Investors cautious on Cinda’s bond debut

The flurry of Chinese bond supply and potential rise in onshore bad loans could impair the secondary market performance of the asset management firm’s new bond.

China Cinda Asset Management, the Chinese bad debt management firm, raised an inaugural $1.5 billion dual-tranche bond on Wednesday but the notes have been trading flat or poorly in the secondary market as a result of oversupply from the mainland space and potential rise in onshore bad debt.

According to Dealogic data, Chinese borrowers account for 46.2% of total Asia ex-Japan issuance, which currently stands at $78.9 billion year-to-date. This is an increase from the previous year’s 38.2% out of $73.4 billion during the same period.

“The supply is a lot and, as a result, we will see more spread dispersion between Chinese credits within the next few months,” a Hong Kong-based fund manager told FinanceAsia. “Given the rally in the market in the last six to nine months, a lot of the deals are coming in relatively tight – priced to perfection.”

“It’s very hard for the deals to perform at break [the level they are priced at], which is making a lot of fund managers hold back right now,” he added.

China Cinda raised a $1 billion five-year bond and $500 million 10-year paper, joining the flurry of large multi-tranche deals from the Chinese space last month when Sinopec and Cnooc came to market. The notes priced at Treasuries plus 250bp and 310bp respectively, after tightening 25bp from initial price guidance.

Cinda’s transaction – the first Reg S/144A dollar bond offering by a Chinese asset management firm – struggled to perform after its debut in secondary markets. Its five-year note traded 5bp wider while its 10-year tranche remains unchanged, according to Bloomberg data.

China’s rising bad loans

The other possibility that has contributed to Cinda’s underperformance is the fact that the firm is seeking to boost funding in anticipation of a spike in bad loans as China’s economic growth slows.

Moody’s expects Cinda’s importance to the economy to increase as China’s economy rebalances, with slower economic growth and tighter credit conditions likely to lead to pressures on the debt servicing capability of some companies.

Also, Cinda is reliant on wholesale funding and has significant credit exposure to the real estate sector, which is also struggling as a result of overinvestment.

“We haven’t gone for Cinda’s offering because there’s no compelling reason for us to chase these bonds and we need more time to evaluate them,” an investor said.

Cinda's distressed debt assets grew more than six times from end-December 2011 to reach Rmb114.36 billion ($18.27 billion) in 2013, the firm’s prospectus showed, but its return-on-equity dropped from 18.1% to 13.8% during the same period.

Meanwhile, China's gross domestic product grew 7.4% in the first quarter from a year earlier, slightly above the 7.3% consensus, but fell short of the annual official target of 7.5% growth and the 7.7% growth registered in the previous quarter.

Despite such worries, Cinda’s transaction received a total order book of $5.8 billion from close to 500 accounts, according to a term sheet. Banks subscribed to 52% of the five-year tranche, followed by asset managers with 26%, private banks and others with 18% and insurers with 4%.

For the 10-year tranche, asset managers purchased 55% of the notes, insurers 19%, financial institutions 15%, and private banks and others 11%.

The nearest comparables for Cinda’s five-year bond was China Orient Asset Management’s existing notes expiring in 2018 that were trading at a G-spread 263bp prior to announcement, says a source familiar with the matter. This suggests that Cinda’s new notes priced inside China Orient’s after taking into consideration the one year extension. A 60bp curve extension was then added to the five-year bond to generate the 10-year pricing levels.

Bank of America Merrill Lynch, Bank of China International, Credit Suisse, Morgan Stanley and UBS were the joint global coordinators and bookrunners of the transaction. Other bookrunners include CCB International, Cinda International Securities, DBS Bank, Citic Securities International, ABC International, ICBC Asia, Standard Chartered and Wing Lung Bank.

Cinda was established in 1999 to absorb toxic assets held by China Construction Bank and is one of four such entities Beijing set up.

Other deals

Chinese oil and gas company China National Oil Corporation also raised a $1.5 billion dual-tranche bond on Wednesday.

The transaction from the state-owned enterprise is split equally between a three-year floating-rate note – the company’s first issuance since 2009 – and a five-year offering, according to a term sheet.

Both the three-year floating rate note and five-year bond tightened by 20bp and 17.5bp respectively from an initial price offering of three-year Libor plus 110bp and Treasuries plus 145bp respectively, according to a source close to the deal.

The source adds that a capped total issue size of $1.5 billion enabled the issuer to generate significant demand from investors. As a result, CNPC’s transaction received a total order book in access of $5 billion from around 250 investors.

US investors purchased around half of both tranches, accounting for 58% of the three-year floating rate notes and 47% for the five-year offering, according to the term sheet.

“There’s no way that Asia can absorb that supply,” a fixed income fund manager said. “A huge part of the AA- or A-rated names are being taken up by US managers who run global portfolios and they will buy the credible Chinese SOE credit for diversification and yield enhancement of their real money portfolios.”

The fund manager adds that US investors can achieve a significant pickup of approximately 100bp when investing in Asian AA/A-rated credit versus back home.

Citi, Bank of China International and Standard Chartered were the joint global coordinators and bookrunners of CNPC’s deal. Other bookrunners include Credit Agricole, Societe Generale, ING, HSBC, JPMorgan, Deutsche Bank, ICBC International and CCB International.

The co-managers of the transaction include Citi, Natixis, Morgan Stanley, Mizuho Securities, DBS Bank and Mitsubishi UFG Securities.


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