What’s fueling the strong appetite for FRNs

The Hong Kong branch of the Industrial and Commercial Bank of China (ICBC) on February 13 printed a multi-tranche bond offering totalling US$2 billion in an opportunistic trade that was priced more competitively than its peers. Like the other financial institutions, the transaction includes floating rate tranches (FRNs) to take advantage of the strong investor appetite for the paper.

The first tranche was a three-year FRN amounting to US$500 million, which was priced at par with a re-offer spread of 75bp over three-month Libor. This was at the tight end of the final price guidance of between 75bp and 80bp, and 25bp inside of the initial guidance of the 100bp area.

The second tranche was a five-year fixed rate note amounting to US$900 million, which was priced at 99.594% with a coupon of 2.875% to offer a yield of 2.963%. This represented a spread of 105bp over the US treasuries – also at the tight end of the final price guidance of between 105bp and 110bp, and 25bp back of the initial guidance of 130bp area.

The final tranche was a five-year FRN amounting to US$600 million, which was priced at par with a re-offer spread of 96.5bp over three-month Libor.

The three-year FRN was priced 2bp tighter than where Bank of China (Hong Kong) priced its own three-year paper on February 8, while the five-year fixed rate bond was 10bp tighter than the comparable BoC trade.

In terms of secondary market performance, the ICBC three-year FRN and five-year fixed rate bond were both trading 1bp wider in the afternoon of February 14, while the five-year FRN was tighter by 6.5bp.

As a well-known and a very established issuer in the G3 bond market, ICBC is in a strong position to access the market opportunistically and execute a very nimble, intra-day deal. It announced the transaction in the morning of February 13 and the order book built very quick with the demand exceeding US$2 billion by 10.30am, reaching a peak of US$6 billion.

The three-year FRN garnered an order book of over US$1.4 billion from 87% with 95% of the paper allocated in Asia and 5% in Europe. By type of investors, banks accounted for 85%, fund and asset managers 12% and other investors 3%.

The five-year fixed rate note attracted a total demand of more than US$1.6 billion from 109 accounts with 90% of the bond sold in Asia and 10% in Europe. Banks also drove this tranche as they bought 73%, followed by fund and asset managers with 23%, private banks 1% and other investors 3%.

The five year FRN generated an order book of over US$2.2 billion from 102 accounts with 94% of the paper distributed in Asia and 6% in Europe. Banks took 77%, fund and asset managers 22% and other investors 1%.

“There is a strong appetite from investors for FRNs in an environment where the interest rates are expected to go up,” explains a banker familiar with the deal, as the market is seeing a proliferation of FRN tranches in the fund raising exercises among the financial institutions so far this year. “We’ve certainly seen good demand in both parts of the curve in three years and five years".

Other banks such as Bank of Communications and the Export-Import Bank of Korea had also added FRN tranches in their foray in the bond market this year.

Proceeds from the bond issue will be used for general corporate purposes. HSBC, ICBC and Standard Chartered were the joint global coordinators for the transaction as well as joint bookrunners and lead managers, along with Bank of America Merrill Lynch, Bank of China, J.P. Morgan, Mizuho Securities, UBS and Wells Fargo Securities.