Crédit Agricole envisages its debut panda bond, which will fund its Chinese subsidiary, to be the first of many. David Wigan reports.

Benjamin Lamberg

Benjamin Lamberg

In the Chinese onshore bond market, France’s Crédit Agricole has regularly been the bridesmaid, helping other financial institutions access local currency liquidity, but never the bride. In December, the bank put itself centre stage with an inaugural panda bond that was also the first to be issued by a European global systemically important bank. 

Following the approval granted by People’s Bank of China for its panda bond issuance programme, on December 5 Crédit Agricole issued a Rmb1bn ($142.7m) senior preferred bond with a three-year tenor and a 3.4% fixed-rate coupon. The inaugural benchmark issuance was bought by Chinese and international investors on the Chinese bond market and through the Hong Kong Bond Connect scheme. The transaction was significant because it enabled the bank to fund the daily operations of its Shenzhen-based subsidiary. However, it also signalled the reawakening of a market that has been in relative hibernation for the past three years.

“We have been in China for more than 120 years and historically Crédit Agricole Corporate and Investment Bank [CACIB] has helped both international clients access the local market and facilitated access to international markets for our Chinese clients,” says Nadine Fedon, the bank’s head of medium- and long-term funding. “However, given rising appetite among both local and international investors, and the inclusion of more renminbi-denominated securities in international bond indexes, we felt the time was right to get involved.”

Instant access

Crédit Agricole’s issuance programme was set with a cap of Rmb5bn, which can be issued partially or in total in the next two years. However, it decided to test the water with a relatively modest transaction, and plans to come back later.

“We believe China is going to be a key market going forward,” says Ms Fedon. “However, we wanted to get access quickly, as we saw some non-European banks were already there and we wanted to add this diversification play to our funding strategy.”

The panda bond market was launched in 2005 with issuances by the International Finance Corporation and the Asian Development Bank, but capital restrictions preventing the export of funds meant the market was quiet for several years. Following liberalisation in 2010, issuance volumes began to pick up slowly. By 2015, issuers including governments, corporates, state-backed organisations and financial institutions were jumping in. The biggest issuer segment to date has been auto manufacturers, with Daimler the biggest single issuer. By late 2019, total panda volumes had reached about Rmb350bn.

“One of the biggest challenges in getting ready to issue in the Chinese bond market is the documentation and administrative side: it is not your native language, nor your legal system, so you need to do more homework and you need more time,” says Benjamin Lamberg, CACIB head of credit trading, syndicate and sales for Asia. “The documentation is prepared in simplified Chinese, and under Chinese governing law, so you need to ensure you work with a strong local law firm to navigate this new environment. At the same time, we also needed to be sure we were aligned with European regulations, which is not something that local borrowers had to deal with before.”

Going Dutch

To ensure effective distribution, Crédit Agricole worked with a powerful group of local banks. Bank of China was mandated as lead underwriter and Agricultural Bank of China, China Construction Bank and Industrial and Commercial Bank of China were joint-lead underwriters. The banks advised that Crédit Agricole look to issue ahead of the upcoming Chinese New Year in mid-January, and in the end the bank decided to proceed in December, amid relatively sparse activity among other issuers.

“Our aim was to print a tightly priced benchmark and to launch an inaugural trade that would act as a reference for the rest of the market,” says Mr Lamberg. “Ideally, we did not want to pay too much of a premium over the European market.”

Unlike most European financial institution transactions, the issuance process in China is conducted over two days rather than hours. Crédit Agricole chose a Dutch auction as its preferred approach, which is popular in China. A Dutch auction is a public offering auction structure in which the price is set after taking in all bids to determine the highest price at which the total offering can be sold. Investors place a bid for the amount they are willing to buy in terms of quantity and price.

“We started the marketing of the transaction at a price range of 3.3% to 3.9% and as investors started coming into the book we soon had between Rmb3bn to Rmb4bn-worth of orders at 3.6%,” says Mr Lamberg. “We then did three rounds of auctions until we eventually settled at 3.4%, or China Development Bank plus 35 basis points, which was almost flat to very well-known local champions.”

The book was 2.5 times oversubscribed when the transaction closed.

“We were extremely happy because one of our key aims was to get solid demand rather than an ultra-low coupon,” says Ms Fedon. “In the end, we were one of the tightest priced panda transactions, but probably the most important thing is that we have now successfully entered the Chinese market and this debut trade was well appreciated by investors.”


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