GlobalCapital Asia/Asiamoney regional capital markets awards 2014, Part III: Bonds
For the third part of our annual awards, we cover Best Local Currency Bond, Best Securitization, Best High Yield Bond, Best Investment Grade Corporate Bond, Best Financial Bond, Best Sovereign Bond, Best Local Currency Bond House and Best G3 Bond House.
BEST LOCAL CURRENCY BOND
Olam International’s S$400m ($322m) senior bond due 2019
Joint bookrunners: DBS, HSBC, RBS
This year saw Olam International stage a glorious capital markets comeback. Not only did the borrower price a new Singapore dollar bond at 40bp through its existing curve after being largely shut out of the market for two years, but the trade also drove the subsequent repricing of its dollar curve.
After a negative report from research firm Muddy Waters in 2012, Olam’s bonds experienced a massive sell-off and while they had bounced back after Temasek stepped up its support of the company in May, the issuer felt that its bonds were still undervalued.
Olam’s next move had to be the right one. A home currency return seemed like the most obvious and safest choice, and the company spent a week meeting investors in Europe and Asia in July.
When it came to selling the bond, the leads decided to start boldly, opening initial price guidance 15bp inside the 4.65% level where the existing bonds 2019s were trading. Their conviction in the strength of investor demand for the credit was rewarded and a book of S$1.7bn stuck with them all the way through to final pricing at 4.25%.
This enabled the borrower to raise S$400m which, at the time, was the largest single tranche corporate bond transaction in the Singapore dollar market.
And if proof were needed that the order book wasn’t full of fluff, the borrower’s existing bonds tightened 15bp-20bp across the curve as those investors who weren’t lucky enough to get an allocation on the new deal scrabbled to buy into the Olam story.
Highly successful in itself, the deal also paved the way for the second stage in Olam’s capital markets rehabilitation — a 4.5% $300m 5.5 year bond that came two weeks later. Although slightly more contentious on account of its aggressive starting price, that deal was equally ambitious and could not have been done without the benchmark set by Olam’s Singapore dollar return.
Driver China One 2014-1 ABS Rmb743m ($120m) three tranche securitization due 2020
Financial adviser: HSBC
Sole bookrunner: China International Capital Corp
China capital markets are opening up at a phenomenal rate, with barely a month passing when the government and regulators do not announce a new policy. But this liberalisation is not often accompanied by the introduction of international market practices.
Volkswagen Finance (China) changed that for the country’s securitization market in 2014, when its Driver China One became the first asset backed security onshore to get international ratings.
Auto ABS is new in China, with five foreign owned car finance companies only given permission to issue in October 2013. VW was not the first to the market, coming after BMW, Ford and Toyota. But it had always been planning to do something different.
“VW had the idea right from the beginning — the decision to get international ratings was taken way ahead of the other transactions,” said a banker working on the deal.
When VW starting marketing the deal to investors in June, the Rmb699m Class A tranche was rated AA(sf) by Fitch and Aa3(sf) by Moody's while the Rmb44m Class B tranche was rated A-(sf) by Fitch and Baa2(sf) by Moody's. The transaction also includes Rmb52.5m of unrated subordinated notes. The overcollateralisation was Rmb3.8m.
But VW did not stop at the ratings. It also adopted a lot of other firsts, features that would be familiar to investors on previous Driver transactions elsewhere in the word but which were new to China. These included being the first auto securitization to offer a fixed rate of interest and also being the first China ABS to have a target overcollateralisation scheme.
This was an important step for China’s nascent securitization market, as while more and more overseas investors are gaining exposure to the Chinese onshore market through local subsidiaries and/or investment quotas, they are often unable to participate in deals without international ratings.
The gamble appears to have paid off for VW, if the book of demand was anything to go by. International investors made up 60% of orders. And the deal managed to achieve the tightest pricing of any China auto ABS that year.
More importantly, Driver China One is expected to become the template for future securitizations in China, setting a good foundation for a new and growing market.
BEST HIGH YIELD BOND
Tata Steel’s $1.5bn dual tranche senior bonds due 2020 and 2024
Joint bookrunners: ANZ, Bank of America Merrill Lynch, BNP Paribas, Citi, Crédit Agricole, Deutsche Bank, HSBC, Morgan Stanley, Rabobank, RBS, SBI Capital Markets and Standard Chartered
India, one of the countries worst hit by 2013’s taper tantrum, has this year become one of Asia’s hottest investment destinations. And one company that took full advantage of the spectacular rally in India credit was Tata Steel.
