It all started when Citic Pacific’s $800m perpetual non-call 5.5 deal was launched with 9% guidance on May 14. Yield-hungry investors jammed the phones to place $8.5bn of orders and the final pricing was eventually tightened to 8.625%. The excitement spilled into secondary, pushing the notes as high as 102.15 on May 17.
Taking the strong performance from private investors as a signal that it could go for more, Citic re-opened the books on May 20, making it one of the earliest taps dealers could remember — with execution even before the original deal had settled.
The message was that the tap would be capped at $200m: once again it was heavily bid, with nearly $4bn in orders. Citic ended up walking away with a total deal worth $1bn at 37.5bp tighter pricing than the leads HSBC and UBS had originally announced.
But despite the blowout of demand and numerous pats on the back for the deal, a handful of investors who bought the notes the first time around raised concerns after prices fell to 100.50 as news of the tap spread on May 20. It was worse for traders who had come in at 102.
The notes have since risen back up to 101 and bankers away from the deal said prices probably had more room to rise because of the handsome yields the issuer was paying. But this was no salve to bondholders, who complained that there was no mention of any possible tap during the original roadshow.
Investors are understandably annoyed and Citic may well find a certain level of buyside wariness the next time it comes to the market — and all the more so if investors reckon they might have an extra chance of incentives in a possible tap, after Citic offered a 50 cent private bank rebate the second time around this time.
But it is also entirely understandable from the issuer’s perspective why it would go for a tap, even one so soon after the original. If it had announced a $1bn deal from the start, instead of $800m, bankers were not sure they could have tightened pricing as much as they did. If anything, the move was savvy and Citic and its dealers should be commended for moving quickly and getting competitive pricing in a volatile market, especially as issuers were worried about rising rates.
Of course it would be more transparent to give investors as much knowledge as possible about an issuer’s plans. But who can blame a company for trying to snag such good pricing? It is a risky strategy, though. The issuer will have to wait for its next order book to find out whether any lasting damage has been done.