APAC CREDIT REVIEW: Primary data points indicate buyers have upper hand

Headlines

** Supply slows down for second straight week

** SSAs contribute bulk of issuance with financials also on the menu

** Response from investors somewhat mixed for this week's deals as data points illustrate

** Pipeline depleted ahead CNY break

Supply volume ticked down again this week (ending 24-Jan-2025), standing at US$6.15bn. That marked the second consecutive week of decline, down from US$7.45bn last week (ending 17-Jan-2025) and a massive US$29.7bn in the first full week of January (ending 10-Jan-2025).

The total number of individual tranches declined by more than half to just eight this week, courtesy of a mere five separate issuers, underpinned by a combined US$5.25bn of SEC-registered notes from Korea Development Bank (KDB) and Republic of the Philippines.

Having said that, the average tranche size of US$768.75m this week marked the highest in any week so far this year, even more so than the massive week ending 10-Jan-2025, which stood at US$761.5m on aggregate.

In terms of ratings, Investment Grade (IG) names dominated the scene with the exception of a small US$50m print from unrated Chinese corporate Phoenix Charm International Investment Limited.

Meanwhile, this week’s other IG deals comprised of a debut Subordinated 10NC5 Tier II deal from Bank of New Zealand, and a 5-year Senior Unsecured Sustainability note from Rizal Commercial Banking Corporation.

The largest transaction of the week though was KDB's 3-part exercise, comprised of US$900m 4.625% 03-Feb-2028 Fixed, US$1.2bn 4.875% 03-Feb-2030 Fixed and a US$900m SOFR+76 03-Feb-2030 FRN.

The 3-year fixed rate line triggered >US$1.1bn of demand (incl US$100m JLM int) from 50 accounts, demand on the 5-year fixed came in at >US$1.5bn (incl US$100m JLM int) from 56 accounts, while the 5-year FRN amassed >US$1.4bn of demand (incl US$50m JLM int) from 65 accounts, all good at reoffer.

That equated to cover ratios of 1.22x, 1.25x and 1.56x respectively, allowing the issuer to tighten each tranche by a modest 1bp during execution to eventually price the bonds at SOFR MS+57, SOFR MS+76 and SOFR+76 respectively.

At first glance, those rather underwhelming cover ratios could imply that the deal wasn’t at the top of every investor’s shopping list. However, that is probably more akin to a typical SSA style transaction which is how KDB positions itself these days, as Korea’s largest policy bank. That is also reflected by the two-day execution period and marketing against mid-swaps, at levels much closer to fair value.

The deal was also listed on the stock exchanges in London and Luxembourg as well as Singapore, which should have made it more accessible to traditional European SSA investors.

Indeed, the type of investors that are typically attracted to SSA deals are high-quality real money accounts such as central banks and official institutions, and that was no exception this time around, where 67% and 58% of the 3-year and 5-year Fixed rate lines were allocated to those accounts. Having said that, KDB still only managed to price just 1bp inside of IPGs which seemed a little underwhelming.

In terms of fair value, we calculated the NICs on the 3- and 5-year fixed rate tranches to be ca. 4bp at reoffer versus the existing KDB curve, and more notably, the secondary market bid levels of the recent US$850m 4.625% 14-Jan-2028 and US$1.25bn 4.875% 14-Jan-2030 lines from state-owned peer KEXIM that priced earlier this year. Note that those KEXIM levels were pulled from the screens shortly after the KDB books were open.

However, a source close to the deal was keen to peg the final NICs at more modest 2bp on the fixed rate 3-year and closer to 1bp on both the fixed and floating rate 5-year tranches. He explained that on Day one SOFR MS spreads equivalent to KEXIM T-spreads were used and marketing started 4bps back of that (IPTs).

However, at the time of guidance the swap spreads had moved in favour of KDB. So the same SOFR MS+ spread as on day one equated to tighter T-spreads on day two. “We tightened final pricing by 1bp but gained a few bps on the swap movement” he said.

Philippines treads familiar path

The other chunky SSA transaction on the week came from The Republic of the Philippines, whose first senior unsecured SEC-registered deal of the year comprised of a US$1.25bn 5.50% 04-Feb-2035 and a US$1bn 5.90% 04-Feb-2050 Sustainability tranche.

