This has not been a vintage year for Asia DCM with the negativity surrounding China causing dollar bond volumes from the country to drop by a sharp 36% in 2016, according to Dealogic.
Sentiment, though, has been picking up slowly since the end of the Chinese New Year holidays in February, so much so that Chinese issuers are once again trying to sell their bonds into the US either via 144A or SEC-registered trades.
There have been five such transactions out of China this year and all of them have come in the past month. However, the results of the US excursions have been mixed.
In the most recent case of ICBC Financial Leasing's $1.5bn triple-trancher, only the five year portion had a US allocation above 20% (with 20% considered the threshold issuers need to meet to make a trip to the US worthwhile). The remaining three year and 10 year tranches were only 11% and 3% sold into the US, respectively.
State Grid Corp of China’s $2bn equivalent dollar/euro combo resonated a little better, with 13% of its five year and 28% of its 10 year notes sold into the US.
But more telling of the environment in the US for Chinese names is the strategy adopted by Agricultural Bank of China’s New York branch. It decided not to bother selling its deal in the United States.
The issuer raised $1.25bn last week via a Reg S only transaction even though it could have easily sold its notes to US accounts without registering thanks to the section 3(a)(2) exemption that exists for US branches of foreign banks.
Its approach was a reversal from its debut last year when it sold a $1.25bn triple-trancher SEC-compliant bond. Its reasoning this time around was simple — why bother with the US when China cynicism is high and demand is limited.
It is not as if deals struggle without US participation given the ample liquidity in Asia. China Huarong Asset Management, for example, raised $3.2bn at the start of last year in the largest Reg S only deal out of Asia ex-Japan — breaking the conventional belief that the US investor base is needed to execute such large fundraisings.
There is of course the argument that investor diversification is important for the long-term development of Chinese borrowers, especially as US investors could come in handy if liquidity dries up in the region.
But if anything, events and transactions since the start of the year have shown that US investors are not really ready to support Chinese issuers. If things go bad in the Mainland, US accounts are likely to be the first ones to flee from such credits.
The fact that it took more than four months for the first 144A deal to appear out of China this year shows that issuers have noticed that bearishness. The mixed results also provide little comfort.
While there are obvious benefits in gaining access to an investor pool as deep as the onshore US market, it is not really justifiable in the current market environment for Chinese issuers to pay almost double the transaction costs for tepid US demand.
Of course, when US accounts decide they are ready to invest in Chinese bonds again, issuers should not hesitate to target that market, but for now it’s time to let go of the American dream.