now loading...
Wealth Asia Connect Middle East Treasury & Capital Markets Europe ESG Forum TechTalk
Treasury & Capital Markets
Investors pile into China’s unrated sovereign bonds
China’s tightly-priced unrated sovereign is a slap in the face for rating agencies
Derrick Hong 1 Nov 2017

The highly-anticipated return of China in the offshore bond market for the first time since 2004 was a slap in the face of rating agencies, as international investors piled into the unrated deal which achieved the lowest-ever spread by an Asian issuer.

The sovereign, through the Ministry of Finance, on October 26 priced a Reg S dual-tranche offering of US$1 billion each that generated a massive demand of US$21 billion. The first tranche was for five years and was priced at 99.666% with a coupon of 2.125% to offer a yield of 2.196%. This represented a spread of 15bp over US Treasuries, which was tighter than the initial price guidance of between the 30bp and 40bp area.

The second tranche was for 10 years and was priced at 99.459% with a coupon of 2.625% to offer a yield of 2.687%. This was equivalent to a spread of 25bp over US Treasuries and was likewise inside the initial price range of between 40bp and 50bp area. “Certainly, these levels are very much more in line with what the AAA-rated issuers are getting versus the A-rated issuers,” says a banker familiar with the deal.

According to the Ministry of Finance, raising capital is not the main objective of the offshore bond. Instead, guiding the market yield is its primary consideration. With no rating agencies involved, China’s Ministry of Finance showed its confidence in the capital market to properly correct the yield curve.

Both tranches tightened even further in the secondary market and were both quoted at 10bp in late morning of October 27. “The market today is figuring out how this new China transaction should trade and how it will impact the Chinese state-owned enterprises,” the banker says.

China announced the formal deal mandate on October 20 and held group investor meetings and calls in Hong Kong on October 25 at the end of 19th Party Congress. On the back of strong investor feedback, the deal arrangers opened the books in the morning of October 26, which grew very quickly to US$10 billion by mid-morning and were in excess of US$20 billion before the opening of the European session.

Such a huge demand enabled the arrangers to push the price guidance significantly to 15bp for the five years and to 25bp for the 10 years, with the final order books amounting to a combined US$21 billion.

The five-year bonds garnered a total demand of US$11 billion from 279 accounts with 52% of the paper distributed in Asia, 28% in Europe and 20% in offshore US. By type of investors, fund managers accounted for 51%, banks 34%, private sector 11%, insurance companies and pension funds 2% and private banks 2%.

The 10-year bonds generated an order book of US$10 billion from 314 accounts with 47% sold in Asia, 34% in Europe and 19% in offshore US. The fund managers bought 66%, public sector 16%, banks 12%, insurance companies and pension funds 4% and private banks 2%.

“The response from the market very much reflects that the deal works very well without a rating,” says the banker.

According to Ping Lian, chief economist of the Bank of Communications, the major reason for abandoning international rating agencies is that they have a “Western mindset” and methodology not applicable to China’s current economic model.

In May and September of this year, international credit rating agencies Moody’s and S&P downgraded China’s credit rating. The Ministry of Finance described the ratings actions as “wrong decisions”. China is rated A+ by both S&P Global Ratings and Fitch Ratings, and A1 by Moody’s Investors Service.

The unrated sovereign USD bond once again proves that obtaining an international rating is not essential for a successful offshore bond listing. In 2016, 74% of Chinese USD bonds were unrated, according to China Minsheng Securities.

Large Chinese corporates, such as Huawei and Haier, have completed several unrated offshore bonds, priced tightly. On October 12, Haier completed its debut offshore issuance. The US$1 billion unrated perpetual received 5.7x oversubscription with a yield of only 3.875%.

Further, investment banks have been increasing the headcount for ratings officers, challenging ratings agencies in giving advice to issuers. One of their major duties will be giving issuers a clear sense of what credit rating they can get. A managing director at a European bank told The Asset that most of the ratings officers have experience working at ratings agencies and know the ratings methodology well.

“Some large Chinese corporates do not want to use rating agencies because they just don’t want to entertain the rating agencies every year,” says the managing director.

Proceeds from the transactions will be used for general governmental purposes. Agricultural Bank of China, Bank of China, Bank of Communications, China Construction Bank, China International Capital Corporation, Citi, Deutsche Bank, HSBC, Industrial and Commercial Bank of China and Standard Chartered acted as the joint bookrunners and lead managers for the transaction. 

This article was originally published prior to deal pricing on October 26 under the headline, Who needs rating agencies? China turns back on rating agencies after downgrade.

Conversation
Wendy Yeo
Wendy Yeo
director, fund management
iFAST Financial
- JOINED THE EVENT -
In-person roundtable
Asia and the future of funds
View Highlights
Conversation
Mildred Chua
Mildred Chua
managing director and group head of syndicated finance
DBS
- JOINED THE EVENT -
In-person roundtable
Finding opportunity amid volatility
View Highlights