Fear of rate hikes prompts bond opportunists

ONGC and Kookmin collectively raise $2b, while Sumitomo Mitsui markets a multi-tranche dollar-denominated note and Bank of Baroda reopens a tap.

India’s national oil company Oil and Natural Gas Corp and Kookmin, Korea’s largest bank by assets, tapped the Asian debt capital markets on Monday in search of cheap funding while interest rates remain favourable.

ONGC issued a dual-tranche $1.5 billion bond, split equally between a five- and 10-year offering. The proceeds will be used to refinance loans made for the acquisition of a participating interest in a Mozambique-based project, according to sources familiar with the matter.

Meanwhile, Kookmin Bank raised a $500 million three-year bond, which will be used for general corporate funding purposes. The 144A/Reg S-registered offering ended up pricing 10bp tighter than its initial price guidance of Treasuries plus 85bp

The Korean bank's recently issued three-year floating-rate notes expiring in January 2017 were used as comparables, and were trading at a Z-spread of 61bp prior to announcement, according to a source close to the deal. After taking a swap spread of 14bp into consideration, fair value of the new bond would be Treasuries plus 75bp. This indicates that Kookmin priced the new offering flat to its secondary curve. 

These deals came amid concerns that the Federal Reserve could hike rates earlier than anticipated, backed by stronger US economic data, but the global credit market environment is still likely to hold up, credit analysts said.

“Although the strong June employment report in the US suggests that the risks to our call for the first Fed rate hike in the first quarter 2016 are skewed toward an earlier hike, we expect monetary policy will remain accommodative and help credit spreads to grind tighter,” Kenneth Ho, credit analyst at Goldman Sachs said.

The US is recovering after contracting at a rate of as much as 8.3% at the worst of the recession that began in December 2007 and ended in June 2009. The economy added 288,000 jobs in June, compared with the 215,000 projected by a survey of analysts. The unemployment rate dropped to 6.1%, a six-year low.

Last week, the 10-year US Treasury yield rose 10bp to touch 2.64%, according to Bloomberg data. The difference between the yields on five- and 30-year bonds touched 1.67 percentage points on June 18, the narrowest since September 2009. During the period, it widened to as much as 3.11 percentage points in November 2010.

Goldman Sachs expects the 10-year UST yield to gradually grind up to touch 3% by year-end, while the five-year remains unchanged at 2.25%.

Elsewhere, Sumitomo Mitsui Banking Corp is marketing a multi-tranche SEC-registered dollar bond. The bank’s three-year fixed note has an initial price guidance of Treasuries plus 55bp area, while its three-year floating rate note is at Libor equivalent.

SMBC’s five- and 10-year offerings have an initial price guidance of Treasuries plus 65bp to 70bp, and 95bp area respectively, according to a term sheet seen by FinanceAsia.

Bank of America Merrill Lynch, Barclays, Citi, Goldman Sachs and SMBC Nikko are the joint bookrunners of SMBC’s deal, which is likely to close as early as Wednesday. Daiwa, Deutsche Bank, HSBC, JPMorgan and Nomura are the co-managers of the transaction. 

Elsewhere Bank of Baroda is re-tapping its existing $750 million 4.875% bond expiring in 2019 at an initial price guidance of Treasuries plus 215bp. HSBC and Standard Chartered are the joint bookrunners of the transaction.

India’s feel-good effect waning

While India’s election result was clearly positive for the markets, credit analysts warn the newly elected Bharatiya Janata Party’s ongoing political hurdles — the BJP doesn’t control India’s upper house or 22 of India’s 30 states — the nation’s fiscal challenges and rising oil prices could lead to the underperformance of Indian credits.

“We see little upside for investors jumping on the Indian bandwagon now,” Mark Reade, desk analyst for Mizuho Securities’ Asian fixed-income trading department, said. “That’s especially the case just three days prior to the new government’s debut budget on Thursday, which could be a key determinant of how long the post-election feel-good-effect lasts.”

Nonetheless, ONGC managed to price its five-year bond — the first Indian dollar deal in almost six weeks — 20bp tighter than its initial price guidance of Treasuries plus 180bp area, while its 10-year offering priced 17.5bp tighter than a guidance of Treasuries plus 225bp area, according to a term sheet. The notes have yields of 3.338% and 4.694% respectively.

“That looks attractive versus ONGC’s existing curve and closest comparables, for one of the highest quality Indian US dollar issuers,” Reade said. “So for those investors seeking Indian exposure or a short-term trading profit this deal stacks up okay, especially the 10-year tranche, which should benefit most from cashed-up life insurance appetite, given the scarcity of quality investment-grade assets yielding more than 4.5%.”

The closest comparables for ONGC’s five-year tranche were its existing notes expiring May 2018 that were trading 22bp tighter than initial pricing on a G-spread basis prior to announcement, while Oil India and Reliance Industry’s outstanding paper maturing April 2019 and October 2020 were trading 10bp and 18bp tighter respectively.

As for the 10-year offering, ONGC’s existing bonds expiring May 2023 were trading 30bp tighter than initial pricing on a G-spread basis prior to announcement, while Oil India and Reliance Industry’s outstanding paper maturing  April 2024 and February 22 were trading 5bp and 30bp tighter respectively.

According to Dealogic data, India G3 volumes have touched an all-time record high of $10.9 billion with 17 deals year-to-date, which is a 11.2% increase from last year’s volume of $9.8 billion with 15 transactions over the same period.

BNP Paribas, Citi, Deutsche Bank, Royal Bank of Scotland and Standard Chartered were the joint bookrunners of ONGC’s transaction.


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