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ABC gives China a solid start to its green bond ambitions

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Agricultural Bank of China (ABC) priced a landmark transaction this week, raising approximately $1bn from a dual-currency, triple-tranche bond. Not only was this China’s first financial green bond, but ABC was also the second bank from the country to sell notes in London in as many days, setting the stage for president Xi Jingping’s visit to the UK next week. Rev Hui reports.

Most of the attention in the Asian bond market this week has been on China Construction Bank and ABC. The former kicked off the week with a Rmb1bn 4.3% 2017 bond that was sold in London on October 12, a feat that was followed by ABC’s historic green bond a day later.

While the deals themselves were pretty standard, bankers on both transactions admitted that it was paramount to get them right as they act as a precursor for Xi’s visit to the UK this month.

“It’s the first of many bonds that China plans to do in London to sort of consolidate the collaboration between the two countries, so there is a high amount of strategic importance in these deals,” said a DCM banker working on the ABC green bond.

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The People’s Bank of China (PBoC) is planning to issue its first overseas RMB central bank note in London next week while China Development Bank is also planning to issue in the same market. The size of the upcoming central bank note is up to Rmb5bn ($788m) and will probably have a tenor of one year. 

Strong demand

The added pressure, however, proved to be little distraction for ABC’s joint global co-ordinators, ABC International, Barclays, HSBC and JP Morgan.

Books opened in the morning of October 13 with the leads setting initial price thoughts of 145bp over, 165bp and in the 4.45% area for a three year dollar, a five year dollar and a two year CNH portion, respectively.

Final guidance was subsequently announced late in the afternoon with the leads cutting 20bp for each of the dollar portions and 25bp for the CNH tranche. All three were expected to price within a 5bp range from final guidance.

True enough, the leads priced all the tranches at the best terms for the issuer. The 2.125% 2018s were eventually sold at par, while the 2.75% 2020s were sold at 99.893 to yield 2.773%. The 4.15% 2017 renminbi portion was also sold at par.

“All three tranches were multiple times subscribed, which was down to a favourable pricing strategy,” said a syndicate banker close to the deal.

The banker pointed out that the starting point of the dollar tranches translated to a somewhat generous 30bp-35bp premium over ABC’s existing 2% 2018s and 2.75% 2020s. The renminbi portion, on the other hand, was marketed at a 22bp premium to the recent CCB bond.

That meant that early momentum for the bonds were very strong, which gave the leads plenty of room to cut on pricing. ABC ended up paying a “single digit new issue premium” for the dollar and priced inside CCB’s notes, which was yielding 4.23%.

Deal statistics for the dollar portions were not disclosed. The CNH portion, on the other hand, obtained a Rmb4.9bn order book consisting of 71 accounts.

Currency dynamics

ABC chose to raise $400m from the 2018s, $500m with the 2020s and Rmb600m in 2017s to bring the total amount raised to approximately $995m. But the bank actually had more than enough demand to go bigger.

“This transaction was really more of a government initiative rather than ABC desperately needing the cash, so from day one the bank made it clear that it only wanted to print no more than $1bn,” said the syndicate banker.

Even though ABC had a very clear size in mind, the bank did play with the idea of adding a euro portion into the mix as well.

That, however, failed to materialise as the $1bn target was too small to execute a three-currency trade. “It wasn’t big enough for us to add another currency into the equation,” added the DCM banker.

While investor diversification has long been pushed as one of the benefits for issuing in euros, he pointed out that most of the euro deals from China this year were predominantly bought by Chinese accounts rather than European.

In addition, the DCM banker added that there was no real pricing advantage to make selling euros worthwhile. In fact, a second origination banker working on the deal reckoned that purely from a pricing standpoint, it would have made more sense for ABC to issue in dollars alone.

Cost of funding for the CNH tranche works out to 3.7%-3.8% once the dollar/renminbi cross currency swap (CCS) is taken into account, which is far more expensive than what ABC was able to achieve in dollars.

“But as one of the big four banks issuing a landmark transaction in London, it cannot not issue a renminbi portion,” the banker said. “That’s why the final split for the CNH portion was so small.”

Bank of America Merrill Lynch, Goldman Sachs, Morgan Stanley, Standard Chartered and Wells Fargo Securities were joint bookrunners and joint lead managers.

China’s green ambitions

While bankers on the trade agreed that the most important aspect of the deal was the political angle, the origination banker said it is also worth remembering that the deal marked China’s first financial green bond.

While China has already made its debut in green financing this year via Xinjiang Goldwind Science and Technology, several market observers told GlobalCapital Asia that they are encouraged by what is another milestone in the nascent asset class.

“ABC as one of the big four Chinese banks is responsive to government initiatives,” said Sean Kidney, chief executive of the Climate Bonds Initiative. “This is a landmark statement from the government that it’s committed to promoting green financing.”

Kidney added that the development of green financing in China is taking longer than expected, but now that ABC has finally come to the market, he expects other Chinese banks to follow suit this year with issuance within the $500m-$1bn range.

One Hong Kong-based DCM banker said he would not be surprised to see more green bonds in the near term given the strong push from the government.

The China Green Finance Committee, an initiative launched by the People’s Bank of China and the United Nations Environment Programme, is co-hosting a green bond conference with the London Stock Exchange on October 23 — coinciding with Xi’s UK visit.

“It’s pretty obvious that this is a huge push on the part of the Chinese to really kick start the green bond market and I’m sure we’ll see issuance in the future,” he said. “But the government can’t always be the one telling companies to issue. You really need the companies themselves to be more proactive.”

Chinese entities that will be attending the conference include ABC, ICBC, Industrial Bank and Golden Concord Holding.

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