Asia’s dollar bond issuance offers lessons
Recent dollar bonds in Asia offer timely insight into the ingredients needed to seal deals in the Covid-19 environment.
Asian bonds are slowly making a comeback after muted supply since the pandemic spread globally, taking hold of Europe and the US in March. As secondary bond prices tanked, the demand for premiums for new transactions grew exponentially. While some US issuers have been willing to pay three digit concessions, Asian borrowers had largely held back.
But after weeks with just a trickle of deals in the offshore market, last week there were a few notable, benchmark-sized bonds from China National Travel Service Group Corp (CNT), Lenovo Group and Petroliam Nasional (Petronas).
These deals shone a light on the state of the market ─ and what borrowers need to know before courting investors.
First, being from an embattled sector does not preclude a company from selling a bond. Malaysian company Petronas, for instance, operates in the tumultuous oil industry. When the issuer marketed its deal, oil prices dipped below $30 a barrel.
CNT's business is travel related, an industry also devastated by Covid-19.
Despite these issuers’ shaky sectors, investors gave their deals strong support.
This was in large part thanks to the issuers' government ties, with investors putting their faith in the ability of the state to hold the borrowers together. Government-owned Petronas was able to raise $6bn on the back of an order book that reached $37bn at its peak. CNT took $900m, and saw orders peak around $9.5bn.
But computer manufacturer Lenovo's transaction last Friday showed that there is more to gaining investor interest than just government support.
Chinese company Lenovo is an unrated credit, considered by analysts at Nomura to be BB+/BB. This put it in clear contrast to the investment grade rated names that opened the Asia bond market.
Lenovo's bond execution was admirable. Like CNT and Petronas, it timed the deal impeccably. Lenovo had been watching the market for some time, and wanted to take advantage of an available window, despite it being on a Friday.
It was also cautious with investors, indicating that it would raise $300m-$500m. It later nabbed $650m when investors proved receptive.
Most importantly, however, Lenovo, as well as CNT and Petronas, offered investors the new issue premiums they wanted.
Concessions are largely a given at this point — the only question being how much. Investor feedback, gathered during phone calls, provided the answer for last week's issuers.
Petronas paid close to 15bp of premium for its bond. CNT paid 15bp for its five year notes and 30bp for its 10 year bond. Lenovo offered somewhere between 50bp and 100bp, with most estimates being on the higher end.
The attractiveness of the deals was evident in the secondary market, as all of the notes tightened significantly. But this should not be taken as a sign that the companies left too much on the table for investors. Instead, it should be seen as an indication of the market conditions.
Investors are keen to get some yield where they can. Lenovo's five year bond was sold at a juicy 5.875%, for example. In comparison, its 3.875% 2022 bond was trading at 3.951%, and its 4.75% 2023 note was spotted at 4.451% just ahead of pricing.
Had the issuers been too aggressive with their final pricing, they inevitably would have seen smaller books, lower quality investors, and would likely have ended up with a smaller size deal. They also might have closed the door for any other issuers hoping to follow them.
Difficult markets require more finesse and careful execution. The plethora of borrowers wanting to sell deals should take heed. Caution and a willingness to meet investors' pricing expectations will pay off.