China prices its first perpetual bond

The country is actively promoting its first perpetual bonds after a failed trial earlier in the year, but the market still has reservations.
Last week, China’s interbank market saw a rate spike, with the seven-day repo rate climbing as much as 2.9% to 6.9% at one point.
Last week, China’s interbank market saw a rate spike, with the seven-day repo rate climbing as much as 2.9% to 6.9% at one point.

China is set to finally see its first onshore perpetual bonds after an initial trial failed earlier this year but hopes are slim that more will follow suit anytime soon. 

Wuhan Metro, an AA+ rated company by domestic ratings agency China Chengxin, closed bookbuilding for its Rmb2.3 billion ($378 million) corporate bond issuance on Tuesday.

A perpetual bond is a bond with no maturity date and may be treated as equity, not as debt. Issuers pay coupons on perpetual bonds forever, and they do not have to redeem the principal.

The notes can be regarded as perpetual bonds because they have no fixed maturities, which the onshore market has not seen before.

Every five years, the issuer has options to extend the bonds for another five years, or fully redeem the notes.

The first five-year Wuhan Metro perp was set at 8.5%, comprising a base coupon of 2.89% as well as a spread of 5.61%. The book was well covered, according to a source familiar with the situation.

The price was set based on investor orders, the source said. According to the offer terms, the guidance price was set at a spread of up to 5.7% over a 1,250-day average of one-week Shibor, the Shanghai Interbank Offered Rate.

The coupon is comparably expensive for the issuer.  In the secondary market, five-year corporate bonds with the same AA+ rating as Wuhan Metro’s were quoted at 6.1%, much lower than 8.5%.

“The timing of the issuance may be not perfect as liquidity is a little tight now,” said another source.

Last week, China’s interbank market saw a rate spike, with the seven-day repo rate climbing as much as 2.9% to 6.9% at one point.

Reasons for the spike include a seasonal cash need of banks for tax payment and market concerns about another liquidity squeeze.

Sources said the hefty issuance cost could also be because the product is new to the market and investors could be concerned.

For example, the company did not clarify whether the bonds will be treated as debt or equity on its balance sheet, which could cause a degree of uncertainty.

Such concerns led to the failure of the trial from China Merchants Group, which planned to issue Rmb1 billion of perpetual medium-term notes (MTN), media reported in April.

State-owned GD Power Development is also in preparation to offer Rmb1 billion perpetual MTN but the deal is in limbo due to diverse market opinions towards the pricing.

“It [the deal] is dependent on the price. It’s a decision of the issuer,” said a source close to GD Power. The source also said the MTN will be more “like perpetual bonds”, which means the notes will most probably be treated as equity, if they come out to the market as planned eventually.

The completion of Wuhan Metro’s deal, like other innovations in China’s financial markets, is a more symbolic breakthrough than practical.  

Guaranteed by a local branch of Industrial and Commercial Bank of China in liquidity and by local fiscal department in interest payment, the bond issuance reveals regulators’ willing to introduce more financial products that are common in the global marketplace.

It also increases the options in terms of funding instruments for issuers, especially Chinese banks, which in strong capital needs to meet Basel III standards.

“The Wuhan Perp is a good starting point,” said the banker on the transaction. “It’s a tester and the Perp market will gradually evolve and develop, in a way usually seen in the Chinese capital markets,” said the banker.

The offering process will end on November 1. Haitong Securities is leading the transaction. 

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