The flagship company of India’s Tata Group made its debut in the dollar market to the tune of a cool $1.5bn — the largest sub investment grade debut from India to date. It priced on a day that saw $2.4bn of high yield bonds from India, but that was no hindrance as it received an order book of over $9.1bn across two tranches.
Tata Steel signed up 12 banks to help manage its dollar debut and a tight-knit execution strategy was devised ahead of launch. This included simultaneous roadshows covering Hong Kong, Singapore and London, meeting more than 50 investors in a single day to minimise execution risk.
The Tata name is huge both in India and abroad, so bankers were confident that the bond would sell well. Nonetheless, they decided not to take any chances.
The markets were still buoyant with Modi-mania when books opened on July 24, and Tata Steel rode that momentum to price 30bp through initial guidance.
Both tenors delivered benefits to Tata Steel. With the 5.5 year, the borrower was able to get an extra six months' funding for the same price as a new five year. And the 10 year – an unusual tenor for a debut – extended the borrower’s curve and played nicely to real money accounts, with 72% allocated to fund managers.
While the Tata name is certainly a darling of the capital markets, this bond came from its steel arm. The fact that it priced so well amid such a difficult year for the steel sector is worthy of praise.
BEST INVESTMENT GRADE CORPORATE BOND
Hutchison Whampoa’s $5.4bn dual currency senior bond
$3.5bn due 2017 and 2024, and €1.5bn ($1.9bn) due 2021
Joint bookrunners, dollar tranches: Bank of America Merrill Lynch, Citi, Goldman Sachs, HSBC
Joint bookrunners, euro tranche: Barclays, Crédit Agricole, Deutsche Bank, Goldman Sachs, HSBC
For the second year running, Hutchison Whampoa takes our award for best investment grade corporate bond, with what was at the time the largest ever G3 corporate deal out of Asia ex Japan. Its size alone was eye-catching enough, but it was the deal’s textbook timing that put it ahead of the competition.
One of the savviest issuers in the world, Hutch had been monitoring the market closely ever since the summer and had always been targeting the October window, which it knew was going to be quiet as companies went into blackout.
But picking the exact day to launch was tricky, as the bond market experienced quite a bit of volatility in October as a result of a large high yield sell-off in Asia. While Hutch was relatively unaffected, broader market sentiment was weak during that period. As a result, if they timed the deal poorly, the bookrunners risked shutting the market altogether, given the size and prominence of Hutch.
In the end, the leads and the issuer plumped for October 28. There was little competing paper in the market and sentiment was positive given that the Hang Seng had started the day up.
There was plenty of discussion about whether to launch both currencies on the same day, but Hutch decided that a one day execution was indeed the best way to minimise market risk.
It did, however, wisely leave itself some flexibility, going live with just the dollar tranches when Asia opened. The euros were then launched when London woke up, after the leads had been able to gauge sentiment via the Asia bookbuild.
Not that it needed to take such a cautious approach in the end, as both currencies resonated well with investors and the entire exercise ended up more than three times covered — a huge achievement considering the sheer size of the trade. The euros, in particular, benefited so much from the momentum created by the dollar tranches that bookbuilding was completed in just five hours.
There was even room for Hutch to push a few basis points tighter, for the euros in particular, but it wanted to keep a smooth pricing curve.
The euros eventually ended up exactly on the interpolated curve between the three and 10 year points, once swapped to dollars. Pricing came at an incredibly tight 68bp over mid-swaps, while the three and 10 years came at 88bp and 135bp over Treasuries, respectively.
If Alibaba’s record-breaking $8bn bond had priced within our awards period of the 12 months to mid-November, it would have made this a much tougher category to judge. But without that, the Hutch deal was on a league of its own in terms of execution, size and pricing. A well-deserved winner.
BEST FINANCIAL BOND
Bank of China’s $6.5bn 6.75% additional tier one perpetual preferred shares
Sole global co-ordinator: Bank of China International
Joint bookrunners: BNP Paribas, China Merchants Securities, Citi, Citic Securities, Credit Suisse, HSBC, Morgan Stanley and Standard Chartered
A deal of many firsts, Bank of China’s $6.5bn additional tier one (AT1) preferred shares transaction in October was the outstanding candidate for our best financial bond award.
The first bank capital trade issued directly by the onshore parent of one of China’s big four lenders, the first Chinese bank deal in preferred share format, and the largest bank capital deal globally, anyone would be hard pressed to find another transaction this year that covered so much new ground and was under as much scrutiny as this one.
