The Republic of the Philippines shook up China’s Panda bond market in March with an exceptionally tight debut that won enthusiastic participation from international investors.
The Rmb1.46bn (US$210m) offering from the Baa2/BBB/BBB rated sovereign was the first sovereign Panda bond issuance from an Association of Southeast Asian Nations country.
The three-year notes priced on March 20 in China’s interbank market at 5.0%, the low end of 5.0%–5.6% indicative guidance and only about 35bp over local benchmark China Development Bank, rated A1/A+ (Moody’s/S&P). Final pricing offered no premium at all over the Rmb10bn three-year issue of Central Huijin, a unit of sovereign wealth fund China Investment Corp, also priced at 5% a week earlier.
Of the other sovereign Panda bond issuers so far, only South Korea (Aa2/AA/AA–), rated five to six notches higher than the Philippines, has priced at a tighter spread over CDB. Other sovereign issuers paid a premium of 60bp–103bp over CDB’s curve.
The timing of the transaction was not particularly fortunate, with heightened volatility in the market prompting the leads to go out with conservative price guidance.
But the Bond Connect link, which gives international investors direct access to China’s domestic market from Hong Kong, helped the deal by allowing overseas buyers to join, with especially strong support from sovereign wealth funds and Philippine banks.
The issuer, no stranger to the international market, was confident about demand after a roadshow in Singapore, Hong Kong and Beijing, but the momentum of the bookbuilding far exceeded bookrunners’ expectations.
In the end, the order book reached Rmb9.2bn, or 6.3 times the issue size, the biggest book and largest oversubscription for any of sovereign Panda bond to date and the tightest pricing among comparable sovereign issuers.
Moreover, the deal garnered the highest international investor participation in China’s interbank market with offshore investors taking a numerically auspicious 88% of the notes in the end. The final allocation to Chinese onshore investors was just over 10%. Onshore bids made up half of the total order book, but most of them lost out to offshore accounts on price.
The issue marked a significant demonstration of support by the Philippines for renminbi internationalisation and paved the way for other sovereign and commercial institutions in ASEAN to tap China’s onshore market.
The deal also helped the Philippines to diversify the country’s financing using a natural hedge for Belt and Road infrastructure projects and, more importantly, to drum up mainland Chinese interest, which could be crucial in attracting infrastructure financing and expertise in future.
The Philippines and the notes have AAA ratings from China Lianhe Credit.
Bank of China was lead underwriter on the offering. Standard Chartered Bank (China) was joint lead underwriter.