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Issuer: People’s Republic of China It is not as if the People’s Republic of China (PRC) has a glittering track record in global bond issuance. Only two years ago a $1 billion 10-year global led by Merrill Lynch widened from 85 basis points at issuance to a high of 160bp in the secondary market. So it was only natural to expect investors to be sceptical when the PRC came to market again in June. As it turned out, the $700 million five-year global led this time by CS First Boston and Morgan Stanley was three times oversubscribed, setting the scene for a further $300 million 10-year issue within a matter of days. About half of the five-year bond was sold in Europe, 30% in Asia and 20% in the US. The formula was straightforward. According to one banker: “It was the easiest deal we’ve ever done.” There aren’t many China issues available and the roadshow which took place as sovereign analysts were arguing that the PRC should be rerated from A3/BBB to mid to weak A convinced investors that the Chinese economy was in good shape. The lead managers were impressed by the sophisticated approach to the deal by China’s finance ministry. Key figures were senior vice-minister Liu Jibin, who is in charge of the national budget and international activities, and Gao Jian, director of the ministry’s state debt management department. The ministry’s first priority was to raise the profile of PRC debt among European investors. Although in the past three years China has issued a Euroyen bond, a dragon bond, a global and several samurais, plus a yankee in January, “they never felt they had dedicated sufficient attention to expanding the European investment base,” says Carl Walter, director and chief representative of CSFB in Beijing. A global directed at Europe seemed the best way to do this, and still involve US and Asian investors. “To some extent it was a transition … to a European focus,” says Gao. “I think in future the European capital market will play a more important role than ever before.” The ministry of finance had been talking to investment banks since the end of 1995 about targeting European investors, but an issue could not be arranged until the 1996 budget was formally approved by the National People’s Congress, China’s parliament, in March. According to Gao, ministry officials believed that in terms of market conditions “the first half of the year would be better than the second half so we had a very short interval of time for preparation”. Morgan Stanley and CSFB were mandated in mid-May. “We selected Merrill Lynch and JP Morgan for the [January $400 million] Yankee bond deal,” says Gao. “It’s not pure rotation but we will give each leading firm a chance.” The PRC already had a shelf listing with the US Securities & Exchange Commission with $1.1 billion left on it from the January yankee. That had only to be updated and legal documentation was in place. The lead managers set a target to finish the deal before the US July 4 holiday weekend. To achieve this, the roadshow was split in two. On June 17, Liu Jibin kicked off the Asian roadshow in Seoul. Gao led the team to the US and the two teams met up in London on June 20 for the European presentation (which included a trip to Luxembourg, where the bond was to be listed). The five-year $700 million issue was launched on June 26 and priced the following day. The roadshow had started without a very clear idea of the deal structure beyond its being a US dollar global. “When we went in and did a presentation we didn’t say ‘welcome to the roadshow for a five- and 10-year tranche of a PRC global bond, the pricing ranges x, y and z’,” says CSFB’s Walter. “Then people think ‘well if that’s what it is, is there any value there?’, and they don’t really focus on the China story so much. We wanted to avoid that, and let them focus on what the minister and Dr Gao were trying to convey about China. Our advice to them was that, if you want to get a good deal, you develop momentum for the deal and let the market tell you what it wants.” The deal size was also to depend on how well it went down. As it happened, the paper was snapped up, particularly by Asian investors: $700 million was launched at 80bp over US treasuries and was two to three times oversubscribed. Even the underwriters were taken by surprise. “People in the syndicate were thinking it was going to be a hard sell,” says one, “because of Taiwan, Hong Kong and Sino-US relations.” PRC finance ministry officials were also pleased. “I myself did not expect such strong demand for the five-year,” says Gao. “But I met a lot of US investors and I think they had a good memory of the yankee bond deal. I think the successful yankee issue really paved the way for the successful global it gave the investors confidence.” But not enough confidence to let finance ministry officials off without a grilling during the roadshow. “They asked a lot of questions,” says Gao. Some were “good” questions, he adds; in others, investors displayed “their own logic” a rather cryptic way of saying that investors, particularly outside Asia, have some peculiar ideas of what is going on in China. Political questions regarding Sino-US relations and the crisis in the Taiwan Strait in February came mainly from US investors. “They’re more politically sensitive,” says Gao. But the officials did not find the questions awkward. He says investors were told: “We are confident that the country is moving forward. We believe the reform and open-door policy will be continued in the future, even with the political succession, because it is in the interests of the majority of the people. And that is not just political propaganda.” Still, the biggest selling point was the economy. Inflation has been brought under control, GDP growth is slowing but strong and foreign exchange reserves (over $80 billion) are among the highest in the world. “The economic fundamentals all look terrific,” says CSFB’s Walter. Demand was strong but not sufficient to warrant a 10-year tranche to the deal, another objective the finance ministry had in mind. Then on June 28 treasuries rallied dramatically. Combined with the momentum built up by the five-year, a 10-year tranche suddenly became possible. The lead managers phoned the ministry team, who were still in Europe. “The lead managers were still very suspicious about the demand for a 10-year maturity, but they wished to try,” says Gao. By midday Liu Jibin had told them to proceed with the 10-year. Pre-marketing began that day, and a $300 million deal was launched and priced at 110bp on July 1. This issue was also two to three times oversubscribed US investors took 80%, 10% went to Europe and 10% to Asia. The rapid response to market changes won the finance ministry a relative newcomer to international capital markets a lot of respect. After a first deal in 1987, it began issuing regularly only in 1993. “Over the past three years the ministry has become more sophisticated in how it approaches the market and how it responds to the market,” says CSFB’s Walter. “The fact that the vice-minister and his team were able to respond so rapidly to a change in market conditions to launch the 10-year is really an indication of that.” Ministry officials say the main lesson they have learnt since 1994 is the need to “establish a long-term relationship with investors”. Gao says: “We have to give confidence to the investors that the Chinese government is a responsible participant in the market.” It is not just about “raising capital but establishing market status”. Not pushing too hard on pricing is an important aspect of that and the ministry is keen to be relatively “generous”. The speed of the 10-year launch meant that the syndicate missed out on potential profits from trading. The lead managers decided they should receive underwriting fees but not be allocated any bonds. Walter says: “We had a very large syndicate; we knew if we were going to do 10 years, we had to do it all in the US and we had a very short period of time to get the deal done in. We wanted to simplify the whole procedure, so Morgan Stanley and we just did it. Given the time constraints we had, we didn’t have a choice.” |
