China Bulls Ignore Downgrade in Biggest Asia Bond Since 2014

  • China rating downgrade ‘minimal impact’: Bank of Singapore
  • Postal Savings’s bonds trading weaker due to size: Nomura

China bulls shrugged off the latest cut to the nation’s credit rating, helping a state-run lender sell the biggest dollar-denominated bond in Asia outside Japan since 2014.

Postal Savings Bank of China Co. raised $7.25 billion Thursday in the largest such deal since Alibaba Group Holding Ltd. secured $8 billion in November 2014. The sale of the so-called additional Tier 1 securities priced just hours after S&P Global Ratings lowered China’s credit score, citing risks from soaring debt.

Global investors hunting for yield have been lapping up offerings from Chinese issuers despite the kinds of concerns flagged by rating firms like S&P. In a sign that such demand not only survived the latest downgrade but is thriving, the yield premium on dollar notes from Chinese issuers slid the most in nearly two weeks Thursday, according to a JPMorgan Chase & Co. index. Broader market reaction to the downgrade was also muted.

“I think that the China rating downgrade had minimal impact on the reception that Postal Savings Bank received,” said Todd Schubert, head of fixed-income research at Bank of Singapore.

China bear Kyle Bass, founder of Hayman Capital Management, warned in May that ballooning assets in Chinese wealth management products are another sign of a looming credit crisis in the world’s second-largest economy. Despite these warnings, a legion of local investors along with fund managers from Singapore to London keen for higher yields continue to seek out Chinese company notes in dollars.

Institutional Demand

Chinese banks in Hong Kong are still sitting on “pretty high liquidity balances,” while there is strong demand from wealthy investors and institutional investors looking to participate in new bond sales, according to Ng Kheng-Siang, Asia Pacific head of fixed income at State Street Global Advisors, which had $2.6 trillion of assets under management as of June 30. “The underlying support is still relatively strong,” said Ng.

The type of securities sold highlights that smaller Chinese lenders are increasingly under pressure to bolster their capital bases.

Postal Savings Bank sold the securities -- which are also called preference shares -- at par to yield 4.5 percent. The notes are used to strengthen capital buffers, and can be converted to equity or written down to absorb losses. They have no maturity date and the bank has the option to cancel the dividends if it determines that a measure of its capital buffer has dropped below a certain level.

READ: China credit party rolls on as downgrade flags hangover risks

The securities traded lower on Friday morning in Hong Kong, though analysts said that was down to other factors, not the S&P move. They traded at around 99.5 cents on the dollar, down from 100 cents at issuance, according to traders.

“Postal Savings Bank’s AT1s are trading weaker this morning, although in our view this is mainly due to the large deal size rather than S&P’s downgrade of China’s sovereign rating, considering that the rest of the China credit space is broadly unchanged this morning,” said Nicholas Yap, a credit desk analyst in Hong Kong at Nomura International (HK) Ltd.

The lackluster performance in secondary trading also related to the recently more hawkish tone from the Federal Reserve, said Bank of Singapore’s Schubert.

— With assistance by Denise Wee, Judy Chen, Annie Lee, and Carrie Hong

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