issuance and marketing strategy in the local currency market – a case study of the adb “panda...

Issuance and Marketing Strategy in the Local Currency Market –

A Case Study of the ADB “Panda Bonds”

May, 2006

2STRICTLY PRIVATE AND CONFIDENTIAL

Disclosures

The information, tools and material presented in this report are provided to you for information purposes only and shall not be used or considered as an offer or the solicitation of an offer to sell or to buy or subscribe for securities or other financial instruments. BOCI Group may not have taken any steps to ensure that the securities referred to in this report are suitable for any particular investor. The contents of this report do not constitute investment advice to any person and such person shall not be treated as a customer of BOCI Group by virtue of receiving this report.

Information and opinions presented in this report have been obtained or derived from sources believed by BOCI Group to be reliable, but BOCI Group makes no representation as to their accuracy or completeness and BOCI Group accepts no liability for loss arising from the use of the material presented in this report unless such liability arises under specific statutes or regulations. This report is not to be relied upon in substitution for the exercise of independent judgment. BOCI Group may have issued other reports that are inconsistent with, and reach different conclusions from, the information presented in this report. The reports reflect the different assumptions, views and analytical methods of the analysts who prepared them. For the avoidance of doubt, views expressed in this report do not necessarily represent those of BOCI Group.

Information, opinions and estimates are provided on an “as in” basis without warranty of any kind and may be changed at any time without prior notice. Nothing in this report constitutes investment, legal, accounting or tax advice nor a representation that any investment or strategy is suitable or appropriate to your individual circumstances. Nothing in this report constitutes a personal recommendation to you.


Highlights of the ADB “Panda Bonds” Deal

The debut of Panda Bond issued by International Development Institutions

The first internationally AAA rated bond available to Chinese investors on the domestic market

Catalyst to the opening of Chinese capital market as one of the first foreign issuers

Another remarkable achievement for ADB in local currency markets

Carefully prepared and successfully arranged one-on-one meetings and roadshows helped the issuer and investors learn about each others effectively, ensuring successful pricing & optimal allocation

Book-building and pricing mechanism accurately reflected investor demand at the time, and truly achieved “market driven pricing”

Order oriented allocation ensured bonds are held by real interested investors

Close cooperation between the issuer and the lead manager

BOCI provided one-stop service from advisory, underwriting, to post-offering support

Well-established sales network guaranteed the success of the offering


Table of Contents

I. Overview of China’s Bond Market

II. ADB Panda Bonds Case Study

1. Transaction Summary

2. Marketing Strategy

3. Deal Execution

4. For Future Issuers

III. BOCI Credentials

STRICTLY PRIVATE AND CONFIDENTIAL

I. Overview of China’s Bond Market


China’s Bond MarketChina’s Bond Market

Non- exchange marketsNon- exchange markets Exchange marketsExchange markets

Inter-Bank Inter-Bank MarketMarket

OTC marketOTC market Shanghai & Shenzhen Shanghai & Shenzhen Stock ExchangesStock Exchanges

Product Types： Treasury bond

Policy financial bond

Corporate bond

Regulatory agency

People’s Bank Of China

Major investors

Financial institutions


Regulatory agency

People’s Bank Of China

Major investors

Institutions and

households


Corporate bond

Convertible bond

Regulatory agency

China Security Regulatory Commission

Major investors Institutions and households

Bond Market Structure


0

1000

2000

3000

4000

5000

6000

7000

8000

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

government bondpolicy financial bondcorporate bond

China’s Market Enjoys Exponential Growth

（ RMB Billions）

Issuance size comparison for government, policy financial and corporate bondsIssuance size comparison for government, policy financial and corporate bondsIssuance size comparison for government, policy financial and corporate bondsIssuance size comparison for government, policy financial and corporate bonds

Over RMB 600 billionOver RMB 600 billionin 2003in 2003

Source： www.chinabond.com.cn, BOCI ResearchAs of April 30


II. ADB Panda Bonds Case Study 1. Transaction Summary 2. Marketing Strategy 3. Deal Execution 4. For Future Issuers


Background

In October 2005, The Asian Development Bank (ADB) completed one of the first-ever RMB Bond issuances by a foreign entity in the domestic Chinese market. BOC International acted as the Sole-lead Manager and Bookrunner on this transaction

Domestic RMB Bonds issued by foreign entities were christened as “Panda Bonds” by the Ministry of Finance ADB and IFC were selected as the two pilot issuers in this market

ADB and IFC simultaneously launched their issues during the week of 10th Oct, the ADB bond was listed on the Inter-Bank Market immediately following the offering

ADB’s October offering was the result of comprehensive preparation and planning as well as overcoming numerous issuance hurdles that spanned regulatory and legal aspects, settlement mechanisms and post-issuance arrangements

By following international best practices and providing full disclosure, the issuer and lead manager set a precedence and contributed to the development of the local bond market

The path blazed by this first issuance has cleared the way for further opening of this market.

