China MoF returns to euro bond market
The five-year tranche of the deal achieves negative yield for the first time for Chinese issuer
19 Nov 2020 | Chito Santiago

The People’s Republic of China made its second sovereign fund raising this year as it returned to the euro bond market, pricing on November 19 a 4 billion euro (US$4.76 billion) offering in three tranches. In doing so, it achieved a negative yield in the short end of the funding exercise.

This was the second consecutive annual euro benchmark deal by China’s Ministry of Finance (MoF), which issued the bonds, following the inaugural issuance in 2019 – demonstrating its continued engagement with the European market at the end of a challenging year.

The Reg S only deal comprised of a five-year bond amounting to 750 million euros, which was priced at 100.763% with a coupon of 0% to offer a yield of minus 0.152%. This was equivalent to a spread of 30bp over mid-swap, which was in line with the final price guidance, and 15bp tighter than the initial price range of 45bp area.

The second tranche was for 10 years amounting to 2 billion euros, which was priced at 99.332% with a coupon of 0.25% and a re-offer yield of 0.318%. This represented a spread of 55bp over mid-swap, which was also in line with the final price guidance, and 15bp inside the initial price guidance of 70bp area.

The third tranche was for 15 years amounting to 1.25 billion euros, which was priced at 99.445% with a coupon of 0.625% and a re-offer yield of 0.664%. This was equivalent to a spread of 70bp over mid-swap, which was likewise in line with the final price guidance, and 20bp tighter than the initial price range of 90bp area.

The deal focused on the benchmark size 10-year and 15-year tranches for international investors, according to Samuel Fischer, head of China onshore debt capital markets at Deutsche Bank, which acted as one of the bookrunners and lead managers for the offering. “The five-year tranche is more focused on Hong Kong, which resulted in a negative yield for the first time for a Chinese issuer,” he adds.

Similar to last year, both the 10-year and 15-year tranches attracted very strong order book from global investors, offering a positive yield for China sovereign risk, which remains a very compelling story. In 2019, China’s MoF raised a similar amount of 4 billion euros when it first returned to the euro bond market after an absence of 15 years.

“The deal was priced around 12bp to 15bp within 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,” Fischer points out. “On a higher level, it shows investors are still under-exposed to China and there is definitely a scarcity value perceived in these bonds.”

“At the back of pent-up demand and taking advantage of the continued low-rates environment, China’s MoF further established its euro curve at very attractive levels,” adds Christophe Cretot, head of debt origination and advisory for Asia-Pacific at Credit Agricole CIB, another bookrunner and lead manager for the deal.

He notes that the deal, as expected, attracted strong participation from European and global sovereign and supra investors. “The success of the transaction proves China’s credit strength and its enhanced infrastructure connectivity with global financial markets,” Cretot says.

The deal garnered a total order book of 15.8 billion euros, with the five-year tranche attracting 5.6 billion euros from 99 accounts, 10-year tranche 6.1 billion euros from 132 accounts and 15-year tranche 4 billion euros from 106 accounts. In terms of geographic distribution, Europe accounted for 68% of the five-year bond, 65% of the 10-year bond and 85% of the 15-year bond.

The net proceeds from the bond sale will be used by MoF for general governmental purposes. In addition to Deutsche Bank and Credit Agricole CIB, the other joint bookrunners and lead managers for the transaction were Bank of China, Bank of Communications, China International Capital Corporation, BofA Securities, Goldman Sachs, HSBC, J.P. Morgan, Societe Generale, Standard Chartered and UBS.

China’s MoF last accessed the international bond market in October when it raised a four-tranche offering totalling US$6 billion. That deal was marketed directly to US-based institutional investors under a 144A format for the first time since the sovereign returned to the offshore debt capital markets in October 2017.

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