first national sovereign dim sum

Investors clamour for landmark UK dim sum

The first renminbi bond by a foreign nation has received hefty investor demand and has set a pricing benchmark for issuers.

The UK government has attracted about Rmb6 billion ($980 million) of orders for its Rmb3 billion debut renminbi bond, establishing a sound market for other sovereign issuers.

The yield of the three-year dim sum bond, the first issued by a foreign national government, was set late on Tuesday at 2.7%.

It generated Rmb5.8 billion of demand from 85 investors, allowing the government to upsize the amount it expected to borrow from Rmb2 billion to Rmb3 billion and tighten the price from initial guidance of 2.9% to 2.7%.

“The [double] coverage ratio may not be a big number if put in the Asian dim sum market. But for such a bulky size as Rmb3 billion, the number indicates strong interest,” said a person familiar with the situation.

The quality of investors in the deal is decent, said the banker. Central banks and institutions took 17% of the paper, banks 64% and fund managers 19%.

Institutional investors include large European pension funds and asset liability management accounts of large banks, indicating real interest from high-quality investors, the source said.

Asian investors bought 57% of the bond, European investors 36% and buyers from Americas 7%.

The transaction also sets a benchmark for other governments to follow suit. Being the first one, the bond could not find any comparable for price discovering.

Bonds issued by quasi-sovereign International Finance Corporation, the private equity arm of the World Bank, and China’s central government were somewhat references for investors, said bankers.

“Three-year is a typical tenor for a dim sum bond so this UK bond can offer guidance for other deals of the kind,” said a bond investor based in Hong Kong.

While the UK bond is a debut by a national government, Canada’s Province of British Columbia was the first foreign government entity to sell a dim sum bond. The province issued a Rmb2.5 billion 2.25% one-year bond in late 2013.

The UK dim sum signals the potential of renminbi as a possible reserve currency as its proceeds will be used to finance the nation’s reserves. Currently, UK only holds reserves in US dollars, euros, yen and Canadian dollars.

The deal also “clearly demonstrates the UK’s commitment to be the leading western hub for renminbi and signals its importance as a potential global reserve currency of the future,” said Spencer Lake, global head of capital financing at HSBC in London.

Bank of China, HSBC and Standard Chartered were leads on the transaction.

BOC’s offshore preference shares

Meanwhile, the market was watching the $6.5 billion additional tier-1 bond by Bank of China, the first offshore preference shares from a Chinese company. The deal has received $23 billion in orders as of Wednesday afternoon. It had guaranteed orders of $14 billion before initial pricing talks, including some anchor demand of $5 billion, according to two bankers on the transaction.

“This [the strong demand] will make bond allocation very tough,” said one banker.  

Price talks are in the range of 6.875% to 7% and the deal will be priced late on Wednesday.

BOC will be the first among a long list of Chinese lenders looking to replenish their capital bases and meet tougher regulatory requirements for capital ratios, to issue preference shares to boost capital. Banks are coming under additional pressure as China’s economic growth slows and bad debts build up in the banking system.

Preferred stock shareholders typically do not have voting rights but have seniority over common stock shareholders in the event of asset dispersal in a bankruptcy. Meanwhile, banks can replenish tier-1 capital through preferred shares, something not possible by issuing bonds.

BOC International is global coordinator on the deal, and joint bookrunner together with BNP Paribas, China Merchants Securities, Citic Securities International, Citi, Credit Suisse, HSBC, Morgan Stanley and Standard Chartered.

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