Chinese Banks With Global Dreams Eye Middle East Mega Bonds

  • Bank of China hired by Saudi Arabia for debut debt sale
  • Chinese banks to challenge U.S. peers in book running: Ashmore

Bank of China Ltd. is heading down the old Silk Road marketing new goods: Debut bonds from Saudi Arabia to Kazakhstan.

In its biggest-ever foray outside Asia, the state-controlled lender is said to have landed three mandates to co-manage emerging-market Eurobonds, including the Saudi government’s international sale. China’s fourth-largest lender is one of nine underwriters hired by the kingdom, which people familiar with the plan said is seeking at least $10 billion to fill holes in its budget.

Desperate to escape negative yields in Japan and Europe, Asian investors are hunting for higher returns in emerging economies and having organizers from their region on bond syndicates makes this easier. That’s putting bankers from Beijing and Tokyo in pole position to grab more business from their U.S. and European competitors, who dominate the developing world’s $350 billion hard-currency bond market.

“We are likely to see China’s banks challenge Wall Street banks and Japanese banks directly in all their lines of business, including book running,” said Jan Dehn, head of research in London at Ashmore Group Plc, which manages $51 billion of emerging-market assets. “Volumes are not huge, but I think it is going to become far bigger than it is today.”

Bank of China has been making its way up the underwriter league table over the past seven years, moving from the 145th rank for worldwide sales in 2009 to 46th place this year. Having an office in London has enabled the bank to get involved with bond sales by companies in the U.K. and Europe including Sky Plc and British American Tobacco Plc.

Yet until now the lender hasn’t been as active in emerging-market mandates outside of Asia, getting named to only two dollar deals from 2013 to 2015. The tide is starting to turn. In July alone, the Chinese bank helped a Bulgarian energy company, a Kazakh oil producer and Teva Pharmaceutical Industries Ltd. of Israel sell bonds.


It’s all part of an expansion strategy to give borrowers access to Bank of China’s network in a country of 1.3 billion people, said Sebastian Ha, head of debt syndicate in Hong Kong at Bank of China, which operated in 41 countries and regions outside China. “We are looking into some deals we have not touched before," he said.

Doing more hard-currency bond underwriting helped Bank of China lead manage 2.2 percent of sales by companies and governments in developing nations last year, surpassing Japanese counterparts like Mitsubishi UFJ Financial Group Inc., which collectively had 1.3 percent market share. The $350 billion of bonds sold in 2015 were still concentrated among five banks, HSBC Holdings Plc, Citigroup Inc., JPMorgan Chase & Co., Deutsche Bank AG and Bank of America Corp., together commanding 42 percent, according to data compiled by Bloomberg.

Since capital markets are less developed in Asian countries outside of Japan than they are in the U.S. and Europe, bankers in the region may face hurdles securing greater clout in the bond business, according to Sergey Dergachev, who helps oversee $13 billion in emerging-market debt as a senior money manager at Union Investment Privatfonds GmbH in Frankfurt. China had only $109 billion invested in debt securities abroad in the second quarter of 2015, compared with $2.9 trillion for the U.S. and $2 trillion for Germany, Institute of International Finance data show.

For Asian investors like Bryan Wang, the push abroad is all about chasing yields. One of the deals he bought into was Qatar’s record $9 billion sale of bonds in May, which included a 10-year tranche that priced to yield 3.37 percent, a premium of 150 basis points over U.S. Treasuries. The rate on similar-maturity Japanese bonds is minus 0.29 percent and for Wang back home in Taiwan it’s 0.7 percent.

“In Asia, most government bond yields are very, very low and Asian investors are forced to buy new issues,” said Wang, who helps oversee $200 million as vice president at Fuh- Hwa Investment Trust Co. in Taipei. “The Middle East will be the new focus.”

Asian investors took up almost a fifth of Qatar’s offering and Wang is already eyeing Saudi Arabia’s sale that people familiar said will take place in September. MUFG, Japan’s largest lender, was also hired to manage the transaction.

“There is a definite desire from Asian investors to look at the Middle East and a huge natural liquidity from those investors,” said Anthony Barklam, the London-based head of debt capital markets for Europe, the Middle East and Africa at MUFG. The bank climbed to 21th position in this year’s emerging-market league table from 36th in 2010.

Silk Road

In China, the push to diversify investments abroad follows a three-year-old program aimed in part at facilitating capital flows and promoting yuan internationalization along a “New Silk Road” connecting Asia to Europe via a network of roads, railways, pipelines and ports.

In June, Bank of China was hired, along with Australia & New Zealand Banking Group Ltd., JPMorgan and Societe Generale CIB, to organize fixed-income investor meetings in London and the U.S. for Papua New Guinea, according to a person familiar with the matter, who is not authorized to speak publicly and asked not to be identified.

In April, Bank of China helped Hungary sell its first yuan-denominated bond and is now preparing to arrange the sale of a three-year yuan panda bond for Poland later this year.

“Step by step, Chinese banks will expand into global capital markets and will bring excellent links to the local client base,” Union Investment’s Dergachev said. They “can also provide good liquidity in a market where it becomes extremely important and critical for success,” he said. 

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