Asian bond issuers are taking advantage of a search for yield among investors, selling a plethora of subordinated and perpetual bonds — deals that can sometimes be a tough pitch in more challenging markets.
Cheung Kong Property and Bank of East Asia became the latest issuers to make the most of the receptive environment on Thursday, raising $2 billion between them. The deals followed perpetual bonds from CK Hutchison — a sister company of Cheung Kong Property — and Woori Bank earlier in the week, as well as a 30-year bond from Indonesian electricity company PLN.
Cheung Kong Property’s deal was particularly striking, bringing the largest ever fixed-for-life perpetual. The $1.5 billion bond generated more than $8 billion of demand at the peak, before its final order book settled at $6.9 billion from 249 accounts.
But Bank of East Asia also got an impressive response to its $500 million bond, drawing $4.5 billion of demand at the peak level, before finishing with $3.7 billion from 205 accounts.
In both cases, the issuers easily beat the 4% yield target that some hungry investors are demanding.
“There has been a lack of high-yield offerings in the market for the past few weeks, leading to a significant amount of pent-up demand for bonds that pay a 4% hurdle or higher,” a Singapore-based investor told FinanceAsia.
He added that the strong secondary performance of recent deals was also a plus-point for investors.
A 'milestone' trade
Two days after CK Hutchison sold a $1 billion perpetual bond, Cheung Kong Property extended the fundraising bandwagon, selling a senior perpetual bond that is callable in 2020.
The company — rated A2/A-/A- by Moody’s, S&P and Fitch — went out with initial price talk around “the 5% area”, before narrowing to “the 4.625% area”. Final pricing of the hybrid security was fixed at par to yield 4.6%, according to a term sheet seen by FinanceAsia.
The price was roughly flat to Cheung Kong Infrastructure’s $1.2 billion 5.875% perpetual bond, which was trading on a cash price of 104.25 to yield 4.638%. Cheung Kong Property is rated three notches higher than the BBB rated CK Infrastructure, another arm of Li Ka-shing’s business empire.
In the secondary market, the new CK Property bond was trading a tad higher on Friday morning at 100.25/100.35, according to market data.
Asian investors took the majority of the deal, leaving 6% to Europe and the remaining 1% to offshore US accounts. By investor type, fund managers took 54%, private banks 27%, insurance companies 13% and banks 6%.
A syndicate banker said that Cheung Kong Property’s bond was a rare investment-grade credit with an attractive return, prompting risk-averse issuers like insurance companies and banks to participate in the deal.
“There was a broad base of investors in Cheung Kong’s perpetual bond, reflecting their confidence in the single A rated credit,” the banker said, describing it as a “milestone trade” because it was the largest perpetual bond since 2010 and built the largest orderbook for a single tranche deal this year.
The bookruners of the bond were Deutsche Bank, HSBC and UBS
No issue premium
Bank of East Asia, controlled by Sir David Li Kwok-po, returned to the international bond markets for the first time this year, raising $500 million from a perpetual additional tier one (AT1) bond that pays a yield of 5.625%.
The new note is its second AT1 bond, after the lender debuted in 2015 with a $650 million issue.
This time around, the Hong Kong-listed lender, rated A3/A by Moody’s and S&P, went out with an initial price guidance at “the 6% area” on Thursday morning, before narrowing the Reg S deal to between 5.625% and 5.75%. Final pricing of the hybrid capital was fixed at par to yield 5.625%, according to a term sheet seen by FinanceAsia.
The coupon for the Basel III-compliant note is fixed for the first five years. If the bank decides not to redeem it in year five, the coupon will be reset on the first call date and every subsequent five years to the prevailing five-year US Treasury yield plus the initial spread. There is no step-up.
The deal appeared to price in line with fair value. The new issue should have come 40bp wider than BEA’s $650 million 5.5% AT1 after taking the 1.5 year extension into account, according to a syndicate banker’s estimate. The old deal was trading at a yield of 5.23%, implying the new deal should be at a theoretical 5.63% area.
Another way to determine the fair value would be to look at how some recently issued outstanding peers were trading in the market, even if there are no perfect comparables. Zheshang Bank’s AT1 was trading at a yield of 5.42%, while Woori Bank’s AT1 was trading on a return of 5.14%. Both are callable in 2022.
“BEA is one of the largest Hong Kong lenders but not totally comparable to similar sized banks because it does not have a major controlling shareholder,” said the Singapore-based investor.
In the secondary market, the new bond was quoted at a cash price of 100.6 on Friday morning, according to a syndicate banker.
The bookrunners were Citigroup, HSBC, while Goldman Sachs, OCBC Bank, SMBC Nikko were joint lead managers. Crédit Agricole CIB, Nomura and Standard Chartered Bank were co-managers.