China's Road King Infrastructure proved that fixed-for-life perpetuals have not yet come to the end of the road following the completion of its second deal this year.
The structure has provided a source of controversy for Asian bond markets where banks' syndicate desks are incentivised to get the best price for issuers who are, in turn, always on the lookout for the cheapest cost of funding.
But questions remain whether many of the region's ever expanding ranks of newly minted bond investors really understand what they are buying and how it might trade if and when US interest rates go up.
Banks' fixed income research desks, which are incentivised to highlight the risks, have been consistently warning investors that perpetuals are the most sensitive to rising interest rates because of their long duration.
In the case of fixed-for-life perpetuals, there are no punitive resets or step-ups to force issuers to call the bonds away.
If interest rates go down, issuers will call a bond and seek cheaper funding. But if they go up, investors will be stuck with paper that will rapidly trade down.
In Road King's case, its new B1 rated deal had different investor dynamics to its last outing in February, when it became the first high-yield issuer to tap the fixed-for-life space.
Then, its $300 million perpetual non-call five-year deal attracted a $5.5 billion order book. This time round, a similar $300 million senior perpetual non-call five-year deal closed out at $1.9 billion on Monday, which is still sizeable in relation to recent other issues.
The new deal, issued in the name of RKI Overseas Finance, was priced at par on a coupon and yield of 7%. It had been marketed around the 7.375% area.
By the end of Tuesday’s debut trading day, it was bid up at 100%/100.375%.
Road King’s outstanding deal carries a 7.95% coupon and was trading at 105%/105.625% on Monday to yield 6.65%. This means the new deal offered a fairly large 35bp pick-up given the two issues both have the same structures.
Distribution stats show that 88% of the new deal went to Asia and 12% to Europe, with fund managers on 52%, private banks 40%, banks 4%, insurers 3% and corporates 1%.
The new deal also has a much higher allocation to private banking investors who took 27% last time round.
Bankers said Road King opted to issue a new bond rather than reopen its existing one to give it greater flexibility if it wants to call any paper away at a later date. Under the terms of both deals, they have to be called in whole, not in part.
They added that the new deal was partly carried by the momentum generated by the first, which has traded very well since its February launch. "There was an element of price discovery around the first deal because it was the region's debut high-yield trade," one banker explained.
The first deal’s high coupon is the main difference between the two bonds and the reason why the new deal had a wider new issuer premium than normal. Fixed income analysts also believe that coupon has so far been shielded the bond from interest rate induced volatility in secondary markets.
But investors generally do not like it when borrowers print one deal and rapidly return for more. During its investor call on Monday, the Hong Kong-listed company gave some comfort that it would not be raising fresh debt this year.
It was also asked how it had been able to bypass National Development & Reform Commission (NDRC) approval to issue it. Management said that since it had begun operations in Hong Kong and expanded back to China, it had no need to.
However, as Lucror Analytics credit analyst Chuanyi Zhou concluded: “We view negatively Road King’s debt-funded expansion in Hong Kong and its potentially regulatory non-compliance.”