Three borrowers came to the market with dollar bonds on Monday night, collectively raising $1.15 billion. Sun Hung Kai & Co secured $350 million, while IDBI Bank raised $500 million and Korea Finance Corp $300 million through a tap of its outstanding $500 million 2.25% 2017s.
IDBI attracted a blowout book of $4.5 billion, coming after the Indian government announced reforms late last week and amid tightening credit spreads for the sector, while KoFC attracted $1.4 billion worth of orders.
The bond rush is expected to continue this week, with Bangkok Bank marketing a dual-tranche five-and-a-half and 10-year dollar benchmark to investors on Tuesday, though perhaps at a less frenetic pace than last week.
“These are not normal market conditions — so you have to make the most of it,” said one banker.
“We saw quantitative easing last week and the ECB also shored up the market. Investors can’t be short bonds in these market conditions, they are compelled to buy bonds,” said another source. “How long this will last is anyone’s guess. I think it could be another six to eight weeks and then we will hit the October golden week in China, which would mean a lull.”
Of the three issuers, Sun Hung Kai & Co, the parent of Sun Hung Kai Financial, was probably the most interesting given that it is a debut print for the company, which held roadshows back in May but has waited until this week to tap the market.
Along with Sun Hung Kai Properties, it was founded by Hong Kong tycoons Lee Shau Kee and Kwok Tak Seng, though the two companies are managed separately.
Its business comprises wealth management and brokerage, capital markets, asset management, consumer finance and principal investments. The company’s bond was unrated but, according to an investor, it would be a “high-yield equivalent”.
The bonds were reoffered at 99.684 to yield 6.45% versus the high 6% initial guidance. The $350 million five-year deal attracted $1.3 billion worth of orders from more than 100 accounts.
However, in secondary markets, the Sun Hung Kai bonds immediately fell two points on the break. They later recovered on Tuesday afternoon and were quoted 99.25/99.75, slightly under reoffer. “The bonds have been under water since they started trading,” said one rival.
In contrast, the other two bonds that priced — KoFC and IDBI — traded tighter in secondary. The former was quoted at 120bp/122bp at the Hong Kong close, inside the Treasuries plus 123bp issue spread, after trading as tight as Treasuries plus 119bp/118bp earlier in the day. The latter was at Treasuries plus 365bp/362bp, 5bp inside the 370bp issue spread.
However, one source familiar with the deal suggested that it came under attack from rival banks, but recovered amid buying from private banking accounts. “Our friendly rivals bashed the bonds by going short, but I don’t see how you can go short on a bond that is yielding 6.45% in these markets,” he said. “It’s ridiculous. The bonds have since recovered.”
Rivals suggested that the underperformance might have been due to over-allocation to private banks. “For some of the big private banking clients, they might take the rebate, as opposed to the private banker,” he added. “So they put in inflated orders and if they get full fills, they sell them in secondary.”
Private banking rebates have been criticised by some portfolio managers, who say they artificially inflate demand and, as a result, allow deals to price tighter than would otherwise be possible. Sun Hung Kai offered a $0.30 private banking rebate, and saw heavy participation from private banks, which were allocated 48%. Commercial banks were allocated 24%, asset managers 23%, companies and other investors the rest. Asian investors were allocated 91% and the remainder went to European investors.
As Sun Hung Kai is an unrated issuer and a debut name in the dollar space, there were no exact comparables for the company. While it has an outstanding Rmb500 million ($80 million) dim sum bond issued in April 2011, which is currently yielding 7% and due in 2014, those bonds are denominated in renminbi and most investors were not looking at them as a comparable, the source familiar with the deal added.