Huawei's scrapped bond ushers in new era of uncertainty

The Chinese company's travails demonstrate that bond investors need to start paying far greater attention to geopolitical risk when they assess individual borrowers.

Huawei’s decision to cancel both a US dollar and euro-denominated bond marks a new chapter for Asian bond markets, as geopolitical tensions rise to the top of a deal’s potential credit risks.

For the past few years, the biggest unknown for investors buying Chinese G3 currency bond issues has been key man risk: the almost impossible task of working out, which tycoon will disappear next as a result of the government’s anti-corruption drive. 

But escalating trade tensions between China and the US have added a new dimension to credit evaluation, with Huawei becoming the Asian bond market’s first victim.

This happened on Wednesday night when the group announced that it was scrapping its debut euro-denominated bond just minutes before pricing without further explanation. This followed the cancellation of a US dollar bond the week before.

The move came hard on the heels of widespread social media reports that the US Department of Justice is investigating whether the Shenzhen-based company violated US sanctions relating to Iran.

On the face of it, investors appeared unperturbed by the rumours. The order book for the €500 million deal rose to a €2 billion peak, before moderating to €1.9 billion after Huawei released final guidance for the prospective 2023 note.

This had been narrowed to between 135bp and 140bp over mid-swaps compared to initial guidance around the 150bp to 160bp level. One source told FinanceAsia that the deal was all set to price at 135bp before being pulled.

But it is not as if investors had not been forewarned of potential difficulties. The euro-denominated deal had already been restructured from a 10-year to a five-year maturity. And then there was the prospective 10-year dollar deal, which was dropped the week before.

Investors narrowly dodged a secondary market hit since Huawei’s outstanding dollar bonds sold off sharply on Thursday. The group’s 4% February 2027 dollar bond dropped more than one point to 92.989%, a record low.

Huawei suppliers with stock market listings also sold off. Hong Kong-listed Chinasoft International, which derives more than 50% of its revenues from Huawei, closed down 15.86%.

As one Singapore-based fixed income investor told FinanceAsia, “Both equity and debt investors are spooked since the US investigation could lead to a big fine, or tough sanctions against the import of microchips from the US.

“Investors are afraid that Huawei will become another ZTE,” the investor added.

Last week, the US government prohibited American chip suppliers from selling crucial parts to ZTE for seven years, accusing the Chinese firm of violating export controls to sanctioned countries such as Iran and North Korea.

In an emailed statement Huawei said it, “complies with all applicable laws and regulations where it operates, including the applicable export control and sanction laws and regulations of the UN, US and EU.”

To be sure, this is not the first time that Huawei has been accused of violating US laws. In 2016, the US Commerce Department issued a subpoena for information regarding its direct and indirect exports of US technology to sanctioned countries such as Iran and North Korea.

Whatever happens, the group’s latest run in with the US authorities will not help its attempts to topple Samsung and Apple as the world’s largest smartphone vendors. At the end of 2017, the South Korean electronics giant had a 22% market share, while Apple stood at 15% and Huawei 11%.

But Huawei’s overall market share masks its poor showing in the US where it accounts for less than 1% of sales and has been stymied from growing them after failing to secure distribution deals with Verizon and AT&T.

Joint global coordinators of the euro bond sale were BNP Paribas, Citi, DBS, ING, JPMorgan and Standard Chartered.


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