China has been absent from the euro-denominated bond market for a decade and a half, and UBS announced its exit from the SSA bond business in 2012. This unlikely duo came together, however, for a €4bn deal in November 2019. Edward Russell-Walling reports.

Team 0120

From left: Armin Peter, Philip Lu, Jason Wang

China returned to the euro-denominated bond market in November 2019 for the first time in 15 years, and the resulting €4bn deal was (briefly) its largest ever single foreign currency sovereign bond. UBS was a joint bookrunner and joint lead manager.

These days, UBS is not the first name that springs to mind in connection with sovereign issuance. The bank announced its exit from sovereign, supranational and agency (SSA) bond business back in 2012, as it sought to meet capital rules and reduce staff numbers. It closed its commercial paper business at the same time.

This did not mean it abandoned all sovereign issuance, however. “We got out of US and European SSA – the pay-to-play, auction market,” says Armin Peter, UBS head of debt syndicate. “But we are still very active elsewhere, in Asian debt capital markets [DCM], in Australia – where we are the leader in the sovereign space – and, of course, in Switzerland.”

Asian debt

In the course of 2019, UBS led emerging market sovereign euro deals for the likes of Mexico, the Philippines and Kazakhstan. Mr Peter notes that the bank has been particularly successful in Asian debt, not least in China, where it was one of the first foreign licensed banks. “We have a partnership of special standing with China,” he says. “Because of our historical co-operation with the sovereign, we also have a very strong relationship with state-owned enterprises.”

UBS was a joint lead manager, together with BNP Paribas and Deutsche Bank, on China’s previous foray into the euro debt markets. That was back in 2004, when the sovereign printed a €1bn 10-year transaction, with a 4.25% coupon and a spread of 40 basis points (bps) over mid-swaps. The order book for the bond, rated A2/BBB+, totalled some €4bn.

China has not been a frequent visitor to the international bond markets, mainly because it does not need the money. It did not tap the US dollar market at all between 2004 and 2017. Since then, however, it has issued annually in dollars, raising $2bn in 2017, split between five- and 10-year tranches, and $3bn in 2018, with maturities of five, 10 and 30 years. In November 2019, only weeks after the latest euro deal, it raised $6bn in three-, five-, 10- and 20-year tranches. That promptly broke the euro transaction's short-lived record as China’s biggest foreign currency deal. 

The size of the euro deal was still impressive, though not its most important feature. “The euro issue wasn't driven purely by funding needs,” says Jason Wang, UBS's Hong Kong-based head of DCM China. “This was more a way for China to further integrate into the global financial market, while enriching the yield curve of its offshore bonds and setting a benchmark for other Chinese issuers.” 

That aside, China is known to want to reduce its – and the world’s – dependence on the US dollar.  

On and offshore

Mr Peter notes that both the onshore and offshore markets for Chinese bonds were strong in 2019. “The growth of Chinese wealth and the desire to invest has made the onshore bond market very competitive,” he says. “At the same time, the international presence of Chinese credits increased by 25%. Together they tell the story of how much growth and development there has been in China."

Trade tensions with the US remain an important influence, he adds, but have not stopped China’s development. All of this prepared the ground for the sovereign euro issue, discussions for which began some six months before the launch. 

Mr Wang says: “The issuer was very hands on, and keen to hear how investors felt about the deal, having been away from the market for 15 years. A lot of thought went into possible maturities."

Chinese corporates had previously issued in euros, mainly in three-year tenors, he notes. Policy banks had also gone to the euro market, generally with five-year maturities. While many emerging market issuers are drawn to the ultra-low yield environment surrounding the euro, in China’s case, the Ministry of Finance was keen to avoid a negative yield.

“There was strong investor feedback against a negative yield, so the minimum tenor would have to go beyond five years," says Mr Wang. “Seven years was thought to be the best case.” That also had the virtue of providing a point of difference with the sovereign’s US dollar curve. The same was true of the 12- and 20-year slices that made up the balance of the transaction.

“A 30-year tranche was considered during discussions," says Mr Wang. "The issuer decided to proceed with the 20-year, balancing investor feedback and absolute yields considerations.” An unrated seven-, 12- and 20-year transaction was announced, followed by four days of investor feedback collection. “The dollar deals had been unrated,” adds Mr Wang. “There was discussion among joint syndicate on how investors would feel about an unrated euro deal and how it might affect pricing. Most investors said it wouldn't affect their decision.”

Attracting demand

As it turned out, Standard & Poor’s gave the bond an unsolicited A+ rating, equivalent to its sovereign rating. The Bank of England confirmed the bond's repo eligibility, which helped to attract European bank treasury demand, particularly in the shorter tenors.

A dozen banks were mandated as managers and bookrunners. Three were domestic institutions: Bank of China, Bank of Communications and China International Capital Corporation. Apart from UBS, the foreign banks were Citigroup, Bank of America, Commerzbank, Crédit Agricole, Deutsche Bank, HSBC, Société Générale and Standard Chartered. “It was a wide range of banks, reflecting the overriding theme of diversification of the investor base,” says Mr Peter.

There was no marketing ‘story’ as such, apart from the fact that this was China. But given its 15-year absence from this market, the bonds had a scarcity value, enhanced by the positive yields being offered. Indications of interest from global investors were 'overwhelming', which led to initial price guidance of mid-swaps plus 45basis points (bps) to 50bps on the seven-year tranche, plus 60bps to 65bps on the 12-year and plus 75bps to 80bps on the 20-year. Orders of more than €3.6bn were logged in the first hour, and demand peaked at about €19.7bn.

There had been no fixed issue size at the outset, but feedback suggested that €4bn would be the right mark. In the final pricing, the issuer did not push for the tightest level possible, to be sure of retaining high-quality investors, especially central banks. Nonetheless, the reoffer spreads tightened considerably, to 30bps for the €2bn seven-year, 40bps for the €1bn 12-year and 58bps for the €1bn 20-year. Coupons were 0.125%, 0.5% and 1%, respectively. All tranches featured a three-month par call, allowing the issuer the flexibility of calling in the bonds shortly before maturity.

“The par call hadn't been done before in China’s previous sovereign issues, though it is becoming more popular with Asian issuers,” says Mr Wang.

Dual engagement

UBS maintains that, as the only Swiss bank in the syndicate team, it could make a significant contribution by reflecting early interest from several high-quality real money accounts, central banks and sovereign fund investors. At the time, this was the 90th offshore bond issuance led by the bank for Chinese issuers in 2019. “In a transaction such as this, there is a big emphasis on global connectivity to fulfil distribution,” says Mr Peter. “So there was dual engagement by our Asian and European syndicate.”

In what was unlikely to be a coincidence, the successful issuance was announced while China’s president, Xi Jinping, was in Paris for talks with French president Emmanuel Macron.

The UBS bankers believe that China will probably return to the euro market before too long. “It won't take 15 years for the next euro deal to come,” says Mr Peter, who adds that a green bond would make a lot of sense. “China is a big driving force in the realm of sustainability. And the euro is the currency of choice for green issuers.”


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