Top PRC brokerage Citic Securities surprised market participants yesterday, adding the credit enhancement of a standby letter of credit for its first transaction in the international capital market. With a low debt-to-asset ratio and a BBB+ investment rating, CiticSec could have tapped the market as a standalone credit, but it decided to use the SBLC to achieve lower funding costs and seize the issuance window rather than await regulatory approval before hitting the offshore market.
The US$800m Reg S issue amassed a US$3.5bn order book from 165 accounts, allowing it to price 15bp inside initial price talk of T+200bp.
The Reg S deal was priced at 99.753 or a yield of 2.553% on a coupon of 2.5% for a spread of Treasuries plus 185bp.
Bankers suggested using BBB+/Baa2/BBB+ rated Vanke 2018s, which were quoted at Treasuries plus 225bp, as reference if CiticSec had come on its own. That means CiticSec may have saved only some 40bp, before taking into account the cost of SBLC.
The small saving probably was not enough to pay for the cost of the SBLC, but using one already in place meant CiticSec did not need to wait for approval from the State Administration of Foreign Exchange to issue in the offshore market.
That process can be very lengthy. When the approval eventually arrives, the issuance window in the US dollar bond market may be long gone. The credit spreads on Chinese SOEs have hovered near-record lows lately. So, even accounting for the cost of the SBLC, it may have made sense for CiticSec to go to the market now instead of later.
That suggests that it may be cost efficient for other Chinese SOEs with large unused SBLC credit lines to tap the US dollar market now to lock in funding at low interest rates.
Yet, some rival banks were of the opinion that CiticSec should have come on its own to establish a benchmark for the Chinese securities sector, as well as for the BBB- segment. That would benefit the development of the Chinese corporate sector in the long run. Still, the wait involved may have again changed the deal terms significantly.
In any case, investors seem to have differentiated CiticSec from the other issuers that used Bank of China SBLC. A close comparable with similar SBLC structure was Cosco 2023 which was quoted at Treasuries +plus 228bp. Assuming a 30bp spread between five-year and 10-year would render fair value at around Treasuries plus 206bp, suggesting CiticSec priced some 20bp through that. The difference between Cosco and CiticSec reflect the contrast in fundamentals, despite coming with the same Bank of China SBLC.
Of the bonds, 61 went to banks, 24% went to fund managers, 11% to insurance companies and 4% to private banks. Asian investors bought 94% of the bonds and Europeans 6%. The new bonds were well supported at Treasuries plus 182bp this morning, tightened 3bp from the reoffer.
Citic Securities International, Bank of China, Citigroup, HSBC, Standard Chartered, Bank of America Merrill Lynch, Deutsche Bank, Crédit Agricole CIB, JP Morgan, Barclays, Agricultural Bank of China are leads on the deal.
The issue off Citic Securities Finance 2013 carries a standby letter of credit from Bank of China’s Macau branch and a keepwell deed from CiticSec.
The deal carries an A rating from S&P, while SBLC provider has A1/A/A ratings and Keepwell deed provider at BBB+ (S&P).