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China bank to test bond syndicate record
November 15, 2013 / 11:52 AM / in 4 years

China bank to test bond syndicate record

* CCB expected to mandate a dozen for capital-eligible bond

* Practice has become a norm as Chinese reward relationships

* Investors complain of lack of accountability for failures

By Christopher Langner and Neha d‘Silva

SINGAPORE, Nov 15 (IFR) - One of China’s biggest lenders is set to name a jumbo group of bookrunners as it prepares to top up its regulatory capital in the overseas markets.

China Construction Bank is likely to name over a dozen bookrunners for a planned Tier 2 issue, according to people familiar with the discussions. That would test the record for any Asian bond issue, rivalling the 12-strong syndicate on Sinopec’s US$3.5bn global offering in April.

CCB has picked Goldman Sachs and HSBC as joint global coordinators, alongside its in-house investment-banking arm CCB International, while other banks are jostling for position in a far larger syndicate, the people said. The line-up is not final and may change as other banks join the deal.

Bank of China is also working on a similar deal but has yet to confirm its line-up of bookrunners.

CCB’s move underscores what has become almost a norm for bond mandates in China. The practice, however, has started to draw criticism from investors, while bankers have been complaining about it from the start.

“At first glance you think that a large number of bookrunners means there will be plenty of support for the bonds in the secondary, but now we know that is not the case,” said a portfolio manager in Singapore. “I just don’t see the value in having so many bookrunners, we’d rather see only a few and be sure about who is doing what.”

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Investors turned a blind eye to the swollen syndicates on jumbo issues from China’s state-owned enterprises earlier this year. Plenty have come to market with eight or more lead managers. CNPC hired 11 bookrunners for its US$2bn issue in April, while Citic Securities picked 11 and State Grid Corp chose nine the following month. More recently, Haitong International named 10 leads in October.

Investors, however, complained about the confusion of dealing with 11 joint bookrunners during the pricing of the ICBC Asia Tier 2 Basel III compliant bond in October, questioning who was in charge of allocations or providing secondary liquidity. “It was chaos,” said one hedge fund manager.

ICBC’s Tier 2 bonds priced at 315bp over Treasuries and widened 20bp as soon as they started trading. Bankers argued that a savvy, small bank line-up would have allowed ICBC Asia to achieve much tighter pricing and still ensure secondary performance.

A subsequent Tier 2 deal from Citic Bank seemed to support that theory. The transaction was led by a syndicate half the size of ICBC Asia. It achieved a better result in pricing - in relative terms, Citic’s bonds came tighter to its old-style subordinated bonds - and performed better in secondary trading, as the bonds rallied almost US$1 on the break.

Bankers have long complained that the trend towards inflated syndicates distorts league tables and squeezes fees.

“This is a sign of immaturity - a bond mandate is not a medal you give your classmates for effort,” said one banker.

“Naturally with a large group the fee that is paid to each individual bank will be very very small. That creates less incentive for the sales force which works on a sales credit basis. The lower credit they get the less incentive they have to push investors to come into that transaction both on size and price which creates a motivation problem for them,” said another banker.

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