Second mover advantage: when it pays not to win the race
Sinopec's $5bn whopper last month was the first of a series of jumbo deals from Chinese SOEs. With so much liquidity being taken out of the market in a record month, it was probably lucky to have beaten its peers to market. But that's not always how it works, as China Cinda might be about to show.
Three top tier Chinese SOEs — Sinopec, Chinese National Offshore Oil Corporation (CNOOC) and State Grid of China — each came to the market with mammoth multi tranche deals last month.
The first mover was Sinopec. It was rewarded for its boldness with pricing that came through its existing curve for all five tranches. CNOOC, which was second to come to market, had to pay a new issue premium of around 5bp for its two longer dated tranches.
And State Grid, which launched late in the month, ended up paying a higher concession of around 15bp for its 10 and 30 year tranches, as the market began to feel fatigued after what had been a record month for Asia ex-Japan dollar deals.
The different experiences of the three issuers showed the advantage of getting in early before liquidity is drained by rivals. All else being equal, buyside appetite will be stronger at the start of a funding flurry.
Not only that, but it's harder to look exciting when you come later. Investors might welcome the first of a queue of similar deals as a diversification play. They are likely to be much less giddy about the second or third.
That seems to make first mover advantage look obvious. But while it might hold true for established issuers doing largely conventional (albeit big) transactions, it will not always for others. When tapping a new market or trying out a new structure, an issuer might be better off not being the pioneer.
This was the story when Sumitomo Mitsui Financial Group followed Mizuho to market in March with Japan's first dollar Basel III tier two deals. Both are rated A/A-, but SMFG was able to priced 5bp inside Mizuho with a bigger deal less than one week later.
After you, I insist
One issuer hoping to repeat that experience is Chinese bad debt manager Cinda, which is meeting investors this week for a potential Reg S/144A offering. It will be the second of its kind to step into the dollar market, and will probably be glad not to have been the first.
That honour belonged to China Orient Asset Management, which completed its own $600m deal in September. After a long price discovery process, it had to pay a hefty 15bp to 20bp premium over where similarly rated Chinese SOEs were trading in order to generate momentum for the transaction.
A few factors made life difficult for China Orient. There were no direct comparables, making it less obvious to investors and bankers where pricing should come. Unfamiliarity with the credit and the sector meant that investors were already cautious.
Cinda ought to benefit from all this. With China Orient having already put in the groundwork for Chinese bad debt managers in the dollar market, Cinda should be able to avoid the teething pains faced by first mover China Orient. Not having to feel around in the dark will lead to faster deal execution and greater investor confidence. That should mean stronger demand and better terms.
Being first to market in any particular fundraising season usually makes sense, given the better liquidity on offer. But it takes a brave — or desperate — issuer to test investor appetite for a new credit story for the first time. If investors don't know how to price your credit, the race to market is probably one you don't want to win.