Hunger for hybrids intensifies

Far East prices maiden perpetual bond, while Noble Group markets its second as investors clamour for duration and yield.

Far East Horizon has raised its first ever hybrid bond, while Noble Group launched its second as investors sought to gain exposure to longer tenor bonds amid an anticipated summer lull and increase returns amid a low interest rate environment.

The Hong Kong-listed Chinese equipment leasing company sold a $200 million senior perpetual note on Monday, catching an ideal issuance window as cost of funding for longer maturity bonds sink to the lowest in a year.

The Reg S-registered unrated bond — callable in year three — was priced at a yield of 5.55%, 45bp tighter than its initial price guidance of around 6%, according to a source close to the transaction.

“A lot of investors are looking for the higher-yielding instruments with a strong structure,” the source said. “With Far East Horizon’s bond, investors are able to pick up higher-yielding paper that essentially has a risk that is equal to a three-year senior bond.”

Perpetual bonds typically pay higher yields to compensate investors for having no fixed maturity date. Borrowers meanwhile are allowed to treat them as equity on their balance sheets (100% in the case of Far East).

Far East’s perpetual resets from the first call date and onwards in three-year intervals to a new fixed rate equal to the prevailing three-year US Treasury benchmark rate plus an initial spread of 460.6bp, according to a term sheet seen by FinanceAsia. Also, a one-time step-up of 500bp payable semi-annually is added to that, resulting in a structure that is extremely investor-friendly, the source added.

Yields on Asian dollar notes dated 10 years or longer have averaged 5.21% since April, and are poised to be the lowest for a three-month period since the second quarter of last year, according to Bank of America Merrill Lynch indices.

All-time highs

The issuance of perpetual bonds has hit a year-to-date record. According to Dealogic data, there has been a total of $5.1 billion or 11 dollar-denominated hybrids raised from Asia ex-Japan, 7.1% higher than last year’s volume of $4.72 billion with nine deals during the same period.

“Investors are preparing for the summer lull by searching tightly held and low-beta bonds that will protect them from any sharp movements in the next two months, when liquidity is reduced,” Amit Sheopuri, co-head of Asia debt origination at Citi, wrote in a note on Monday.

“Traders said accounts were also seeking to extend duration and are looking for bonds in the lower rungs of investment grade,” he added. “The simultaneous search for yield, duration and quality made the new perpetual bonds issued popular targets.”

Commodities trade Noble Group is currently marketing a benchmark-sized dollar-denominated subordinated perpetual bond at around 6%. The offering — callable in year five — is expected to be priced as early as Tuesday, according to sources familiar with the matter.

Noble’s Reg S-registered bond receives 100% equity credit from IFRS, and 50% from Fitch, Moody’s and Standard & Poor’s, but S&P only offers it for the first five years, according to a term sheet seen by FinanceAsia.

Equity credit is the reclassification of a security to which a credit rating agency treats the security as equity rather than debt.

PTT Exploration & Production was the last corporate to sell a $1 billion subordinated perpetual bond, last Wednesday, overcoming political uncertainty that has plagued Thailand since it fell under martial law on May 20.

Bank of America Merrill Lynch, Citi, HSBC, JPMorgan and Societe Generale are the joint bookrunners of Noble’s hybrid note, which will be used for refinancing purposes.

Far East comparables

The comparables that were used to price Far East’s perpetual were its existing three-year notes, which were trading at a yield of 3.78% prior to the announcement.

Also used were Aluminium Corporation of China’s (Chalco) outstanding three-year hybrids maturing in February and April 2017, which were trading at yields of 5.41% and 5.57%, respectively, according to a source close to the transaction.

The issuer's new paper was 30 times oversubscribed, obtaining an orderbook of $5.9 billion from over 180 accounts, according to a source close to the transaction. Asian investors grabbed 93% of the notes, while the remainder went to European investors.

Fund managers subscribed to 65% of the bonds, followed by private banks 31%, insurers 3% and banks 1%. 

In secondary markets, the bonds have traded up to around 100.63 and 101, according to Bloomberg data.

ANZ, DBS, HSBC and Standard Chartered were the joint bookrunners of Far East’s perpetual bond, which will be used for working capital and general corporate purposes.


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