China joins sub-zero euro club

IFR 2360 - 21 Nov 2020 - 27 Nov 2020
6 min read
Carol Chan

The People's Republic of China continued to expand its profile in the global capital markets with a €4bn offering that included the country's first bond to price at a negative yield.

Wednesday's three-tranche Reg S benchmark is the largest euro-denominated bond from Asia this year and comes only a month after China raised US$6bn in its first US-targeted offering since 2004, underlining the country's focus on deepening its investor base and developing a liquid international curve.

Christophe Cretot, Credit Agricole's head of debt origination and advisory for Asia-Pacific, said the success of the transaction "proves China's credit strength and its enhanced infrastructure connectivity with global financial markets".

China's second euro benchmark in two years drew a final order book of over €15.8bn, or nearly four times the issue size, with European investors taking around 72% of the bonds.

Acting through the Ministry of Finance, the sovereign issued €750m 0.0% five-year, €2bn 0.25% 10-year and €1.25bn 0.625% 15-year tranches at mid-swaps plus 30bp, 55bp and 70bp, respectively – 15bp–20bp inside initial guidance. The three tranches were priced at 100.763, 99.332 and 99.445, giving reoffer yields of –0.152%, 0.318% and 0.664%.

The negative yield on the five-year piece, which was more focused on Hong Kong as the first euro bond cleared through the Hong Kong Monetary Authority’s Central Moneymarkets Unit, was a first for a Chinese issuer. The 10-year and 15-year portions were also the first Asian sovereign euro issues at these tenors in 2020.

The bonds have unsolicited ratings of A1/A+/A+ from the main global rating agencies, in line with China's ratings, also unsolicited.

Inside the curve

Sam Fischer, head of China onshore DCM at Deutsche Bank, said the deal was priced around 12bp–15bp inside secondaries, which showed that the MoF continues to be able to guide the market lower through new issues while still offering investors an attractive spread.

The 10 and 15-year tranches attracted very strong global orders. Fischer said offering a positive yield for China sovereign risk delivered "a very compelling story".

"On a higher level, it shows investors are still underexposed to China and there definitely is a scarcity value perceived in these bonds," he said.

Demand stood at just over €7bn before the London open but more than doubled to over €16bn about two hours afterwards. At the time of final guidance, orders were said to be over €17.9bn. Final orders still stood at over €15.8bn, including €1.635bn from the leads.

In November last year China issued a €4bn triple-tranche deal, its first euro sovereign bond in 15 years. That comprised tenors of seven, 12 and 20 years, which are more common in the euro market.

In order to establish a complete benchmark curve for other Chinese issuers, the MoF chose different tenors this time, said those involved.

There are not many euro bond offerings from Chinese issuers as US dollar bonds are more advantageous on a currency-hedged basis at the moment.

According to IFR data, only 12 Chinese issuers printed euro bonds for a total €6.076bn this year before the latest sovereign deal. These deals were dominated by financial institutions and state-owned enterprises with actual euro needs, including for M&A.

The timing of China's euro issue was challenging, with Covid-19 cases continuing to surge worldwide, despite positive vaccine news. However, China is the only major economy expected to show positive GDP growth in 2020 as it recovers from the pandemic. A Biden presidency in the US is also expected to improve, or at least not further damage, relations between the two countries.

Strong demand

David Yim, Standard Chartered's head of capital markets for Greater China and North Asia, said the investor base for China's euro deal was highly diversified, including central banks, sovereign wealth funds, and global asset managers, spanning Europe, Asia and the US.

"In particular, European investors account for 85% of the 15-year tranche as they look for high quality long-term investment opportunities," he said. "This once again demonstrates that international investors are full of confidence in China’s strong economic rebound and its future developments despite the lingering global Covid-19 pandemic."

Final orders for the five-year notes amounted to €5.6bn from 99 accounts, including €620m from the leads. Investors from Europe took 68% of the five-year bonds, Asia 29% and others 3%. Official institutions, central banks, pension funds and insurers bought a combined 49%, banks and private banks 32%, and fund managers 19%.

For the 10-year tranche, final orders were over €6.1bn from 132 accounts, including €520m from the leads. European investors received 65%, Asia 33% and others 2%. Fund managers were allocated 40%, banks and private banks 40%, and official institutions, insurers and pension funds 20%.

For the 15-year notes, final orders stood at over €4.1bn from 106 accounts, including €495m from the leads. Allocations for European investors reached 85%, while Asia took 12% and others 3%. Fund managers were allocated 44%, sovereign wealth funds, insurers, central banks and official institutions 38%, and banks and private banks 18%.

Bank of China, Bank of Communications, China International Capital Corporation, Bank of America, Credit Agricole, Deutsche Bank, Goldman Sachs, HSBC, JP Morgan, Societe Generale, Standard Chartered and UBS were joint lead managers and bookrunners.

Squeezing tighter