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Rare China sovereign bond sees robust global demand, tight pricing

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10/27/2017 | 01:36pm CET

International investors piled into a rare global bond offering from China, with orders more than 10 times the $2 billion on offer, allowing Beijing to price it at much lower spreads than initially indicated.

The sovereign debt sale is expected to serve as a pricing benchmark for China's state-owned firms which are among Asia's most active issuers in the offshore bond market.

China, which last sold a global bond in 2004, priced a $1 billion, 5-year bond at 15 basis points (bps) over US Treasuries on Thursday and a $1 billion, 10-year tranche at 25 bps over.

That compares with the initial guidance of 30-40 bps and 40-50 bps respectively. The bonds are unrated.

The total issue attracted $21 billion in orders, with investors unfazed by two downgrades of the sovereign this year by S&P and Moody's.

By late afternoon on Friday, the 2.125 percent bonds due 2022 <XS170660510=TE> were trading at 99.65/99.78 cents on the dollar for a yield of about 2.19 percent.

The yield had dropped to as low as 2.114 percent, according to Thomson Reuters data.

The 2.625 percent bonds due 2027 <XS170660528=TE> were trading at 110.27/100.58 cents on the dollar for a yield of 2.57 percent.

The yield had fallen to a low of 2.317 percent, trading inside US Treasuries at one point.

"Everyone wants to get their hands on this bond. These are tight levels but we are interested as there is little risk of repeated issuance in the same maturity bucket," said Edmund Goh, fund manager at Aberdeen Standard Investments.

The unsatiated demand spilled over into the credit default swaps market - another route that investors can use to get credit exposure. The 5-year CDS for China <CNGV5YUSAC=MG> dropped on Friday to 45.5 bps from 49 bps.

The bonds had similar allocation patterns in geographic terms and by investor type.

The 2022 bond saw 52 percent participation from Asia, 28 percent from Europe and 20 percent from the United States.

By investor type ,fund managers accounted for 51 percent, banks 34 percent, public sector investors 11 percent and others 4 percent.

The 2027 bonds saw a 47 percent take up from Asia, 34 percent from Europe and 19 percent from U.S. investors.

By investor type, fund managers accounted for 66 percent, banks 12 percent, public sector investors 16 percent and others 6 percent.

"Sovereign bonds set the benchmark and create velocity for capital markets to deepen," said Henrik Raber, Standard Chartered debt capital market head.

We expect to see continued robust primary bond issuance activity across Asia, and in particular, from China."

Existing bonds from these issuers have seen spreads narrow in anticipation of tight pricing of the underlying sovereign.

Export Import Bank of China's bonds have rallied 10 bps since the sovereign debt plan was announced earlier this month.

"It will re-price the China (state-owned enterprise) curve across the board particularly higher-rated bonds like CNOOC, Sinopec, Petrochina," said Raymond Lee of Kapstream Capital adding that he would prefer investing via credit default swaps - insurance-like contracts that protect against defaults.

"I would prefer to go long the CDS if I want exposure to a China sovereign, which is providing an extra around 20 bps of carry and also considered liquid. In recent times it's uncommon for the CDS to trade tighter than the bond, and it tells us that the technical bid is very strong for the new deal."

This demand for China's CDS has pushed it to levels below higher-rated sovereigns such as South Korea.

Investors say that infrequent, high profile issuers such as China can get away with pricing the bonds tightly even though the bonds are unrated.

Last month, S&P cut China's long-term sovereign credit ratings by one notch to A+ from AA-, after a downgrade from Moody's in May. The move put S&P's ratings in line with those of Fitch and Moody's.

Both S&P and Moody's cited risks from a rapid build-up in debt.

China's finance ministry has described the S&P downgrade as "a wrong decision" that ignored the economic fundamentals and development potential of the world's second-largest economy.

President Xi Jinping said at the Communist Party Congress last week that China will deepen economic and financial reforms and further open its markets to foreign investors as it looks to move from high-speed to high-quality growth.

Bank of China (>> Bank of China Ltd), Bank of Communications (>> Bank of Communications Co Ltd), Agricultural Bank of China (>> Agricultural Bank of China Ltd), China Construction Bank (>> China Construction Bank Corporation), CICC (>> China International Capital Corp Ltd), Citigroup (>> Citigroup), Deutsche Bank (>> Deutsche Bank), HSBC (>> HSBC Holdings), ICBC (>> Industrial and Commrcl Bank of China Ltd) and Standard Chartered Bank (>> Standard Chartered) have been hired to manage the deal.

(Reporting by Umesh Desai; Editing by Kim Coghill, Jacqueline Wong and Peter Graff)

By Umesh Desai

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