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Bond underwriters should tread carefully

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By Rashmi Kumar
19 Jun 2018

The Asian bond market has had a volatile quarter, with new dollar issues struggling in primary and notes underperforming in the secondary market. It may be tempting to cut corners, but there is no room for shoddy market practices.

This year has undoubtedly been turbulent for global markets, with tensions in the Korean peninsula and fears of a trade war between the US and China wreaking havoc on fixed income and stock markets. Asia hasn’t been immune, with dollar bond volumes in May slumping to around $18bn, less than half of what was sold in April and a 25% fall year-on-year, as volatility buffeted the market.

This, of course, means some borrowers faced roadblocks with their dollar bond issuance. In early June, South Korea’s Asiana Airlines, which does not have an international rating, pulled a planned senior perpetual bond. At the end of May, China Overseas Grand Oceans Group managed to raise $500m, but not before being forced to cancel its first attempt a week earlier. China local government financing vehicle Zhongyuan Yuzi Investment Co also ended up dropping a planned dollar bond sale in mid-May.

Those that did manage to get their deals past the finish line struggled in the secondary markets. China Aoyuan Property Group’s $200m note widened by a hefty 50bp the day after pricing, while Yuzhou Properties Group’s $200m 7.9% three year non-call two slid by 75 cents to a point in the aftermarket. Credits such as China South City, Cifi Holdings and Logan Property all tanked in the aftermarket last month.

However, this has led to the arrival of poor market practices among some bond underwriters.

Some firms, mainly Chinese brokerage houses, have started to offer investors a rebate to buy bonds (this is different to the private bank rebates that have been around for a long time). In these cases, even long-only accounts are being offered a discount to buy the bonds in primary, distorting the market discovery process for pricing — a practice one senior DCM banker recently described as “absolutely horrible”.

Other DCM bankers told GlobalCapital Asia that a handful of investors are flat-out refusing to participate in deals if they know that the Chinese brokerages involved in such practices are bookrunning a transaction.

Then there is the case of musical chairs within syndicate groups, which bankers say undermines all the work a firm may have already done on a trade.

When Industrial and Commercial Bank of China (Asia) printed a green bond last week, a last-minute change in the syndicate team was notable. China Construction Bank (Asia) was on the fundraising when the mandate and initial price guidance were announced. But by the time the deal was priced, it was no longer on the trade.

Other banks on and away from the deal said this reflected the issuer’s feeling that CCB had not contributed as much as the other global co-ordinators when it came to keeping some of the bonds on its books — a situation they said was not very transparent.

An October 2017 deal for Bank of Zhengzhou also had a last minute shake-up in the bookrunning group, while in October 2016 a trade for Yuzhou Properties experienced similar changes to the co-ordinating group.

Such changes are rare, but there have been enough occurrences that bankers in the region almost don't bat an eyelid when it happens.

But market participants should truly beware these practices, which are unheard of in the European or US debt markets.

Offering the buy-side a discount to the market price may help carry a trade forward, or win approval from the issuer for having managed to ‘attract demand’, but this is certainly not helpful for the long-term development of the market — and most definitely unhelpful for the bank’s reputation. 

Musical chairs within syndicate groups, meanwhile, hamper transparency around issuance.

Asia has already proven it can digest abundant dollar bond supply, as reflected by record volumes year after year in recent times. But if the region is to grow, and mature, further, it should not be at the expense of best market practices.

By Rashmi Kumar
19 Jun 2018