There were plenty of sceptics before the trade was launched, as the bookrunners had to deal with a number of structural issues such as the RMB denomination of the preferred shares, a cap of 200 on the number of accounts that could be allocated and the subordination of AT1 trades. Not to mention the pressure from China’s regulators to make sure the deal went off without a hitch.
With so many hurdles to overcome and with such a big size, many wondered if the deal could get enough demand. But Bank of China silenced those concerns with the $21.8bn order book it amassed for the deal.
This success was thanks to careful planning. Global co-ordinator BoC International had been working on the trade since the beginning of the year and had $4bn of indications of interest locked down months before official bookbuilding. While the identities of the anchors were never formally revealed — not even to the other bookrunners — several of them were eventually identified as Greater China insurers, such as China Taiping Insurance Group and New China Life Insurance.
The lack of transparency, months of soft sounding and the participation of many non-traditional accounts, such as equity funds, had many purists slamming it as an onshore deal in an offshore dress.
But being unorthodox was precisely what made the deal stand out — and what ultimately led to its success.
While in preferred share format, the deal was run by bond desks, was sold overwhelming to fixed income investors and was only structured in this way because of the vagaries of China’s regulators. It was a bond in all but name.
As the first of the big four banks to tap the offshore market with AT1 preferred shares, the borrower knew it was bringing an entirely new asset class and the pressure was on to set a good benchmark. A failed deal would have shut the offshore market for its peers in China, so it was entirely justifiable for the lead to gather as many anchor orders as possible in order to ensure nothing could go wrong.
Being the first of its kind, the deal was never going to fully resolve all the concerns surrounding additional tier one preferred shares from China. But it set out to tackle the issues head on, with effective, albeit controversial, strategies.
With so much hinging on its success, this deal was always going to be more about effectiveness than aesthetics. It got the priorities right.
BEST SOVEREIGN BOND
The Government of the Hong Kong Special Administrative Region of the People’s Republic of China’s $1bn sukuk due 2019
Joint bookrunners: CIMB, HSBC, National Bank of Abu Dhabi, Standard Chartered
Asian sovereigns issued the highest volume of G3 denominated debt on record in 2014, making this a category with plenty of contenders. But the Hong Kong sukuk wins this award for being a truly landmark transaction.
Not only does the deal mark Hong Kong’s return after a 10 year absence from the international capital markets, it is also the first ever dollar sukuk from a non-Islamic government and the first US dollar sukuk from a AAA rated government.
The award recognises a sovereign borrower that has fulfilled its role of pioneering and expanding its capital markets. The purpose of the deal was to promote development of a sukuk market in Hong Kong and to establish the regulatory framework and a pricing benchmark for prospective corporate issuers. With a budget surplus, Hong Kong certainly didn’t need the money.
But even beyond its strategic importance, the deal was a flawlessly executed one that proved popular with investors globally.
Work on the trade started back in the third quarter of 2013, with Standard Chartered advising the government on the size and structure of the deal, including identifying suitable assets.
This took time, and it was not until June that banks were mandated for the bond. But with Ramadan due to start at the end of that month, the leads took the decision to hold off launching until September.
The sovereign spent four days meeting global investors in early September – no mean undertaking as the government had to come up with a back-up plan for having so many senior officials out of the office. On the day the deal was a huge success, with books reaching $2bn by lunchtime on September 10, and finally closing at $4.7bn.
The final pricing of 23bp over the five year US Treasury is the tightest ever spread achieved on a benchmark dollar offering by an Asian government, and it positioned Hong Kong much closer to AAA rated peers, such as Canada, than to other Asian sovereigns.
It also hit some pretty strong numbers in terms of investor diversification, with 47% of the allocation going to Middle Eastern investors.
While bankers are not expecting Hong Kong to turn into an Islamic finance hub overnight, Hong Kong’s sukuk has provided the strongest possible start for this market to grow.
BEST LOCAL CURRENCY BOND HOUSE
This year’s introduction of a local currency bond house award is a recognition of the growing importance of non-G3 debt in the region. With initiatives such as the Asian Development Bank’s Asean +3 scheme and the phenomenal rise of the offshore renminbi, banks are increasing turning their focus to the region’s local currencies.
As a result, this was a strong category, with many banks demonstrating their pedigree.
DBS deserves a special mention. While the bank has a natural advantage in Singapore dollars, it has not rested on its laurels. Instead, it has grown its market share, in part by bringing SME issuers to the market for the first time. More impressively, DBS has moved from ninth to fifth for offshore renminbi in the space of just a year.
