Japanese buyers snap up Citic bonds despite geopolitical rivalry

citic-groupSEOUL: Citic Group’s 100 billion yen ($964 million) Samurai bond last week smashed records for a Chinese issuer in the Japanese market. It could have been even larger.

The four-tranche issue, the first from China in 16 years, drew a 200 billion yen order book in a clear sign of Japanese investors looking beyond their traditional comfort zone for higher-yielding credits, even from regional rivals.

Frosty relations between Beijing and Tokyo have taken a backseat as Japanese investors scramble to find higher returns away from home, where the Bank of Japan’s negative interest rate policy has left government bonds and domestic credits in negative or micro-yield territory.

Even large, state-linked city investors, crucial to the success of jumbo Samurai deals, but sensitive to geopolitics, are said to be looking to buy Chinese credits, according to two bankers on the deal.

“Today’s market conditions are a serious issue for investors. It’s not a good idea to be thinking of emotional stuff when investing,” said one of the bankers. “In a negative interest rate environment, the returns offered on Citic’s four tranches were very attractive.”

Citic’s Samurai is only the second from a Chinese issuer this century, and the largest on record, following the People’s Bank of China’s 30 billion yen five-year print at a coupon of 1.72% 16 years ago, according to Thomson Reuters data.

Central government agencies and bank treasuries were said to have been big participants in the deal. Chinese bank branches in Tokyo also accounted for significant demand, but there was sufficient interest from Japanese investors to skew allocations to local institutions rather than Chinese banks.

There was also a broad range of Japanese investors participating, including asset managers, life insurers and foundations. Asian investors from Singapore, Hong Kong and South Korea were also said to have placed orders.

These aspects bode well for future deals. Industrial and Commercial Bank of China’s Tokyo branch mandated for a renminbi Pro-bond last month, after successfully pricing the first Chinese Pro-bond in Japan in June with a 15 billion three-year issue.

Demand is also seen growing for Japan’s other Asian rival, South Korea. Korean corporate and financial issuers have been able to sell yen bonds in the past, but diplomatic spats have also occasionally hindered their deals.

Last week, Hanwha Chemical announced plans to price a three-year Samurai as early as November 2. A successful issue will be the first Korean Samurai this year.

Investor education

Citic Group announced the Samurai mandate in July to give Japanese investors sufficient time to examine the credit, given that it was the first Chinese offering for many years.

“Even though Citic is very well known in China, we needed to create momentum here, and education was key,” said one of the bankers.

It helped to highlight Citic’s Japanese links – domestic trading house Itochu Corp bought a 20% stake in Citic, together with Thailand’s Charoen Pokphand Group in 2015, in a Japanese company’s largest investment in China.

Since then, the two groups have announced collaborations in various areas, including oil-and-gas development.

Citic also has a Samurai track record, though not a recent one. In 1996, it sold a 10 billion yen bond at 4.95%, which matured on September 19 this year, according to Thomson Reuters data.

Marketing of the fixed-rate notes of three and five years began on Monday at 0.48%-0.54% and 0.67%-0.72%, respectively, based on US dollar secondary levels of Chinese bank credits. Fixed-rate tranches of seven and 10 years were also being shown to investors on a reverse enquiry basis at 0.85%-0.90% and 1.05%-1.10%, respectively.

Two days later, prices on all four tranches was moved to the tight ends of the guidance ranges.

During marketing, Citic’s June 2026 dollar bonds were seen at a Z-spread of 180 basis points, translating to yen offer-side swaps plus 80bps. The final pricing of the 10-year Samurai tranche was in the low 90s over offer-side swaps, in line with an estimated 10-20bps new-issue concession across the various tranches, compared to dollars.

The notes are expected to be rated A3/A- (Moody’s/S&P).