Bank of China rakes in ‘Silk Road’ bond success
All eyes were on Bank of China’s landmark four-currency deal on June 24, which was divided into 10 tranches in dollars, euro, Singapore dollars and offshore renminbi (CNH). It became the first bond ever issued in support of China’s plans to extend its global influence under the "One Belt, One Road" (OBOR) policy, but its success doesn’t necessarily mean there will be more, reports Narae Kim.
Chinese president Xi Jinping introduced plans for a new Silk Road in 2013 to better connect its economy with the Middle East, Africa and Europe. Projects under the OBOR initiative include a network of railways, highways, oil and gas pipelines, power grids, internet networks, maritime and other infrastructure links.
Against this backdrop, Bank of China blazed a trail this week with a Silk Road bond whose proceeds will be explicitly used to fund the OBOR scheme.
As the total issue size was not expected to exceed $4bn, market observers knew it wasn’t going to smash size records. What grabbed their attention, however, was the sight of joint global co-ordinators Bank of China, Barclays, Citi, DBS and HSBC opting to sell four different currencies across 10 tranches — all launched on the same day.
“As is usually the case for pioneers — especially this time as it’s linked to the Chinese government’s key economic and diplomatic policy — this bond was focused on delivering a political message, rather than achieving certain pricing or size goals,” said a syndicate banker on the deal.
“We chose five branches as issuers — from Asia (Hong Kong, Taiwan and Singapore) to Abu Dhabi (Middle East) and then to Hungary (Europe) — as they represent, if you connect them all together, the new Silk Road.”
All at once
Having selected the issuing branches, leads then chose the most liquid currencies — dollars, euro, Singapore dollars and offshore renminbi (dim sum and Formosa).
“We could have launched them separately, but hitting the road all at once delivers a much more powerful political statement,” the banker said.
However, this all-out approach required caution, as a multiple tranche, multiple currency deal could cannibalise the entire market, drying up liquidity and clogging the pipeline that had been built up due to volatility.
“We were mindful of this and we didn’t want to kill the market, especially when it was still jittery. So aside from choosing different currencies, we spread out the tenors as well in a bid to target different investor bases,” said a second syndicate official on the deal.
While the Formosa portion comprised four tranches of five, seven, 10 and 15 years, the US deal was divided into three, five and 10 years, and the euro part was a three year floater. Meanwhile, the dim sum bond was a two year, and the Singapore dollar a four year.
Pricing was one of the reasons behind the simultaneous launch, one syndicate banker away from the deal assumed. “If you do multiple deals in different currencies at the same time, it is cost efficient since if not, latter deals should pay a premium given the current volatility in the market,” the banker said.
But the second banker on the deal affirmed the simultaneous launch was more symbolic than to do with saving cost.
“I agree that if you have multiple books open on the same day by the same issuer, bookbuilding gains momentum more easily as books may look like they are growing faster and bigger, and this may encourage other investors to jump in, but this was not the main objective,” the banker said.
On the morning of June 24 Hong Kong time, joint leads started taking orders for the dollar, Singapore dollar, and dim sum trades, issued by BoC’s Hong Kong, Singapore and Abu Dhabi branches, respectively.
For the dollar offering, the JGCs, along with joint lead managers and bookrunners Commonwealth Bank of Australia, Goldman Sachs and JP Morgan, released initial price guidance at 140bp over Treasuries, 150bp over, and 180bp over for three, five and 10 year tranches. They were able to revise guidance to 115bp-120bp, 125bp-130bp, and 160bp plus or minus 2.5bp, before pricing all of them at the tightest ends.
The new $1bn 2.125% 2018s were eventually sold at 99.769 to yield 2.205%, the $800m 2.875% 2020s at 99.737 to yield 2.932% and the $500m 3.875% 2025s to yield 3.957%.
However, Asian investors were divided when it came to pricing. One fund manager, who was intrigued by the concept of the OBOR theme, said he didn’t place a bid as he wanted 10bp-20bp higher yields across the tranches.
Another Hong Kong-based investor, who was also keen on the deal and had had investor calls before launch, said pricing wasn’t the reason he decided not to participate.
“I saw IPT levels were around 20bp cheaper than I expected, so the pricing was attractive for sure. But I chose not to go after this aggressively given the recent volatility in Treasuries and competing supplies of high grade names expected for the weeks to come,” he said.
The dollar bonds were seen 3bp-5bp tighter in the morning of June 25.
Meanwhile, the three year FRN in euros was launched in the afternoon Asia time, with BNP Paribas, First Gulf Bank, Société Générale and UBS working alongside the JGCs. But bankers were wary because of the negative headlines from Greece that hit the market on June 24.
Greece’s creditors turned down the latest offer from the country, and handed the government new terms for a deal to unlock bailout funds. This rejection was denounced by the Greek prime minister.
“The euro deal was most challenging at first as new negative headlines hit the news, but it was a reverse enquiry deal and we were looking at around €300m ($335m), which is not so huge,” the third banker said. “So we just went ahead with the deal, and our move proved right as we ended up raising more.”
With €1.25bn of orders, the issuer bulked up the size to €500m with a coupon of 100bp over Euribor, 5bp tighter than guidance.
Singapore dollar and CNH
For the Singapore dollar portion, which was the issuer’s maiden outing in the currency, the leads along with OCBC and Standard Chartered sold the four year trade at par to yield 2.75%. The leads were able to tighten guidance by 25bp from initial guidance of 3%, and raised S$500m ($372m) from an order book of S$1.3bn from 78 accounts.
Also printed on the same day was a Rmb2bn ($326m) two year dim sum trade, which the leads marketed with initial guidance of 3.75% area. The bond, dual listed in Nasdaq Dubai and Singapore, was sold at par to yield 3.6%, which came a little wider than its own Rmb1.5bn 3.45% 2017s, yielding 3.5%.
All these deals came shortly after the leads priced the Chinese lender’s Rmb3bn ($489.6m) Taiwan Formosa deal, which was split into four tranches of five years of Rmb1.5bn, seven years of Rmb500m, 10 years of Rmb500m and 15 years of Rmb500m, priced at 3.95%, 4.05%, 4.15% and 4.40%, respectively. Bank of Taiwan, CTBC Bank, Mega International Commercial Bank and Masterlink Securities also worked on this deal.
More to come?
Bankers on and off the deal hailed it a success but doubted the Silk Road bond would become a persistent trend.
“It's definitely not a trend for the time being,” said the first banker on the deal. “The multi-tranche multi-currency deal was possible because it was Bank of China. There are not many banks which are as ambitious about OBOR themes as BoC while at the same time have ability to execute 10 tranches at the same time. It’s very tough.”
This sentiment was reflected by investors as well.
“This kind of bond requires a massive amount of time and work to prepare and investors also need time to be educated and get familiar with the whole concept," said the Hong Kong-based investor. "Maybe one of those big four Chinese banks can come with OBOR-related bonds, but even if they do, it’s going to be intermittent at best, and not multiple currencies simultaneously."