But as competition in local currency bonds picks up, one house stood out this year. HSBC managed to expand its commanding presence in local currencies in 2014, both in terms of the breadth of its coverage, working on deals across eight currencies, but also demonstrating an ability to bring its structuring expertise into domestic markets.
In the 12 months to November 15, 2014, the bank priced 141 local currency bonds, raising $10.2bn.
This strength across the region means HSBC can switch quickly between currencies should conditions change in a particular market — without hurting execution. Thanks to this flexibility, the bank does not just service issuers in their domestic market, but is also able to deliver cross-border local currency bonds.
It comes as no surprise that in a year that has seen a record volume of offshore renminbi bonds, HSBC was the leading house, having sat on top of the bookrunner league table since the market took off in 2010.
But its achievements go much further than what is seen as a natural currency strength. HSBC has priced more local currency Basel III transactions than any of its rivals, including in Indonesian rupiah, Malaysian ringgit, Philippine pesos and Singapore dollars.
HSBC's local currency bond business has also benefited from the bank’s reorganisation of its capital markets business late in 2013 under the new capital financing group, which brought bonds and loans together. This has also led to capital markets working more closely with colleagues in commercial banking (CMB).
This latter relationship has allowed HSBC to bring increasing numbers of high yield borrowers into local currency bonds, particularly to the liquidity available in offshore renminbi and Singapore dollars.
At the opposite end of the scale, HSBC has also won its fair share of sovereign and supra mandates, such as the first ever onshore rupee Maharaja bond, the UK government’s offshore renminbi transaction, as well as a domestic liability management exercise for the Republic of the Philippines.
HSBC’s strength across currencies, combined with its structuring capabilities and work for issuers across the credit spectrum, gave the bank a convincing lead over its rivals and makes it the leader in local currency bonds.
BEST G3 BOND HOUSE
It has been a hectic year for the Asian bond market, with a double digit spike in volumes matched by an increase in competition. But HSBC managed to outshine its rivals by continuing to innovate and building on what was already a market-leading franchise.
Many houses would find it tough to improve on a business that has delivered a leading position in the Asia G3 league tables for the last few years. But HSBC has brought in organisational changes that have helped it keep ahead of its rivals, including aligning all its capital financing teams under one umbrella.
In late 2013, the bank brought its capital raising teams together in a new division called capital financing. The move has given the bank a new level of adaptability as different platforms — DCM, ECM and loans — or even divisions within a platform — G3 or local currency — are now better able to support one another.
This has allowed HSBC to follow up its winning position last year with another stellar performance. During the awards period of the 12 months to mid November, the bank worked on a record 151 deals and raised more than $23bn.
That earned it a market share of 12%, up from 11% and a huge achievement considering that many of its rivals also posted strong growth.
Citi, for example, gave HSBC a good run for its money and was a close contender for this award this year. The US bank was able to improve considerably from last year’s third position in the rankings to go top for large parts of the first half of 2014.
It did this by leveraging on its strength in sovereign issuance, while also making a push in high yield and Basel III bonds.
And it would have been hard to tell the two apart, were it not for HSBC’s depth and breadth of business. This is what gave it the edge, especially in the second half of the year. HSBC ended the awards period top in G3 bank capital, corporate hybrids, Chinese financial institutions, Chinese state-owned enterprises, debut issuers, insurance and investment grade.
HSBC’s dominance in bank capital trades, in particular, was impressive as that was one area where most of its rivals were also heavily investing as they prepared for Asian institutions' response to Basel III. The bank was involved in all but one of the 16 G3 bank capital deals to have priced during the awards period.
That was not the only key battleground that HSBC was able to capture, though, as it was also a leader when it came to bringing state-owned Chinese issuers offshore.
The bank was able to issue the highest number of SOE trades — 23 compared to second place Citi’s 13 — as the new capital financing structure proved effective. Many of the issuers were existing clients from other platforms.
Execution capability is not HSBC’s only strong point. The bank also prides itself in being structurally innovative, and it was involved in bringing to Asia the first ever one-day switch tender offer and concurrent bond issue, via the Philippine sovereign’s $1.5bn bond in January.
Once again, HSBC relied on its knowledge from other parts of its business, as the structure was imported from a trade it had executed in South America. It repeated the feat later on in the year for the Vietnamese government.
While other banks have upped their game this year, HSBC managed to go even further — not just in a single area, but across the entire spectrum. Its top notch execution capabilities, coupled with its improved organisational structure, make HSBC the deserved winner.
(All data sourced from Dealogic.)