Chinese issuers find route to cheaper debt
Skip the emerging markets teams of big US fund houses in favour of better pricing at high-grade desks, bankers are telling mainland corporates
Cheaper debt capital is available to mainland issuers who are willing to take a slightly different approach to marketing.
That is the message from bankers looking to bring Chinese issuers to the United States.
The marketing strategy is deceptively simple: market your bonds to the high-grade desks of the big American fund houses, as opposed to the traditional route of pitching to the emerging-markets specialists at the same fund.
The high-grade desks give issuers better pricing than the emerging-markets team, even within the same institution.
Chinese technology firm Baidu last night was using this strategy, marketing a US$1 billion-plus bond to high-grade specialists at US fund houses.
Bankers expected this will save the issuer about US$25 million in funding costs over the life of the five-year security.
"An emerging-markets investor takes a top-down approach," said Mark Follett, head of high-grade debt capital markets, Asia ex-Japan, for JP Morgan.
"You typically start with the sovereign and with the macro environment and then everything really prices off the sovereign - it's almost what premium above the sovereign do you require.
"They look at how strategic is the entity, how much government ownership is there, and so forth. The standalone credit profile of that company is a secondary consideration.
"A high-grade investor does the opposite. They look at the company itself and compare it to other companies within that industry.
"They take a bottom-up approach. Their benchmarking is very different."
This strategy was first employed in a US$1 billion bond for Samsung Electronics in April 2012.
Bankers pitched the issuer to the high-grade desks of big US investment houses, and encouraged investors to price the deal in reference to well-known American technology names.
This resulted in significant savings.
Samsung gained a deal that priced some 70 basis points tighter than South Korean government bonds.
It also priced more than 100 basis points tighter than a bond from the state-owned Korea National Oil Corporation that came a month earlier.
"The [Korean] sovereign was trading at a spread of 150 basis points … in the end they [Samsung] priced at 80 basis points over treasuries. It was an amazing outcome," said Follett, who worked on the Samsung deal.
"But 80 per cent of Samsung's revenues comes from overseas, and they are able to divorce themselves from the sovereign, and price themselves with reference to the likes of Oracle, IBM or Intel."
Chinese issuers, such as Tencent and Want Want, followed Samsung with deals pitched at the high-grade desks of US fund houses.
Baidu did such a deal in November 2012, and was revisiting the strategy with yesterday's bond.
Follett estimated that these issuers cut about 50 basis points from their annual funding costs, if their deals are compared with similarly rated state-owned credits that were trading at the time of issuance.
Candidates for such marketing must, of course, be investment grade. They also should be privately owned - not state-owned - which allows investors to differentiate the credits from the emerging market in which they are based.
It also helps if the issuer is a global brand that is well known in the US market, and lends itself to comparisons with big American names.
Baidu at time of writing was launching into the US market, with pricing indicated at 150 basis points over treasuries, and was getting a strong response from investors.