Having opened books at initial price guidance (IPG) of T+120 area and 6.10% area, those numbers were tightened by 30bp and 20bp respectively during execution to a final T+90bp and 5.90% at reoffer.

The well received exercise triggered over US$6.2bn of orders at reoffer (incl. US$150m JLM interest and an additional US$24.2m PROP per SFC code from ca. 300 accounts, weighted slightly in favour of the 10-year tranche at >US$3.2bn (incl. US$75m JLM interest and US$13.7m PROP per SFC). That wasn’t without some price attrition in the order book however that peaked at >US$8.7bn before FPG was announced.

We derived fair value using the sovereign's existing curve as per the official comps, which had the US$1.1bn 4.750% 05-Mar-2035 line marked at G+83.5 (5.447%) and the US$900m 5.175% 05-Sep-2049 line marked at G+92 (5.781%) pre-announcement. Accounting for maturity differentials, we saw NICs on the new 10-year and 25-year lines at ca. 6bp and 5bp respectively. That indicates that pricing power has become more weighted in favour of investors, as NICs paid by the sovereign on its previous benchmark deal back in August 2024 was at zero for both the 10.5-year and 25-year tranches.

Also worth mentioning would be this week’s return to the USD market just after a year by Rizal Commercial Banking Corporation (RCBC), the second consecutive year it has been the first Philippine headquartered issuer from the country to hit the primary market. RCBC came with a conventional US$350m 5.375% 5-year Senior Unsecured Fixed Rate Sustainability note this week, which was tightened by 30bps to T+115bp at reoffer.

In comparison with its previous outing in January 2024 where the final orderbook was over US$2.3bn (5.75x covered), this week’s offered sparked considerably less demand of US$1bn (incl. US$40m JLM interest).

Meanwhile, we calculated the NIC at ca. 0bp (zero) through extrapolating the curve out from RCBC's existing 5.500% 2029s and adding 10-15bp to accommodate the additional 12-months to maturity.

Bank of New Zealand benefits from scarcity value and demand for yield

Offering some diversification and also boasting the highest cover ratio of the week was Bank of New Zealand’s debut Subordinated Tier II bond. The US$500 WNG 10NC5 (Callable: January 28, 2030) 144A/RegS offering was marketed at an initial price guidance of T+155a, before tightening 25bp to land at T+130.

The transaction garnered final orderbooks of ca.US$3.3bn (6.60x covered) at reoffer, the highest level of oversubscription on any single deal this week, highlighting investor appetite for rarer names and higher yielding products. That in turn enabled the lender to secure some attractive funding also at a 0bp NIC (zero).

And that positive momentum has continued in the aftermarket where the deal was bid ca. 6bp tighter on the screens on Friday morning at G+124bp. That stood out in what has been a broadly encouraging performance of this week’s crop of USD deals where five of the seven that priced were bid at a tighter spread or a lower yield than reoffer on Friday morning. For a more comprehensive look at how this week’s deals have performed, see our APAC Performance Tracker.

Investors keen for exposure to the right names at the right price

Overall, this week’s key takeaway was that investors are in the driving seat currently, as reflected by smaller cover ratios (KDB, RCBC) and higher NICs (Republic of the Philippines).

Having said that, BNZ's transaction was well oversubscribed, in part due to the rarity of the name and also the fact that size aspirations were fixed at the outset, forcing investors to jostle with each other to get a portion of the pie. Ultimately, with the right names and price, we believe investors will continue to support transactions going forward.

Looking ahead to next week, where we will be surprised to see any benchmark supply given the Chinese New Year holidays in the middle of the week. Indeed, in the last two years there has not been any APAC US$ issuances in the corresponding week. That is also reflected by the depleted pipeline of confirmed issuers as we head into the weekend.

See the APAC NICs & Books Week Ending 24-Jan-2025 spreadsheet for the full pricing evolution of all this week's regional USD/EUR/CNH/AUD/NZD-denominated bond issues complete with new issue concessions, book sizes, cover ratios, and convenient links to IGM relative value analysis and distribution statistics where available.

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