Bank of Communications (BoCom) returned to the offshore bond markets for the second time this year on Tuesday, building up a predictably strong order book for a new $1 billion dual tranche issue by its offshore leasing subsidiary.
The ongoing lack of dollar supply from Chinese credits combined with heavy redemptions and renewed renminbi weakness, all ensured a strong bid from onshore Chinese accounts and a peak order book that topped $5 billion.
This was higher than the $3.5 billion order book Bocom built up in late January when it was last in the market with a $500 million issue by its Hong Kong branch, although the new deal encompassed two rather than one tranche this time round.
Bankers said there was a noticeable drop off to $4.1 billion after indicative pricing was revised to levels, which showed investors the two tranches would price through fair value. However, they said the illiquidity of Bocom's secondary curve made fair value calculations difficult and argued that pricing was ultimately determined by the level the main investors (other Chinese banks) were happy to hold the paper at.
Indicative pricing was initially pitched at 140bp over Treasuries for the three-year and 160bp over Treasuries for the five-year.
Final pricing for a $400 million three-year bond was fixed at 99.697% on a coupon of 2.125% and yield of 2.23% equating to 110bp over Treasuries.
This tranche attracted final demand of $1.8 billion from 40 investors. By geography 99% went to Asia and 1% to EMEA. Banks took 96% followed by corporates on 2%, private banks 1% and fund managers 1%.
A $600 million five-year was priced at 99.429% on a coupon of 2.625% and yield of 2.748% representing 130bp over Treasuries.
This tranche attracted final demand of $2.3 billion from 75 investors. Again 99% went to Asia and 1% to EMEA. Banks took 81%, sovereigns and insurers 12%, fund managers 6% and private banks 1%.
The issuance vehicle was Azure Orbit III, which is fully owned by BoCom's offshore leasing company JY Aviation Leasing Ireland Company and guaranteed by BoCom's Macau branch.
Last August, BoCom used the same structure to raise $385 million from a five-year deal that attracted a $2.2 billion order book. This deal was priced at 99.624% on a coupon of 3.125% to yield 3.201% or 165bp over Treasuries.
On Tuesday it was trading at a G-spread of 134bp and price of 101.53% to yield 2.756%.
The new five-year tranche has, therefore, priced 4bp through its existing paper without accounting for the additional seven months on the curve, or any new issue premium. Bankers estimated fair value at 135bp over Treasuries.
BoCom also has a similarly structured deal with an April 2019 maturity and 3.375% coupon. This was trading on a G-spread of 143bp on Tuesday, which means the new deal has come 33bp through its existing curve.
However, syndicate bankers said that where the shorter-dated tranche was concerned nearly all accounts referenced BoCom's recent $500 million 2.25% deal from January, which has a 2019 maturity. This was trading on a mid G-spread of 106bp on Tuesday.
After being priced at 99.951% the deal hit a high around the 100.82% level in early February before falling almost three-quarters of a point to 100.05% yesterday.
Syndicate bankers said fair value for the new three-year probably falls around the 110bp level.
In a sales note prior to the deal's launch, Mizuho noted that the new deal's structural subordination should have entailed a 5bp to 10bp premium, placing fair value around the 115bp level.
However, syndicate bankers noted that offshore Chinese banks have consistently viewed the Azure bonds as pure BoCom credit and therefore disregarded the structural subordination.
Their ongoing appetite for dollar-denominated debt is also likely to have been fuelled by the Renminbi's renewed weakness.
After weakening to 6.5520 against the dollar at the end of February the currency had been on an upswing during the annual National People's Congress, which ran from March 5 to 14. Over the past few days it has shown renewed signs of weakness falling back from 6.49 to 6.5145 at Tuesday's close.
In a recent research report Goldman Sachs forecast it will hit seven by the end of the year as China tries to manage its slowdown and the People's Bank of China continues its easing policy.
BoCom has been particularly badly hit by deteriorating asset quality given its high exposure to exporters based in the Yangtze River Delta area, which became the first to start defaulting on their loans. At the end of the third quarter the bank reported an NPL ratio of 1.42% compared to 1.3% at the end of 2015.
In a research report published at the beginning of March, HSBC suggested it could take five to six years before Chinese banks are able to clear out their NPLs.
However, the government is believed to have issued a $7.65 billion quota to six banks including BoCom, allowing them to re-package NPL's through asset backed securities and transfer the risk to wealth management sector. Last week it was also reported that it is considering debt for equity swaps as well.