Borrower aggression is stupid, at best

Chinese high yield borrowers are getting used to pushing their bankers around — and it is easy to see why. These companies may be a rich source of supply in the bond market but now is not the time to be demanding hard underwrites and unrealistic pricing.

  • 20 Nov 2012
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Bond syndicate desks in Asia have had a tremendous year, hoovering up deals across the region. But high yield companies — especially property developers — in mainland China have proved one of the most important sources of supply over the last few months. Any banker with close relationships there has been kept busy.

This stream of supply does, however, seem to be going to some issuers’ heads. Few bankers will admit it, but there are whispers that companies are pushing their relationship bankers for hard underwrites and demanding that company officials will decide where deals will be priced, even after giving banks the green light for guidance.

This is foolish. Bankers may be hungry to get all the deals they can, but when it comes to Chinese high yield, they are spoilt for choice. Perhaps more importantly, so are investors.

Bond investors will not easily accept deals from any borrower unwilling to budge on price and a company refusing to listen to its lead managers is clearly not very willing. It is terrible timing on the borrowers’ part.

Asian banks have managed to close $7.72bn of dollar bonds for Chinese property companies this year, some 39.72% higher than the same period in 2011, according to Dealogic.

These deals have been relatively easy to close for much of the year but things are getting a lot tougher as the scale of supply starts to affect the buy-side’s appetite.

Far East Consortium International was forced to cancel a deal last week, China Aoyuan Property Group needed a lengthy pitch to close a smaller-than-expected bond and other companies, Mingfa Group and Lai Sun Development among them, hit the road to meet investors but then did not launch any deals. (Bankers close to these meetings made the usual denials that any deals were planned, but rivals said there was little point in meetings otherwise.)


Abuse of power

The tougher environment means now is the worst time for funding officials to become more aggressive with investors, and even less to push their bankers for hard underwrites. But it is hardly surprising and can perhaps be taken as a sign of the top of the market. The arrogant attitude of some company officials is a consequence of the frenetic supply. But the more aggressive they become, the more chance there is of that supply falling apart.

Bankers are trying their best to get all the business they can and that makes borrowers feel they have all the power. But right now, being too aggressive will show them little more than that they have the power to ruin their relationships, derail funding plans, and wreck their businesses. That’s not a power many would want.

  • 20 Nov 2012

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