Deal-making stalls amid virus outbreak
G3 bond issuance in Asia, outside of Japan and Australasia, dropped 39.2% in February
1 Apr 2020 | Chito Santiago
After a blistering start in January, which saw the issuance activity maintaining the brisk momentum of 2019, the deal volume in Asia G3 bond market plummeted in February. This comes as the impact of the Covid-19 outbreak began taking its toll in the capital markets activity across the region.
 
According to figures provided by Refinitiv, G3 bond issuance in Asia, outside of Japan and Australasia, dropped 39.2% to US$28.16 billion with 54 deals in February, compared with US$46.30 billion with 77 deals in January. The amount, however, was 16.3% higher from US$24.22 billion on 47 offerings in February 2019.
 
By all accounts, the deal flow in February was still impressive amid the uncertain market environment as issuers continue to lock-in funding and investors remain focused on buying opportunities and put their money to work. At the same time, several issuers were launching deals in shorter tenors – including sub one-year maturities – or paying up in order to access the market.
 
For instance, Central China Real Estate sold a 364-day bond amounting to US$300 million that generated a total demand of US$2 billion from 138 accounts, while Hopson Development Holdings also printed a 364-day bond amounting to US$500 million on the back of a US$1.3 billion order book.
 
In the wake of the Covid-19 outbreak, Chinese issuers and borrowers have launched fund raising to support lending to clients impacted by the epidemic. Bank of China Macau branch on February 27 priced a HK$4 billion (US$514.8 million) bond to support lending to SMEs – the first offshore social bond by a Chinese issuer.
 
The two-year senior unsecured notes are priced at par with a similar coupon and re-offer yield of 1.95% and generated a total demand of HK$7.1 billion from 20 accounts. With 98% of the bonds allocated in Asia and 2% in Europe, the paper was sold mainly to banks (84%) and to fund managers and private banks (8%) and to central banks (8%).
 
Sean McNelis, global co-head of debt capital markets at HSBC, which acted as a joint bookrunner and lead manager for the transaction, says the landmark transaction illustrates that public markets have a critical role to play in supporting SMEs impacted by the Covid-19 outbreak. “The strength of the order book shows there is clearly an investor appetite to get behind this initiative, which further broadens the range of alleviation measures, from both public agencies and private institutions,” he adds.
 
Bank of China, Agricultural Bank of China (Hong Kong), Citi, Commonwealth Bank of Australia, Credit Agricole CIB, DBS, ICBC (Asia), J.P. Morgan and Scotiabank were the other joint bookrunners and lead managers for the deal.
 
Earlier on February 11, the Agricultural Development Bank of China (ADBC) successfully priced the CNH1.5 billion tap of its existing 3.4% bonds due 2024 – the net proceeds of which will be used to finance the bank’s rural revitalization strategy as well as to fund China’s efforts in its fight against the Covid-19 outbreak.
 
The issuance followed the first anti-coronavirus financial bond and the first “fight coronavirus, alleviate poverty” dual-themed financial bond issued on the onshore market via Bond Connect in January.
 
Other Chinese companies are also accessing the debt market to raise Covid-19-linked bonds to shore up their balance sheet. Hengan International Group Company on February 28 announced the completion of the issuance of the first tranche of the super short-term commercial paper (SCP), which it called epidemic prevention and control debt, amounting to one billion yuan (US$144 million). It carried a fixed rate coupon of 2.85% per annum and a term of 270 days. The remaining SCP approved, but unissued, amount to 2 billion yuan immediately after completion.
 
Market access
 
The proceeds from the issue are intended to supplement the working capital of the company and its subsidiaries, repayment of the bank loans of some of the domestic subsidiaries, and also to supplement the working capital requirement relating to the fight against Covid-19.
 
Meanwhile, Chinese regulators have adopted measures to facilitate quicker and easier bond issuance in a bid to mitigate the Covid-19 outbreak’s disruption of corporate refinancing. The measures include specialized channels for primary issuance, acceptance of online submission of issuance materials and extension of the valid period of issuance approvals.
 
Fitch Ratings expects the market access of state-owned enterprises (SOEs), which account for around 87% of the maturing corporate bonds by value during February-June 2020, will be largely uninterrupted. In contrast, the rating agency expects a moderate contraction in bond issuance of privately-owned enterprises (POEs), though their bond maturities will stay close to the 2019 level of one trillion yuan.
 
“The health crisis may further weaken investors’ sentiment and increase default risks,” adds Fitch in a February 26 report. “Many POE bond issuers are too big to be considered SMEs, which are the target of the recent supportive policies, including fiscal subsidies, tax exemptions and deferral of loan repayments and social insurance payments.”
 
On Chinese local government financing vehicles (LGFVs), Moody’s Investors Service says in a new report issued on February 25 that although the Covid-19 outbreak is credit negative for these entities, it does not pose immediate refinancing risk.
 
“It is possible Covid-19 will delay or reduce the funding LGFVs receive from their regional and local government (RLG) owners in the first half of this year, given that the outbreak is likely to have a negative impact on the growth of local economies and government revenues,” says Moody’s analyst Sarah Xu.
 
“However, that doesn’t mean that LGFVs importance to RLGs will diminish. We expect LGFVs will continue to receive government support, maintain their funding access and benefit from credit easing measures,” she points out.
 
While deals are still being printed in the bond market, the deal-making in the equity capital markets slows to a trickle, with several initial public offerings (IPOs) being put on hold. In South Korea, which has one of the highest Covid-19 cases, a number of companies have cancelled their plans to go public.
 
These include customer relationship management solution provider Metanet Mplatform, which eventually pulled its deal after conducting bookbuilding, and prefab steel manufacturer SEN Coretech, which will be looking for a better issuance window to launch its IPO.
 
But India’s second largest credit card issuer SBI Cards and Payment Services was able to bring its deal across the line and raised over US$1.44 billion after closing its IPO subscription on March 5. The company sold a total of 137.15 million shares, including 130.53 million secondary shares, at 755 rupees each.
 
Overall, the total IPO proceeds in February 2020 amounted to US$5.61 billion, according to Refinitiv. This was largely driven by the IPO of Central Retail Corporation of Thailand, which raised over US$2.52 billion. There were a number of Chinese IPOs completed during the month as well, including Beijing Roborock Technology, which raised US$647.19 million, China Resources Microelectronics (US$617.71 million) and Bio-Thera Solutions (US$281.52 million).
 
The loan syndication market was also quiet in February, as one banker points out, with a total volume of only US$4.76 billion based on Refinitiv’s figures. This was way below the US$24.24 billion recorded in February 2019 as no deals were recorded for China during the month.
 
There are some bright spots, though, in acquisition finance following the sale of the Asian businesses of the UK’s largest supermarket chain Tesco to Thai tycoon Dhanin Chearavanont of the Charoen Pokphand Group for more than US$10 billion. The sale marks Tesco’s exit from Thailand, where it operates more than 2,000 hypermarkets and convenience stores under the Tesco Lotus brand.  
 
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