BOCI successfully completed The Asian Development Bank’s inaugural Panda Bonds in October 2005


The “window department” of RMB Bonds issued by international development institutions, coordinates applications & reports to the Sate Council for final approval.

National Development& Reform Commission

Key Regulators

MOF

Ministry of Finance

NDRC

Inspects and verifies the use of proceeds of the bond.

PBOC

People’s Bank of ChinaThe central bank, supervising the National Inter-bank Bond Market.

CSRCChina Securities Regulatory Commission

Regulator of the securities industry and the stock exchanges.

SAFEState Administration of Foreign ExchangeApproves the opening of bank accounts. It will also require monthly report from foreign issuers about transactions relating to the bank account.

CGSD Chinese Government Securities Depository Clearing & Trust Co. LtdThe only clearing and trust agency on the Inter-bank market. Who is also the paying agent for all bonds issued and traded in the Inter-bank market.

PANDA BONDSPANDA BONDS


Transaction Overview

: The Asian Development Bank

: RMB denominated 10-year Fixed Rate Bond – Panda Bond

:

RMB 1,000,000,000:

General, direct, unconditional, unsubordinated and unsecured obligations of the issuer

: 14 October 2015

: 3.34% Annual Fixed Coupon

: 100%

: China Government Securities Depository Trust and Clearing Co.,Ltd

: Laws of the People’s Republic of China

IssuerIssuer

IssueIssue

: BOC International (China) Limited Sole Lead Manager and Book-Sole Lead Manager and Book-RunnerRunner

Issue AmountIssue Amount

TypeType

Maturity DateMaturity Date

Coupon Rate/FrequencyCoupon Rate/Frequency

Issue PriceIssue Price

Depository/Paying AgentDepository/Paying Agent

Governing LawGoverning Law

: The National Inter-bank Bond MarketListingListing

: “AAA” by S&P, “Aaa” by Moody’s, and “AAA” by FitchCredit RatingCredit Rating


Significant Achievements

As this is the first of its kind, the ADB Bond deal overcame a significant number of execution hurdles

The transaction followed international standards of disclosure and execution, in line with the issuer’s objective to promote the development of the domestic bond market

Groundbreaking Execution

Effective Marketing Strategy

Attractive Pricing

Effective marketing strategy & strong selling effort Attracted a high quality order book with an subscription

ratio of more than 2.8x, especially when compared to an average subscription ratio of under 2.0x for other financial bonds during the same period

Conducted a domestic roadshow, a first for domestic bond issuances, in Beijing and Shanghai to introduce ADB to the Chinese investor base

Published an effective pre-deal research piece to highlight the credit of ADB

Conducted a full marketing program tightly coordinated by BOCI, thus ensuring that pricing reflected true demand from investors

As a result, ADB’s offering achieved the tightest pricing of comparable issues


Highly Effective Marketing Strategy

BOCI was the sole bookrunner tightly coordinating the entire marketing process

Supplemented with a syndicate of 7 domestic financial institutions to maximize investor reach and achieve a broad and stable investor base

Strong Syndicate Structure

Comprehensive Pre-marketing

Effective Roadshow Program

Comprehensive pre-marketing since beginning of the deal

Full pre-deal research piece (which is an international practice, and in compliance with PRC regulations)

Market soundings by our research analyst and salespeople

The first-ever formal roadshow program used in conjunction with a domestic bond offering

Investor group meetings in Beijing and Shanghai allowed over 50 institutional investors to meet with ADB management over the marketing period


Highly Efficient Time Table

Distribute pre-deal research

Form syndicateOne-on-One

meetings with potential anchor

investors

Formal feedback from investors

Re-priced pricing range

Deal LaunchedRoadshowBookbuilding

Pricing and Allocation

Within a short time frame of two months, BOCI successfully completed ADB’s inaugural Panda bonds in China via an

extremely efficient execution process


Fully Leveraging the Syndicate Structure

Selection of syndicate members to complement BOCI’s strengths The syndicate consistent with domestic practice, and syndicate members

“stand by underwrite” their commitments at the beginning of the deal However, as an innovation to satisfy ADB’s desire to achieve a balanced

investor base, BOCI as bookrunner allocated the syndicate’s demand according to quality of demand. This is more common in international debt offerings

In order to maximize the syndicate’s efficiency in communicating ADB’s investment merits and pricing rationale, BOCI invested much time and effort to educate and familiarize the syndicate members with the credit story of ADB

