SDB proves China's bond markets remain open

Shenzhen Development Bank raises the equivalent of $923 million in the country's second largest sub-debt deal.
Shenzhen Development Bank has raised a total of Rmb6.5 billion ($923 million) in lower tier-2 fixed- and floating-rate bonds through sole lead manager UBS Securities, demonstrating again the vibrancy of domestic Asian markets.

The 10-year non-call-five transaction marks UBS SecuritiesÆ inaugural renminbi-denominated bond deal since it established operations in China last year. In 2006 UBS won initial approval to invest $200 million in state-owned Beijing Securities in return for a 20% stake and de facto management control of its day-to-day business and operations. This allowed the Swiss bank to begin arranging domestic stock and bond deals for Chinese companies.

The transaction is the second largest renminbi-denominated subordinated debt deal to date after Bank of Communications issued Rmb25 billion in bonds in March 2007. It also comes behind jumbo transactions for Korea's Woori Bank ($1 billion in 2006 and 2007) and Singapore's DBS ($2 billion in 2007).

The deal attracted demand of Rmb7.2 billion, with 50% of the bonds allocated to insurance companies, and the remainder selling to banks. The transaction was split between Rmb6 billion fixed-note and Rmb0.5 billion FRN. The fixed-rate priced with a coupon of 6.10%, while the FRN closed with a spread of 140bp over three-month Shibor. Coupons on both transactions will increase by 3% should the bonds not be called.

ChinaÆs domestic markets have remained active throughout the global turmoil, with a reported $15 billion-equivalent of issuance in 2008. This compares to just $4.5 billion raised in the international markets, versus $9.6 billion this time last year. Asian companies have increasingly turned to local markets to raise funds, or issued in foreign currencies such as Malaysian ringgit in order to secure cheaper borrowing than could be achieved in international markets.

However, offshore companies hoping to tap the liquidity of the Chinese markets with so-called panda bonds (which are renminbi-denominated bonds from a non-Chinese issuer sold in the mainland) still need to wait. So far, the only eligible issuers for panda bonds are international development organisations, and the conditions are stringent. They include a double-A rating by a qualified rating agency registered in China, prior investment in the country of no less than $1 billion, mid- or long-term loans or equity investments in projects in China and three years of audited financial statements in accordance with PRC accounting standards.

Currently, only the Asian Development Bank (ADB) and the International Finance Corporation (IFC) have issued panda bonds, namely a 10-year Rmb1.13 billion and a seven-year Rmb870 million by the IFC, and a Rmb1 billion by the ADB. Concerned about the possible effects on their currency peg, China negotiated for several years before permitting the sale of such bonds in 2005 and 2006, before agreeing that the funds raised would have to remain in China.

ôThe next big move for China's corporate bond market is for foreign corporates to issue local-currency bonds,ö says Cao Yanping, a Shanghai-based partner at law firm Clifford Chance. Clifford Chance advised the IFC on its renminbi-denominated bond issues. ôThis requires an easing of the eligibility requirements, allowing a more flexible use of proceeds as well as an acceptance of internal accounting standards. In addition, the restrictions on currency convertibility are a major obstacle which needs to be lifted if this sector is to really take off.ö

Shenzhen Development Bank is ChinaÆs sixteenth largest commercial bank by assets, and is managed by US private equity fund Newbridge Capital, which owns 16.68% of the bank.
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