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Poland seals Europe’s inaugural Panda trade

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By Addison Gong
25 Aug 2016

Poland became the first European country to issue a Panda bond on Thursday, printing a landmark Rmb3bn ($451m) deal. The depreciating renminbi was not enough to put off foreign investors, while the yield pick-up over other sovereign bonds helped ensure a strong order book. Addison Gong reports.

Although not the first Panda bond from a sovereign, Poland still made history this week by becoming the first European country to tap the onshore Chinese debt market. Before the A2/A-/BBB+ rated European government, the Republic of Korea (Aa2/AA/AA-) printed a Rmb3bn 3% 2018 at the end of 2015, while the Province of British Columbia (Aaa/AAA/AAA) sealed a Rmb3bn 2.95% three year note in January.

Poland’s deal has been in the making since June when Chinese president Xi Jinping visited the country and the issuer signed a memorandum of understanding with Bank of China. HSBC was added to the mandate on August 12 and on Monday the leads said that the deal would go ahead on Thursday.

Joint lead underwriters BOC and HSBC opened books at around 9am local time after setting initial guidance of 3.2%-3.7% for the three year the previous day.

Demand was strong throughout bookbuilding with bids coming in from both onshore Chinese investors and international accounts, said a banker on the deal. This allowed the leads to price the Rmb3bn transaction at 3.4% from orders totalling Rmb5.9bn when the book closed at 5pm.

The bond was pitched against China Development Bank’s outstanding 2019s. That 2.72% deal was trading at a cash price of 99.92 to yield 2.75% before books opened. 

As well as offering a generous pick up over the CDB bond, Poland also offers a premium over the coupons of the Panda debt from the Republic of Korea (3%) and British Columbia (2.95%). Bankers on the deal said this was largely due to the Polish sovereign’s lower rating.

“Korea is double-A and British Columbia is triple-A rated, so there is a discount,” said the banker. “The fact that Poland got 3.4% and Rmb3bn done is still quite an achievement.”

Korea and BC’s Panda bonds were yielding around 2.47% and 2.84% at Thursday’s market close.

Swap shop

As well as diversifying its funding sources, the sovereign is also saving money with its new bond.

“In terms of cost of funding, it’s very competitive compared to other currencies like dollar or euro,” said the banker close to the trade. “I wouldn’t comment on how many basis points against the curves, but it is quite a bit of saving compared with the G3 currencies.”

Piotr Nowak, deputy finance minister of Poland told GlobalCapital Asia’s sister publication GlobalRMB in an interview in June that the country planned to swap the Panda proceeds back into euros as it had no funding needs in China. Proceeds will be used to finance budgetary expenditures and other outflows stipulated in the budget act for 2016.

A banker away from deal said no one was really worried about whether Poland’s Panda would go through successfully, given it was mainly politically driven. But that did not stop them from keeping a close eye on its progress.

“I believe many sovereigns are being offered this new ‘darling’ but the reality is that the funding cost is still high compared to their own jurisdictions. It is more of a demonstration effect,” Alicia Garcia Herrero, chief economist for Asia Pacific at Natixis, told GlobalCapital Asia.

“A Panda bond brings the Polish sovereign name into a huge market which has obvious benefits in terms of image. Polish firms could also benefit from their sovereign move in the future.”

With its deal sealed, market watchers said the window was open for more issuance to follow.

“The Panda bond issuance by the Polish government is the first one in Europe and will not be the last,” said an economist at an investment bank. “This is particularly true for countries aiming to diversify currency exposure because of the strong dollar and weak renminbi expectations.

“Countries which have strong relationships with China — especially in trade and infrastructure investment — may use the cheap money to fund their expenses. This includes countries like Hungary and Russia. Possibly African countries like Nigeria may also join but they will face more challenges as there is no existing case,” he added.  

Hungary has already said it is considering printing a Panda bond this year, having raised Rmb1bn from a debut dim sum offering earlier in April.

“We are also working closely with a few more issuers who are looking at the Panda bond market, in Europe as well as other Asian issuers. I think in 2016 we will see more Panda bonds,” said the banker on the trade.

Joint underwriters included Agricultural Bank of China, Bank of Communications, Bank of Ningbo, BNP Paribas (China), China Bohai Bank, China Construction Bank, China Development Bank Corporation, China International Capital Corp, Citi (China), Guotai Junan Securities, Haitong Securities, Industrial and Commercial Bank of China, Shanghai Pudong Development Bank, Shenwan Hongyuan Securities and Standard Chartered (China).

Deal statistics were not released as GlobalCapital Asia went to press.

By Addison Gong
25 Aug 2016