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State banks could follow CDB with 15-year bonds

16 Jan 2012

Government-owned lenders capital needs could follow China Development Bank in issuing 15-year CNH bonds, but a lack of pricing arbitrage and interested investors will prevent a large number of such deals. Anita Davis reports.

State Chinese banks could follow China Development Bank in offering 15-year bonds in the offshore renminbi (CNH) market - provided the cost of funding makes sense.

CDB’s Rmb1.5 billion bonds mature in 2027, meaning that they possess the longest tenor of any debt transaction conducted in the offshore renminbi market.

Sources close to the deal told Asiamoney PLUS that CDB was an optimal issuer for the long-tenor bonds because it is a strong brand name for investors with deep roots in the dim sum space. The bank has now issued Rmb15.5 billion (US$2.46 billion) in offshore CNH notes through four separate bond transactions.

The mixture of a strong track record and robust balance sheet is required to entice investors to long-term dim sum market, analysts say. Other Chinese top tier banks will be the most likely contenders.

“Only the solid names will come out,” said Chia Woon Khien, managing director and head of local markets strategy of emerging Asia at RBS. “I think few will venture to issue as far as 15-year bonds, and you issue when you really need the money.

“Corporates don’t really issue beyond five years, with only some corporate property developers and infrastructure companies that would consider 10 years,” she continued. “Banks are the ones that may go long as 15 years, and they would be the ones to consider longer-dated bonds in the future.”

Several other banks may seek to quickly follow CDB into the CNH market. Earlier this week, CDB was named as one of 10 Chinese financial institutions approved to raise up to Rmb25 billion in offshore renminbi debt. The other financial institutions mentioned were Export-Import Bank of China, Agricultural Development Bank of China, Industrial & Commercial Bank of China, Agricultural Bank of China, Bank of China, China Construction Bank, and the China units of Bank of East Asia and HSBC Holdings.

However, the desire of these lenders to do similar deals could be stymied by relatively unappealing valuation levels.

Institutions typically favour the offshore renminbi market over the local alternative because they can price deals in the former with lower coupons. But Chia says the pricing of CDB’s bonds was on par with similarly termed mainland debt.
CDH priced its 15-year CNH bonds to offer a yield of 4.2%.

“CDB listed a similar product - a 10-year onshore bond - a few days earlier than this 15-year offshore bond, which was issued at 3.85%,” Chia noted. “In comparison to the CNH bond’s 4.2% yield, that’s a very reasonable roll up between onshore and offshore.”
She believes that this means CDB conducted the transaction less to be a trailblazer and more because it genuinely needs the cash.

“If it [CDB] issues a bond that has a 4.2% coupon in a year when the market is tanking, it’s not going to get very far,” Chia said. “So for that, it’s looking for the money.”

Another hurdle is the depth of the investor market. Few groups would have interest in holding such long-dated bonds, with the key exceptions being pensions and insurance companies. The two groups comprised 73% of the buyers of CDB’s bonds, sources close to the issue say.

“Investors in these bonds will be those that use renminbi as part of their businesses, so I wouldn’t expect a large UK insurance company, for example, to be among this investor class because it doesn’t write renminbi contract. These investors will largely be Chinese or Greater China-based,” said one source close to the issue. “I would say that, at this juncture, issuances of long-tenor bonds will be slim because it’s still a relatively young market for both investors and issuers.”

CDB initially planned to split its issue into a 10-year tranche and a 15-year tranche, but opted to fully issue the longer-dated security given market demand.

The longest-dated deals prior to CDB’s transaction were 10-year dim sum bonds issued by the Asian Development Bank, Industrial & Commercial Bank of China, and the Chinese government.
16 Jan 2012