* People's Republic of China
Amount: $1bn global bond (increased from $500m)
Maturity: December 14, 2008
Issue/fixed re-offer price: 99.678
Spread at re-offer: 280bp over the 4.75% November 2008 UST (indicated: 287.5bp)
Launched: Wednesday December 9
Joint books: Credit Suisse First Boston, Goldman Sachs
CSFB -- We are now in the second week of December and the markets are closing down after a year which has been characterised by huge volatility. Having had to contend with a lot of bad press about Gitic and considerable uncertainty on the ratings front, the completion of this deal represents a remarkable accomplishment for China.
The increase from $500m to $1bn was driven by the strength of demand, which resulted, for example, in over 250 accounts attending the Hong Kong roadshows.
That is a phenomenal turnout by any standards, partially a result of the fact that China is now the premier credit in the region other than Japan and Australasia, and partly because the region has been starved of quality paper.
The Chinese team and in particular vice minister Jin put together a series of fantastic presentations and we were undoubtedly given a boost by Moody's decision to reaffirm China's A3 rating last Friday.
There was a good range of orders, with the US taking roughly a quarter and the rest split equally between Asia and Europe. In terms of size, the average ticket was probably about $5m, but in reality there was a wide range of tickets from sub-retail orders to some quite chunky tickets which were enough to drive the transaction forwards.
European demand was very broadly-based, with the majority of orders spanning Italy, France and Germany as well as the UK and Ireland. The US also played its part, but the deal was driven by Europe and Asia. In general the US accounts wanted to see what other investors were doing before committing themselves.
The consensus was that China is a break-through credit and has a lot of relative value at these levels, which is probably why it was picked up quite heavily by traditional single-A bond funds. There was no particular emerging markets interest, and virtually nothing from hedge funds.
But I don't think other issuers in the region can necessarily look at this deal and say the market is open again. Global markets have segmented to the point that investors are looking at credits on a stand-alone basis.
You can't ignore the bigger picture, but generally they are looking for the diamond in the rough whether it be from Asia, Europe or Latin America.
There is without question a large differential between the trading level of sovereign and semi-sovereign credits in Asia. This therefore begs the question of where the corporate and banking credits are going to fit into the equation next year.
But now there is at the very least a liquid benchmark for the region. A lot of people have probably been quite surprised by how well it went after what has happened in Asia this year. They probably also thought that there would be a lot of flippers.
But what we have found its that a lot of accounts held back because they thought there had been too much hype behind the deal. Although secondary market trading has been quiet so far, with about $100m traded in total, I think this follow-on demand will start to feed through ensuring that the bonds remain stable in the aftermarket.
Goldman Sachs -- When we put this deal in progress eight or nine days ago, we thought that we would eventually have a transaction close to $500m. We are therefore very pleased with the final result.
The decision to increase the amount to $1bn was only taken early on Wednesday morning New York time after reviewing the book. That review reinforced our confidence that a tightening of the price talk would not result in significant demand falling away.
The previous night we had said that we would price the deal in the 287.5bp area and this had kept most of the US orders in the book, so we felt comfortable bringing it at the tight end of this range. The final geographical mix of orders and allocations was very balanced between the three regions, although obviously Asia as the least price sensitive region and first on the roadshow schedule drove the momentum forwards.
The results speak for themselves, but it should be emphasised that embarking on roadshows which covered 12 cities in seven working days was no easy trip. It reinforces the work the Chinese government was prepared to put in to make the deal run smoothly.
They were peppered with a lot of questions, but had the confidence to meet them head on. Investors have the facts before them, but often the most important aspect is how the underlying message is communicated. In this respect, vice minister Jin Li Qun did an excellent job.
He reiterated the soundness of the government's policies and their determination to make them stick, but also emphasised that these things take time. He said that while the fall-out from Gitic might be painful to China's reputation in the short term, it was a price they had to pay to ensure a robust financial system.
From the point of US investors, the success of the presentations resulted in a lot of demand from investment advisers, while insurance funds were comforted by the fact that China was given an NAIC 2 rating. Unusually there were no hedge funds in the book.
The Chinese were also adamant that they did not want to see paper being placed back into the republic, and we were very strict about enforcing this.
To complete an important deal like this so close to the end of the year is a real achievement. We also believe that it bodes well for 1999.
"...we sold our ticket very quickly and, in view of the issuer's objectives, maintained balanced allocations to the three geographical centres. The issue appears to have achieved solid placement and so far secondary market trading has been stable.
There was a pick-up in demand from Asia this (Thursday) morning, which resulted in spreads tightening in by a few basis points. But there has obviously been a slight shake-out in London later in the day which has seen them revert back to the launch spread.
This is a landmark issue which lays a path for other sovereign issuers from Asia after a period of considerable volatility. However, the deal will need to be well managed in the weeks that follow and Goldman Sachs in particular has developed a reputation for executing deals extremely well but then walking away.
We canvassed a number of traditionally large buyers of China paper in the US and found that very few had placed orders. The overriding comment we got was that they simply couldn't believe the growth figures coming out of the republic. It all seemed too good to be true.
So far the deal seems to have worked. In essence, China had three objectives: to diversify its client base, which it has done; to reassert its credit, which it has also achieved; and to find a price that facilitates the entry of other issuers from the country, which remains to be seen. But two out of three isn't bad."
"...this deal was clearly well subscribed and in many ways ranks as deal of the year. However, we feel that its undoubted success is clouded by one quibble concerning information flow.
Even though syndicate allocations were small, the lack of information coming from the lead managers from start to finish was frustrating. It was difficult to build any kind of book when there seemed to be no consensus where the deal was likely to price. This was a deal on which everyone had an opinion, but no one knew what was going on with the leads.
This deal has provided a reopening for Asia. It has been such a difficult year, and to print a transaction of this size and duration so close to the year-end is quite remarkable. Whatever people might say about where the deal was placed, no one should lose sight of this fact.
Europe seems to be trading the bonds as if they have a few more long positions than they would have wanted. But we believe that China has got a good deal at a fair price. We should see a relatively stable secondary market, although it has been fairly quiet so far.
"...from what we understand, the deal has sold well into Asia but not much has gone anywhere else. We sold our bonds, all $2.5m of them, to accounts in Asia.
The deal is an astonishing achievement for China, launching a $500m deal in the 287.5bp area and then doubling the size at 280bp over. I doubt many bonds have been sold in the US. The clients we contacted there wanted to see a three handle on the issue."
"...we had a very small ticket in the original deal and then didn't get any bonds on the increase. The leads said that they had too much demand to increase our allocation. So we were left with our initial $6.5m which we sold in two tickets, one to a private investor, the other to a UK institution.
It is difficult to say how well the deal went, or where it went, with such a small ticket. But we were not overwhelmed with interest as we would have expected had it been a very hot deal.
I believe that China always wanted to do a $1bn issue but went out with $500m to create scarcity and momentum."
"...we had a tiny ticket so didn't spend much time on the deal, but we did hear that Asian demand was crucial to the transaction and one can only guess where the leads placed their bonds.
There has always been talk that last year's China deal went to Chinese government institutions, and this new transaction has the whiff of a similar investor base.
We allocated out ticket between the three centres in tiny portions and we could have sold more but certainly not as much as the $940m which the leads shared between them."