China stamped its authority on the international capital markets last October when it became the first Asian sovereign to issue a 10-year bond in euros.
The †1 billion transaction generated huge demand as investors fought to gain some exposure to one of the world's most compelling growth stories. The order book totalled †4.2 billion as funds from Cyprus to Norway participated.
In total, 83% of demand came from Euroland, with the bulk of orders emanating from Germany. Asian investors in Singapore, China, Hong Kong and elsewhere accounted for the rest. Some of the distribution was surprising as Irish investors, for example, bought more of the deal than Chinese and Hong Kong accounts combined.
"The transaction had a number of accounts participating, especially in continental Europe, that had never bought a China bond before," says Rahul Mookerjee, co-head of Asia debt capital markets at Deutsche Bank, which lead managed the issue together with BNP Paribas and UBS. In fact, the People's Republic gained 84 new investors through the deal.
As well as China's rosy economic picture, investors were also enticed by the benchmark status of the transaction. By raising †1 billion and by issuing a 10-year bond, the sovereign was making a statement that the euro is becoming an important funding currency. This is something of a new trend for Asian borrowers, says Mookerjee.
Previously, China had issued small, shorter-term euro-denominated bonds (these were placed simultaneously with benchmark sized US dollar-denominated bonds). This time the sovereign took the reverse approach. The †1 billion, 10-year bond was issued at the same time as a $500 million, five-year transaction.
The euro-denominated bond was priced just inside the sovereign's new 10-year US dollar bond, confounding sceptics' views that the former would be poorly received and that investors would demand a substantial premium over the dollar yield curve. Indeed, China became the first Asian sovereign issuer to price a euro-denominated bond through its dollar yield curve.
"The pricing was not difficult to achieve," says Frank Kwong, head of Asia syndicate at BNP Paribas. "Europe had not seen a China 10-year bond before, so demand was overwhelming." He adds, however, that the sovereign was keen that the pricing did not appear to be too tight. "China wanted to leave something on the table to attract quality investors."
Asset managers were the biggest buyers, taking 36% of the paper. Pension funds, insurance companies and central banks accounted for 33%, private banks for 27% and retail investors for 4%.
Bankers and investors will wait to see what China does this year. Typically, the sovereign comes to market once a year through a dual-tranche placement, raising about $1.5 billion in total. "China has a very deliberate funding strategy; it's not opportunistic," says Mookerjee. "The sovereign issues to set benchmark bonds. Their timing is not overly influenced by the markets or the level of demand."
Issuer: People's Republic of China
Date: October 21, 2004
Amount: †1 billion
Maturity: 10 years
Coupon: 4.25%
Credit ratings: A- (Fitch); A2 (Moody's); BBB+ (S&P)
Bookrunners: Deutsche Bank; BNP Paribas; UBS
Best multilateral deal in a G7 currency
ADB 2014
The Asian Development Bank demonstrated its pulling power last October when its first 10-year bond in seven years proved a big hit.
The $1 billion transaction achieved very tight pricing levels though it was still attractive enough to a number of different investors. The multilateral priced the deal at 22bp through dollar Libor. The deal was also priced 33bp inside US agencies.
At the same time, the ADB's deal, which was lead managed by Citigroup, Daiwa SMBC and UBS, was oversubscribed. Demand stemmed mostly from Asia but also from the US. This is largely because the ADB is a rare issuer. Typically, the supranational tests the international capital markets once a year. The last time the ADB had issued in the global dollar bond market was in January 2003. That was for a three-year transaction.
In addition, the Bank is triple-A rated making it a 'must-have' for many investors, especially in Asia. Investors in the region bought two-thirds of the paper, 45% from non-Japanese accounts. US buyers accounted for 20% and Europeans 14%. By investor types, 42% of the bonds went to central banks and government institutions, 36% to bank treasuries, 18% to fund managers and 4% to others.
"The transaction reflects ADB's core funding strategy of maintaining a strong presence in key currency bond markets through regular issuance of liquid benchmark global bonds," says Mikio Kashiwagi, the Bank's treasurer.
According to Elif Soydas, head of supranational origination at Citigroup, the ADB's flexible approach was one of the reasons behind the transaction's success. Initially, the Bank was open-minded about the transaction's maturity, she says. "We undertook a comprehensive roadshow in the US and Asia. Certain critical investors indicated that they would be interested in buying a 10-year global bond."
The timing of the transaction was critical. For most of the year, the 10-year dollar market had experienced volatility, making it difficult for all borrowers to issue. But the market stabilized in the days preceding the ADB deal on the back of friendly US payroll data. In addition, issuance in the supranational sector had been relatively light though demand for stable, top-quality credits was still strong.
Charlie Berman, managing director at Citigroup, says the 10-year market is a particularly tough sector to issue in. "Deals in this market tend to be binary," he says. "The universe of buyers is relatively small but demanding. So neither the issuer nor investors have much room for manoeuvre in trying to achieve their aims. As lead managers, therefore, you have to trust that your judgement is correct."
"If you get a 10-year deal wrong, it doesn't matter if the borrower is triple-A rated. A poor transaction can eat up a lot of a bank's capital. You have to have confidence in your distribution system," he adds.
Issuer: Asian Development Bank
Date: October 14, 2004
Amount: $1 billion
Maturity: 10 years
Coupon: 4.25%
Credit ratings: Aaa (Moody's); AAA (S&P)
Bookrunners: Citigroup; Daiwa SMBC; UBS