Chinese banks mandate international bond deals

Chexim and ICBC mandate benchmark dollar bonds, with CDB likely to follow shortly after.

July is shaping up to be the month for Chinese bank bonds, with $1.5 billion in paper expected from the Export Import Bank of China (Chexim) and ICBC Asia.

Government-owned policy bank Chexim has mandated Citigroup, Goldman Sachs and HSBC for a $1 billion 10-year 144a issue, which is being prepared for launch in mid-July. Prior to this, ICBC Asia is likely to bring a $300 million five-year Reg S deal via Goldman Sachs, HSBC and JPMorgan at the beginning of the month.

International bond issues from China are extremely rare and there has been virtually no paper from the banking sector, particularly the fixed rate sector. Chexim, for example, has issued just one FRN back in 1999 - a $200 million transaction that falls due this November.

Its prospective issue will be eagerly anticipated because of its benchmark size and rarity value, not to mention the fact it will offer much needed diversity away from the sovereign. Chexim may also be more willing to set a market-driven price than the government, whose bond deal last autumn was heavily criticised for pushing pricing too far.

Currently, the PRC's 4.75% October 2013 bond is trading at about 95% to yield 5.42%. This equates to about 73bp over Treasuries and 28bp over Libor.

The sovereign is the obvious pricing benchmark for Chexim. However, whereas the government has an A2/BBB+ rating, Chexim is rated one-notch lower on Moody's side with an A3/BBB+ rating.

As such it may need to price at a wider differential to the sovereign than Korean policy banks such as KDB and Kexim do to the Republic of Korea. The three Koreans have the same A3/A- rating, but the two policy banks typically price new deals at a 20bp to 30bp premium to the Republic.

In April, ICBC Asia was rated A2 by Moody's following the announcement of a Sale and Purchase Agreement to buy Fortis Bank Asia at a cost of 1.05 times book value. At this rating level, ICBC Asia falls one notch below Moody's A1 rating for Hong Kong, although its rating fundamentals are heavily influenced by its parent ICBC, China's largest commercial bank.

As a result of the deal, ICBC Asia will jump from being Hong Kong's 10th largest listed bank by assets to its sixth largest, with an asset base of HK$95 billion ($12.18 billion). The deal will propel it above Wing Hang to sit one ranking below Bank of East Asia.

In terms of pricing benchmarks, Dao Heng Bank's 7.75% January 2007 deal is the most comparable in terms of rating, structure and maturity. The A3/A rated bank's senior issue is currently trading at 109% to yield 3.95%, equating to about 120bp over two-year Treasuries or 46bp over Libor.

ICBC Asia has agreed to pay Fortis $276 million for its Hong Kong operations, which comprise 22 retail branches and five commercial business centres. On completion, the acquisition will double ICBC Asia's current 20-strong branch network and one wealth management centre.

In its ratings release, Moody's said that, "If properly integrated, it should allow the bank to develop a more diversified business platform with enhanced retail and commercial banking. This strategic move should allow the bank to dilute it heavy dependence on the more volatile corporate banking sector and to capitalize on its relationship with its majority parent."

Finally, local analysts say China Development Bank is also in advanced stages of preparing to mandate a fixed rate dollar benchmark. Like Chexim, it is keen to issue before US interest rates less hospitable.

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