at 95bp to 100bp over Treasuries and 35bp to 40bp over mid-swaps. However, final pricing levels are not surprising in the context of difficult market conditions, which have weighed heavily on Asian spreads over the past week.
Three weeks of heavy supply culminated last week in $26 billion of corporate issuance from the US alone versus a year-to-date average of about $13 billion. This proved the trigger point for a sell-down by an investor base with no clear market direction.
"Investor uncertainty is very high right now," says one banker. "There's just too many conflicting data points. On the one hand, the Fed continues to be relatively sanguine about the US economy and yet oil prices are shooting past $50 per barrel."
As a result, both of CDB's main benchmarks widened. The sovereign's October 2013 bond gapped out from 76bp over Treasuries at the time CDB released price guidance to 80bp by the day of pricing. Fellow policy bank Chexim came under even more pressure and widened out from 98bp to 106bp over the same period.
Some might argue that A3/BBB+/A- (Fitch) rated CDB should have ceded the market a basis point or two more to make sure its deal holds tight during secondary market trading. The borrower itself is said to believe it has left a basis point on the table, since it was able to clear the entire the dollar order book at 98bp over.
Relative to Chexim, CDB is said to have priced 5bp to 6bp through on a like-for-like basis given the former was bid at 61bp over Libor at the time of pricing.
Compared to the sovereign it has priced at a tight 4bp premium on a Libor basis given that the People's Republic was trading at 45bp over and there is roughly 5bp on the curve to account for the one-year maturity differential. In Treasury terms it is a more reasonable 15bp on a like-for-like basis, which would put it in line with the 20bp plus premium the Korean quasi-sovereign banks typically aim for relative to the Republic of Korea.
When Chexim came to market in late July, it priced at a 13bp differential to the sovereign on a Treasuries basis. Chexim, for example, was priced at 93bp over Treasuries when the sovereign was then trading at 75bp. The curve was also worth roughly 5bp for the one-year maturity differential.
Since then the sovereign has widened 5bp on a Treasuries basis and Chexim is out 13bp. Bankers say the latter is trading wide because rumours abound that one of its lead managers is still long $100 million of bonds.
"Even if the rumour isn't true, the very fact this speculation is out there is causing an overhang," notes one specialist. "It was a bit of a hurdle for CDB to get past."
Within a day of pricing the dollar bond was still being bid at 99bp by the leads, although other market participants says it widened slightly to 101bp/98bp.
The euro-denominated deal is said to have priced at a 3bp differential to the dollar bond on a like-for-like basis, but could have priced at 1bp over had it not been downsized. Euro investors initially submitted orders for over Eu700 million, but a number of accounts dropped out after the deal was cut back and lost its benchmark status.
This reduction was not that surpising given the order book for the dollar deal was stronger and the leads were incentivized to push this tranche. However, disappointed investors are likely to be filled up relatively soon since the sovereign is preparing to complete its own issue within the next three weeks.
The PRC has indicated it will raise a minimum of Eu1 billion from a 10-year euro-denominated deal and $500 million from a five-year dollar deal. Strategic reasons aside, weighting a euro-tranche probably makes sense given Chexim and CDB between them have now pushed $1.35 billion into the dollar market over the last two months.
Lead managers for the sovereign deal are BNP, Deutsche Bank and UBS on the euro tranche and Goldman Sachs, JPMorgan and Morgan Stanley in dollars.
