Tight yield fails to dim lustre of CDB issue

Despite indications that it will be priced with a fairly tight yield, there has been no shortage of demand for the latest bond offering from China Development Bank (CDB), reflecting the abundance of liquidity in the market and the strong appetite for China debt, according to market participants.

Orders for the US$1 billion, 10-year offering topped U$5 billion yesterday, with the book still open to United States investors, market sources said.

The strong demand had prompted the arranging banks to tighten the yield guidance to between 86 and 89 basis points over the 10-year US treasury from 90 basis points at the beginning of the week-long roadshow, they said.

The price was expected to be fixed in the middle of that range in New York today, the sources said.

BNP Paribas and Merrill Lynch are joint global co-ordinators for the sale, with Barclays Capital, Citigroup, Goldman Sachs, HSBC Holdings, JP Morgan and UBS as joint bookrunners.

CDB, which lent money to the Three Gorges Dam and the Qinshan Nuclear Power Plant, is the largest of the mainland's three state-owned policy banks and provides long-term funding for medium and large public works projects.

Two weeks ago, Standard & Poor's raised its long-term ratings on the bank to A-minus from BBB-plus, reflecting expectations of close government support and a better-defined policy role for the bank. Moody's Investors Service rated the bonds at A2.

Analysts said the offer would be fair even at the bottom end of the indicated range but would leave little upside against comparable issues such as the bank's own 2014 bond and China Export-Import Bank's (Chexim) 2015 bond issued in July.

'If it had been priced at 90 basis points, there would have been about five basis points left on the top. But at the current range, investors are buying something that is extremely fairly priced. There will be no juice left,' Calyon credit analyst Dilip Parameswaran said.

But spreads were tight because there was a lot of liquidity and at 4.3 per cent, 10-year US treasury yields were still low, making investors look for higher returns elsewhere, including Asia, he said.

Market participants said CDB's 2014 bond had tightened to 76 basis points over treasuries from 79 at the end of last week. Chexim's 2015 bond was yesterday quoted at treasuries plus 90 basis points.