On paper, nothing particularly stood out for the €600m ($660m) 1.75% four year bond from China Overseas Land & Investment (Coli) that was issued on July 7 via joint global co-ordinators Agricultural Bank of China, BNP Paribas, DBS, HSBC and ICBC.
In a similar way to the Chinese credits that have tapped the euro market in the past, a lot of focus was on the degree of state backing that Baa1/BBB+/BBB+ rated Coli enjoys as a subsidiary of China State Construction Engineering Corp – one of the largest construction firms in the world.
But while the high degree of state backing was indeed a key selling point highlighted by the leads to investors, a head of DCM close to the trade said the true worth of the transaction was the amount of future issuance Coli could stimulate.
“I think it is important to look beyond the deal itself because the stuff on pricing and tenors is pretty much standard,” said the DCM head. “Coli is the first Chinese property firm to issue a euro bond. That is the key.”
That is important because the real estate sector is one of China’s largest and most consistent users of the international debt market, mostly through dollar or offshore renminbi bonds.
Year-to-date, the sector has raised a combined $7.6bn from dollar bonds alone, according to Dealogic.
Shackles undone
Now that Coli has opened up a new funding channel for the real estate sector, the DCM head is confident Chinese euro bond issuance will go from strength to strength, especially given that another shackle had also been released by a deal from China Huiyuan Juice Group a week earlier.
That €200m 1.55% 2018 bond was also a landmark transaction, being the first non-state-owned issuer from China to ever tap the euro market.
“Whenever we do a euro bond, the questions we get asked the most are, are there going to be more deals and has the euro market truly opened for Chinese credits?” said a Hong Kong based syndicate banker. “The answer to the first question is always yes, but the second question has always been tough to answer.”
This seems surprising when comparing the volumes in 2014 (€1.6bn) to 2015 YTD (€7.8bn), but the reality is tougher to deduce, say bankers.
That is because before the appearance of Coli and Huiyuan, the euro market had only been available to a very small group of top-tier state owned names, such as oil and gas giant Sinopec.
“Everyone is pitching hard for the Chinese to do more in euros and now that these two deals are done, we’ve opened up a whole new class of issuers to do just that, so volumes will definitely go up,” the syndicate banker said.
Not true deals
But not everyone in the market shares this optimism. As one DCM banker based in Hong Kong pointed out, it remains to be seen whether the euro investor base is really open to the entire spectrum of Chinese credits given that both Coli and Huiyuan were heavily sold to Chinese accounts.
“When it comes to the Chinese, there are two types of deals. Some are properly marketed, but the others, no matter the currency, get sold predominantly to the Chinese themselves,” he said. “You can’t really call deals that get sold mostly back into China, euro deals.”
As a result, he thinks it is premature and incorrect to use the two recent deals as examples of the euro market further warming up to Chinese credits.
What would be better examples, however, are deals earlier in the year by utility firm State Grid Corp of China, as well as Sinopec.
State Grid raised €1bn on January 19 with a dual tranche offering split between a 1.5% 2022 and a 2.45% 2027, while Sinopec raised $6.42bn on April 21 with a five tranche transaction that included two euro-denominated portions worth €1.5bn.
In this banker's eyes, those two deals serve as better yardsticks because they were the first Chinese issuers to print euro bonds in two tranches, reflecting a growing comfort among Chinese issuers to test the boundaries of that currency.
“Can I see high yield corporates issuing in euros anytime soon? No, unless it’s one of those quasi-private placements that gets sold only to Chinese banks,” the DCM banker said. “Most of the future issuance will continue to revolve around top tier state owned names although the political instability in Europe means issuance probably won’t fly in the short term.”
In spite of that, the banker still predicts the volume of Chinese euro bonds will hit €10bn by the end of the year.