As the sole bookrunner, BOCI was able to manage the investment story and generate demand tension

ICBC ABC CCB EverbrightGuo Tai &

JunAn Shenyin

&WanGuo

Changjiang BNP

Paribas

Syndicate Members – 5% Stand-by underwriting each

Sole Lead Manager and Bookrunner – 65% underwriting


Comprehensive Pre-marketing Effort

BOCI’s top-ranked fixed income research team produced a full report on ADB in Chinese a few days prior to the offering

As the domestic investor base did not previously have much exposure to ADB, this was important in their credit assessment and pricing considerations

Following issuance of the research report, our research analyst and sales team met with potential investors to assess their preferences, concerns and demand levels prior to the official launch of the deal

BOCI has conducted pre-marketing one-on-one meeting with over institutional 14 investors Only large size potential anchor investors were

approached at this stage The feedback was important in allowing us to

recommend and set an accurate price range for the offering

Pre-marketing effort enhanced understanding of ADB by potential anchor investors


Roadshow

Shanghai

Beijing

17 investors in Beijing and 33 in Shanghai

Agricutural Bank of ChinaBank of ChinaBeijing BankBeijing Rural Commercial BankChina Fund Management China Life Asset Management China Postal Savings Reserve BureauChina Reinsurance Asset Management China Shipping High Industry Finance CNOOC Finance Everbright Bank of ChinaHarvest Fund ManagementICBC UBS Asset Management Mingsheng Bank of ChinaMingsheng Life InsuranceTaikang Life Insurance

Haifutong Fund Managemnet Haire New York Life Insurance HSBC Shanghai BranchHuaan Fund Managemnet J.P Morgan Chase Shanghai BranchManulife-Sinochem Insurance Pingan Insurance (Group) Shanghai Auto (Group) Finance Shanghai Baoshan Steel Finance Shanghai Baoshan Steel Group Shanghai Pudong Development BankShanghai Rural Commercial BankShenyin Wanguo Securities Sino Life Insurance Standard Chartered Bank ShanghaiTaiping Life Insurance Tianan Insurance Investment Mgmt Centre

Agricultural Bank of ChinaAIG Shanghai BranchBank of China Shanghai Capital Mgmt CentreBank Of CommunicationsBank Of Communications Schroder Fund Management Changjiang BNP Paribas Securities China Continent Property & Casualty Insurance China Pacific Insurance (Group) China People Insurance AMCitibank Shanghai BranchDeutsche Bank Shanghai BranchGalaxy Fund Managemnet Guolanan Fund Managemnet Guotai Fund Managemnet Guotai Junan Securities Guotai Life Insurance


Pre-Offering Phases

Policy Approval Appointment

by ADB Application

PreparationApplication to

Authorities

November 2004, Chinese government gave policy approval for Panda bond issuance

December 2004, BOCI was appointed by ADB as the manager for its inaugural Panda bond offering

All key application documents were prepared between December 2004 to March 2005

Obtain approvals from Ministry of Finance, People’s Bank of China and State Administration of Foreign Exchange

Applications to Authorities

Ministry of FinancePeople’s Bank of ChinaState Administration of Foreign Exchange

Ready to Launch


The Role of The Sole Lead

Rating AdvisoryRating Advisory

Legal OpinionLegal Opinion

Accounting StatementsAccounting Statements

Paperwork for SAFE,PBOC,SDRC,etc.

Paperwork for SAFE,PBOC,SDRC,etc.

BOCI acted as the interface between

ADB and the various financial intermediaries in

China.

BOCI also helped ADB with its

communications and approval

process with the Chinese

Government.


Marketing Plan And Investment Story (1)

PRE-MARKETING:

Target investor groups:

Banks

Insurance Companies

other Institutional investors

Rationale:

The most active and influential investors in the local bond market

With large portfolio size and appetite for quality names

Already familiar with ADB and its international issuer status



Road Show:

3 major financial centers: Beijing, Shanghai and Shenzhen

Maximize Key investor coverage

Follow international practice, such as luncheon presentations and

1 on 1 meetings

Pricing in Shanghai, based on the prevailing Treasury

benchmark yield on pricing day

Invite leading domestic financial media to boost publicity



Investment Story:

First high-quality, international issuer in the RMB bond market

Strong financial position and debt servicing capacity

Government support and Quasi-Sovereign status

Proven success in local markets

Commitment to the development of China’s RMB bond market


Pricing Parameters

2.9

3.0

3.1

3.2

3.3

3.4

3.5

3.6

05/9/15 05/9/22 05/9/29 05/10/6 05/10/13 05/10/20 05/10/27

YTM

CDB 10 year 3.35%

ADB 10 year 3.34%

Treasury Bond

IFC 10 year 3.40%CDB Bond

ADB achieved tighter pricing than similar offerings

The pricing achieved was 25 bps over comparable Chinese Treasuries

One must note that only Chinese Treasury coupons are tax-exempt whereas Panda bond holders are subject to income taxes, taking that into account, the pricing is extremely favorable


