China Gives Tight But Valid Bond Price Guidance
Tuesday October 21, 6:05 PM
By Karen K. Lane
Of DOW JONES NEWSWIRES
SINGAPORE (Dow Jones)--After weeks of speculation, China came to market Tuesday proffering US$1 billion in 10-year international paper at 55 basis points over Treasuries, and another US$500 million in five-year euro bonds at around 10 basis points over the mid-swap rate, market sources said.
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Although considered expensive, the pricing won't deter investors, and demand is expected to be strong for the rare Chinese sovereign.
"As a single A credit, it looks expensive at Treasurys plus 55 but given the technical demand - there is very little issue out of China, typically - and this is an improving credit, it doesn't look so expensive," said Lakshmi Iyer, principal, fixed income research at BA Asia.
Moody's Investors Service Thursday upgraded the sovereign's foreign currency rating by a notch to A2 from A3, citing strong exports and foreign direct investment. That is expected to have provided some positive impetus for the bonds.
Standard and Poor's revised its outlook to positive from stable in April and began to review China for a possible upgrade of its BBB rating.
Much of China's previous issuance has gone into the hands of long-term holders giving the paper a rarity value.
Iyer said that comparing with the Malaysia 2011 and China's own 2011 paper - bonds with the closest tenor - the 55-basis point indicative spread on the upcoming U.S. dollar bonds was within the ballpark.
The U.S. dollar denominated bonds carry a 10-year maturity and the euro paper falls due in five years. Speculation had for days coalesced around the prospect of dollar bonds due 2013. For the euro paper, market players were until the last minute still considering whether it would carry a five- or seven-year maturity.
JP Morgan Chase, Goldman Sachs and Merrill Lynch are lead managing the dollar-denominated bonds while UBS, Deutsche Bank and BNP Paribas are taking care of the euro portion.
Investor presentations for both tranches are continuing simultaneously in the U.S. and Europe, and will end Thursday in New York and London respectively.
Official pricing is expected to occur shortly thereafter.
Initial indications are that demand for both tranches is high and that China could sell more than it has outlined if it so chooses. The euro tranche has already attracted demand of around US$1 billion, according to one market source.
Although its shelf registration allows the Chinese authorities to raise up to $4.5 billion, they indicated at roadshows in Asia last week that they were more interested in setting benchmarks with their bonds than selling as much as they could.
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