Donald Trump is making investors scared again. The election of Trump on November 8 has pushed Treasury yields dramatically higher, scuppered bond deals, and pushed up new issue premiums. As the end of the year approaches, some bankers are now trying to discourage their clients from rushing to the market.
“We tell issuers if they have the flexibility they should wait,” said an Asian debt syndicate head. “The rate volatility is not subsiding any time soon.”
Most issuers appear to have taken that advice. But many Chinese issuers are ploughing ahead with bonds, trying to hit their funding plans before the year ends and their regulatory approval to tap the bond markets expires. That is forcing these issuers to be flexible with pricing, with size — and even with maturities.
CEFC Shanghai raised $250 million from a two-year bond on Thursday, after previously flirting with a three-year bond. China Energy Reserve sold a $265 million three-year, after previously mulling a five-year tranche. Other issuers are paying chunky new-issue premiums.
Some are trying unusual structures. Country Garden, for instance, attempted a 10-year bond earlier in the week that included a put option after five years. That is a rarity in the Asian dollar bond market, but the extra security of the put proved insufficient to overcome the issuer’s aggressive pricing target. The deal was abandoned in the middle of the week.
“They thought the value of the put would help,” said an executive at another Chinese property company that has also issued dollar bonds. “But the market is too risk averse at the moment.”
That is a term repeated again and again by bankers in Asia’s bond market. They are bracing themselves for some difficult weeks ahead.
The push and the pull
Part of the problem is the extreme volatility in dollar interest rates since Trump’s election.
On November 7, the day before the election, 10-year US Treasuries were yielding 1.739%. But Trump made frequent — albeit vague — promises to unleash a fiscal stimulus programme during his campaign, and when he was elected investors took him at this word. By mid-afternoon on Friday (November 18), the 10-year Treasury yield had ballooned to 2.304%.
The speed and direction of that move underlines the extent to which Asia’s debt issuers are about to face a new reality. Bankers, investors and issuers have said for several years that the low-rate environment could not last forever. Trump’s election is making sure of that.
The movement in rates, and the subsequent impact on corporate bonds, is making some investors stay away from new deals. This fear is even greater among those investors who have so far had a good year, and who might not see the value in putting their performance at risk.
“Everyone is a bit shell-shocked at the moment, so they’re not willing to put money to work,” said a credit analyst in Hong Kong. “Investors have still done very well for the year even with the back-up we’ve had in the last couple of weeks.”
This is enough to put most issuers off. There are some non-Chinese credits considering issuing dollar bonds in the next few weeks — Studio City and Shinhan Bank have both mandated banks, for instance — but most of the supply is likely to come from the mainland.
This is partly because issuers that have received approval to sell bonds from China's National Development and Reform Commission are not certain they will get such approval again — or how long it will take. And even if they can be certain about getting approval early next year, they may still be reluctant to wait, said a China DCM head.
“It usually takes a month or six weeks to get approval,” he said. “If some of these companies don’t do a deal this year, and they apply in early January, they will be running into Chinese New Year [at the end of January]. Then in February, for some of the listed companies, they start running into results season, which creates timing issues.”
This is why bankers and analysts expect the Chinese supply to keep up even amid rising volatility. But deals in the second-half of the week showed that Chinese issuers hoping to tap the market soon may need to be flexible.
Small but well-formed
Fosun International, CEFC Shanghai International and China Energy Reserve all sold bonds in latter half of the week, following issuance from China Huarong Asset Management, Yancheng Oriental and South Korea’s Doosan Infracore on Tuesday.
Fosun’s deal was something of an exception in that the company got away with a longer maturity. Fosun tapped an outstanding $300 million bond for another $290 million on Wednesday, offering investors a six-year-and-nine-month maturity with a call option after two years and nine months.
China Merchants Bank, Citi, Fosun Holdings and UBS managed the BB rated deal. The bond — sold by an SPV, and secured on share pledges by subsidiaries — priced to yield 5.35% coupon, inside initial price guidance of “the 5.5% area”. The deal came at an issue price of 100.83.
CEFC Shanghai International raised $250 million from a two year bond on Thursday. Citic CLSA was the sole bookrunner of the bond, and approached investors with initial price guidance in “the 6% area”, and ended up pricing the bond at par with a 5.95% coupon.
The debut issuer — which opted not to get a rating for the deal — went on a roadshow in late October. It met more than 60 investors on the trip.
China Energy Reserve sold a $265 million three year bond at par with a 6.25% coupon on Thursday, in line with initial price guidance.
Barclays, CEB International Capital Corp, Shenwahn Hongyuan Securities and Wing Lung Bank were the bookrunners. They built a book worth $450 million, split between 92% Asian investors and 8% Europeans. Banks bought 55%, funds 30% and private banks 15%.
Whenever small Chinese deals hit the market, there is always some debate about the unique demand they are able to get. The strong support these deals tend to get from Chinese banks means they can be easier to close than other deals. As one analyst put it: “it’s not broad supply that the market needs to digest."
But while that might help banks close these bonds, it does not offer guarantees. Debt bankers are bracing themselves for a spate of supply from Chinese credits before the end of the year — and the increasing likelihood that none of these deals will be plain sailing.