Chinese friends-and-family euro bonds make more sense than you think
The unusual execution of some recent Chinese euro deals might not be everyone’s cup of tea, especially those participants who like to preach best market practices. But the doomsayers should not be so quick to condemn. What the Chinese have shown is the type of flexibility that is needed to get deals done.
Recent euro deals from Chinese issuers such as China Huiyuan Juice Group and China Overseas Land & Investment (Coli) have stirred up comment in the market. Critics complain that they appear more like private placements than properly syndicated transactions.
It’s not hard to see why the deals have attracted attention. They came at the height of the Greek debt fiasco, when pretty much no other euro trades were able to get done. Seeing issuers embark on deals when Europe was engulfed by a bond firesale amid talk of Grexit was certainly startling. But Chinese borrowers managed to pull off this feat twice in quick succession, by anchoring them on large bids from Chinese banks.
This method of execution irked many bankers, since the transactions were effectively sold before launch. But those who condemn the Chinese borrowers for adopting unconventional practices are forgetting that those deals were executed in unconventional times.
When markets are bad — and markets were really bad during the Greek crisis — it is only to be expected that issuers and bankers will adopt all the tools available to them to make a deal work. If they hadn’t done so and tried to push a deal out anyway, the same critics would have called them reckless.
That doesn't mean it is wrong to label such deals as "friends-and-family", since there is no doubting the close relationships between the issuers, the bookrunners and the anchor investors share. The Coli deal, for example, had Agricultural Bank of China and ICBC as joint global co-ordinators, and it was their presence that brought in not just their own treasury units but also a couple of their smaller counterparts as anchors.
But dismissing the credibility of these deals simply the anchor investors are close to the issuer or the bookrunners is wrong. An investor’s worth should not be judged on their relationship with an issuer or a bookrunner, but rather on the size of its money pool, its reputation and its investment mandate.
And just because a buyer is a Chinese bank does not make it any less of a professional bond investor than any other. When it comes to Chinese issuers, it probably makes even more sense to build deals around such buyers since they are the ones with the best knowledge of the country and the company.
Another whinge is that diversifying into euros is pointless if those bonds then get sold to a familiar face sitting in Bank of China’s Beijing office. But this is only true if the issuer’s objective is diversification of investor base rather than currency. They are far from the same thing and can be achieved in very different ways. The former will probably require a full marketing process; the latter a couple of good friends with plenty of euros.
There are some echoes here of green bonds. The green label is nice to have, but ultimately it’s the bond that counts. And when it comes to many Chinese issuers, it’s the money that matters. How they get it is not their main concern — their main goal, particularly for SOEs, is to be able to tell the higher-ups that they have fulfilled one of the many political mandates they get tasked with.
If that means relying on friends and family, so be it. It's worth remembering that Chinese issuers don't always go down that route. This week's Beijing Infrastructure deal shows they are more than comfortable executing a properly syndicated deal if the situation allows.
Their history in international capital markets might have been short, but it is fair to say that Chinese borrowers have taken to it as well as any others. They’ve proven adept at coming up with tactics that suit their purposes and flexible enough to switch when there are better alternatives. Belittle them at your own risk, but the Chinese do know what they are doing and are here to stay.