China Development Bank (CDB) is poised to be the first Chinese policy bank this year to tap the dim sum bond market after receiving a long-awaited quota from the National Development and Reform Commission (NDRC). And as part of its role to develop the offshore renminbi bond market, it will introduce a rare floating rate tranche that could generate confidence in the nascent CNH Hibor fixing.
CDB will start marketing its bond on November 6 to Hong Kong investors, bankers close to CDB told Asiamoney PLUS. The size is expected to take up at least half of its approximate Rmb6 billion (US$983.8 million) dim sum quota: at the very least, CDB is looking to issue a Rmb3 billion bond across two-, five- and 15-year tranches. At most, it will sell Rmb4.5 billion and include a fourth, longer-dated tranche, though dealers speaking on the afternoon of November 5 say a longer-tranche bond is unlikely.
The longer-dated tranches will have fixed coupons, while the two-year tranche will be floating.
Bank of China (Hong Kong), Barclays, HSBC and Standard Chartered are the global coordinators for the deal. The four banks are also bookrunners, joined by Agricultural Bank of China International, Bank of Communications Hong Kong, China Construction Bank International, ICBC Asia and ICBC International.
The deal comes weeks before the Ministry of Finance (MoF) also looks to sell Rmb10 billion of bonds on November 21. The sovereign announced its plans on November 5, outlining that it will sell a Rmb5 billion three-year tranche, a Rmb2 billion five-year tranche, and a Rmb3 billion two-year tranche geared towards retail investors.
Floating appeal
CDB has issued two previous floating rate deals into the dim sum market, according to data provider Delaogic. The first, a Rmb1 billion two-year bond sold in August 2009, priced 30 basis points (bp) above three-month Shibor, Shanghai’s interbank reference rate. The second was a Rmb2 billion three-year deal that pays 10bp over three-month Shibor, sold in October 2010.
Senior bankers close to the upcoming dim sum bond say that CDB was considering linking its two-year bond to Shibor rather than CNH Hibor as late Monday. This is because the Shanghai rate is more liquid and better-established than CNH Hibor, which was only launched in June and is less liquid over one year.
But CDB ultimately decided to link the note to CNH Hibor, as the bank is charged with helping to develop the offshore renminbi market.
“We are talking about policy banks, and a name like CDB has a responsibility to assist in the development of the offshore market. That means it’s part of its responsibility to do a CNH Hibor deal,” said an origination banker on the trade. “This will have an influence on other issuers into this market… But CDB did consider its two options [for its floating rate note], and it did think about linking to Shibor.”
Dealers add that select investors have exhibited appetite for CNH Hibor floaters, which offers a defence against rates volatility that may stem from a change in China’s onshore liquidity situation.
“Floater appetite with CNH is highly correlated with onshore rates,” said a Hong Kong-based debt banker. “Rates may be a bit volatile because of the liquidity tightening onshore, and there are selective issuers who want to the option for floating rates. It’s something that more investors have been asking about and it’s something that will help develop CNH Hibor.”
The deal comes less than a week after L-Bank sold the first floating rate private placement linked to CNH Hibor.
Long-dated liquidity
CDB also toyed with the idea of introducing a long-dated tranche to its deal, but abstained issuing too far out along the curve to ensure enough liquidity remained in the offshore market for the bonds from other state-owned enterprises (SOEs) that are sure to follow.
“There was talk about doing two-, five, 10- and 15-year tranches and then talk about doing a 30 year, but we thought that shouldn’t,” said a capital markets banker close to the deal. “There was even some debate about a potential 40 year. But at the end of the day this is a really good outcome [to have a 15-year tranche] because CDB is looking to build out its curve but do it in a practical manner – you can print a long-dated piece but…it’s not very liquid. We can provide a reference level at 15 years so we thought it was best to stick to that.”
The longest dim sum bond in the offshore renminbi market is CDB’s Rmb1 billion 20-year bond sold on July 26 of last year.
Among the considerations for CDB is that more state-owned issuers will follow it to the market now that the NDRC has approved Rmb75 billion of dim sum quotas to SOEs. These issuers, including other policy banks such as Agricultural Development Bank of China and big-four commercial banks, are also looking to set benchmarks in the market and sell longer-dated deals. Yet if these issuers also decide to sell larger-sized benchmark deals in the weeks after CDB, there they could face liquidity issues on the longer-end of the curve.
“CDB has a history of coming out first in the market to set the tone, followed by other policy banks and the big-four banks,” said the origination banker. “It wanted to get its deal out as soon as possible, and we also fully expect that the MoF will issue a retail tranche before December. There needs to be a balance of liquidity to accommodate these larger-sized deals across tenors.”
CDB’s last dim sum bond was sold on July 26 and included a three-year tranche in addition to its 20 years. That Rmb2.5 billion deal came from the bank’s previous Rmb6 billion issuance quota which expired in April of this year.