Power tap: bond issuers should take the money and run
When Sinopec this week tapped three of the five tranches from its record breaking $5bn April issue, it joined a select group of savvy issuers who are reopening existing bonds to take more for less. Tighter spreads and abundant liquidity make for cheaper deals. Borrowers with further funding needs should consider a quick and easy return to the market.
Recent taps by Asian issuers have been met with rich demand. China Overseas Land and Investment (COLI) saw so much interest for its tap on June 5 that it added a new 20 year bond into the bargain.
COLI was following ICICI, which reopened its 4.8% 2019s on May 29 to great success, pricing inside its existing curve. According to bankers, this was the first time an Asian issuer had managed to price a tap inside the existing bond.
And then came Sinopec. The oil giant made across the board savings of up to 45bp with its June 9 offering just two months after pricing its original bond. Demand for yield coupled with increased liquidity driven by redemptions and by bond fund inflows over the last couple of weeks meant that the borrower was opening its tap into receptive markets.
Sinopec was the ultimate opportunist. It had more to raise this year and with its own bonds trading well in secondary and investors looking to put their money to work, it made a quick return.
It’s not just the saving that makes doing a tap worthwhile. It’s also cutting out the usual grind and being able to go home early, safe in the knowledge that the bonds are safely ensconced with accounts that were clamouring for them. Unlike a new issue, extensive marketing is not required — people know the name, the bonds are already trading, price discovery is unnecessary and in cases like the dramatically oversubscribed Sinopec deal, demand is already there.
In addition, the issuer does not need to go through the whole regulatory process as the docs are already in order. Of course, not every borrower can issue a tap — it depends on what kind of set-up they have. A debutant may not find the same demand as a well-known and liquid SOE like Sinopec.
Another potential concern is that if an issuer is saving, investors are losing out — which raises the question of why they should buy a new issue when they can get a better price in the secondary market. Before ICICI, borrowers wanting to tap had to pay at least a 5bp concession.
But taking a hit on price to get a primary allocation is also in investors' interests too. Sinopec’s original deal had an order book of $17.25bn but only saw $5bn allocated. For the $12.25bn worth of orders who missed out the first time round, buying a large chunk in the secondary market would cause pricing to move so much that — in the words of one syndicate banker — you are going to get creamed. And with secondary market trading volumes falling in May from April, investors are obviously in a buy and hold mode.
Taps are by no means always a success. But with the market in risk-on mode, rates low and liquidity abundant, opportunistic issuers could do worse than lay down fat for the winter. Or to put it more bluntly, take the money and run while it’s cheap.