China Slowdown Spurs Record Sales of Notes Tied to Nation's Debtby and
September was the busiest month ever, with $230 million sold
Buyers from South Korea and Japan embraced Chinese credit
Sales of structured notes tied to the sovereign debt of China are on track for a record year, as the climbing cost of insuring against a default by the country sweetens coupons on the securities.
Banks sold $230 million of the notes in September, the busiest month ever, according to data compiled by Bloomberg, taking this year’s issuance to $642 million. That’s more than triple the $189 million banks sold during all of 2014.
Concern that growth in China is slowing pushed credit-default swaps on the nation to their highest this week since 2013, according to Bloomberg data. As the cost of insuring against a Chinese default rose, so did coupons on the notes backed by the swaps contracts. The credit-linked notes, all denominated in U.S. dollars, yield 3.49 percent on average and mature in about seven years, the data show.
Buyers from South Korea and Japan in particular have embraced Chinese credit over the past six to nine months, said Ryan Chan, the co-head of business development at Societe Generale SA’s cross-structuring group for Asia excluding Japan.
“In the end, these countries have a lot of economic ties to China and it will make investors more and more comfortable with the country’s sovereign or quasi-sovereign risks,” Chan said.
Investors in the notes are looking beyond warning signs including September’s decline in a preliminary manufacturing reading to a six-and-a-half-year low and an 8.8 percent drop in Chinese industrial profits in August from a year earlier. Fitch Ratings said in an Aug. 26 report that pessimism about China was “overdone.”
Deutsche Bank AG is the biggest issuer of the notes this year, selling $239.4 million. It announced plans on Sept. 17 to sell $140 million of notes linked to China’s debt, the year’s largest deal, Bloomberg data show. The five-year securities pay 1.75 percentage points more than the three-month dollar London interbank offered rate.
Gael Gunubu, a London-based spokesman for Deutsche Bank, declined to comment.