Investors & Allocation

Instead of the “proportional” distribution, we aimed to reflect issuer preference in the allocation

The final allocation is determined based on both order demand & investor characteristics

InsuranceCompanies

19%

Postal Savings12%

CommercialBanks51%

Rural CreditUnions

2%

Mutual Funds6%

SecuritiesCompanies

8%Others

2%

Postal Savings13%

InsuranceCompanies

15%

SecuritiesCompanies

2%

CommercialBanks57%

Rural CreditUnions

6%

Mutual Funds5%

Others2%

Order Distribution by Investor Type Allocation By Investor Type


The Panda bond represents a step towards adopting global best practices particularly in

disclosure, documentation, and deal management

….it will help develop an interest-rate system that is more market based and provide an

outlet for the country’s large pool of savings….

A well functioning bond market will enable China to reduce the risk of over dependency

on bank lending……

The success of ADB issue demonstrates the readiness of China’s bond market for participation by foreign issuers and

investors….

Positive Media Reactions

BEST Multilateral DEAL IN Local CURRENCY

Emerging Markets - 4th May 2006


Highlights of the Deal

The debut of Panda Bond issued by International Development Institutions

The first internationally AAA rated bond available to Chinese investors on the domestic market

Catalyst to the opening of Chinese capital market as one of the first foreign issuers

Another remarkable achievement for ADB in local currency markets

Carefully prepared and successfully arranged one-on-one meetings and roadshows helped the issuer and investors learn about each others effectively, ensuring successful pricing & optimal allocation

Book-building and pricing mechanism accurately reflected investor demand at the time, and truly achieved “market driven pricing”

Order oriented allocation ensured bonds are held by real interested investors

Close cooperation between the issuer and the lead manager

BOCI provided one-stop service from advisory, underwriting, to post-offering support

Well-established sales network guaranteed the success of the offering


Requirements Under Current Interpretation

The bond is to be rated AA or better by domestic PRC credit rating The bond is to be rated AA or better by domestic PRC credit rating agenciesagencies

Pre-Qualification of the Issuer

Have made loans to and/or equity investments in domestic projects in Have made loans to and/or equity investments in domestic projects in excess of US$1 billion in totalexcess of US$1 billion in total

Proceeds from the bond to be used as mid- to long- term loans for fixed Proceeds from the bond to be used as mid- to long- term loans for fixed assets or equity investments, which should be in line with China’s assets or equity investments, which should be in line with China’s industrial policyindustrial policy

Potential issuer must be an international development institution with a Potential issuer must be an international development institution with a strong focus on projects in Chinastrong focus on projects in China

Requirement for the Issuance

Past three years financial statements audited according to PRC GAAP to Past three years financial statements audited according to PRC GAAP to be provided as part of the application packagebe provided as part of the application package


Pricing Analysis

The benchmark treasury bond Other comparable domestic issues, such as the China

Development Bank (for financial institutions)

Tax Treatment Chinese Treasuries are the only bonds in China whose coupons are

not subject to income tax. An appropriate premium due to tax treatment would need to be added for all other bonds

Liquidity Spread Depending on the size and estimated trading liquidity of the

bond, investors would expect to receive a premium on the issue

Other Factors Other factors may also come into play to affect the pricing of

the bond, such as familiarity of the credit, investor preference and also market volatility during the time of issue

Key Pricing Benchmarks

Adjustments Over Benchmark


10-year Chinese Treasuries are currently trading at 2.85% (May 23, 2006)

CDB’s 10-year bond currently trades at around 25 bps spread over the Treasury, while the historical spread of CDB bonds over Treasuries ranged from 15-30bps

Issue Date Maturity Date YTM Over Treasury

Chinese Treasuries

CDB

2/28/2005

8/2/2005

2/28/2015

8/2/2015

-

25

Comparables Pricing

1. Pricing as of May 23, 2006 , 2. Pricing as of May 24, 2006

2.85%1

3.10%2


III. BOCI Credentials


BOCI: A Unique Fixed Income House

Combination of local expertise and international capital markets experience

The only investment bank with full RMB and international debt

capabilities

Leader in the RMB debt market

Exceptional distribution capability

BOCI’s Unique Advantage

Strong backing of the BOC Group

BOCI Research sets the industry standard


BOCI: BOC’s Investment Banking Arm

Leading investment bank with global

operations

Leading investment bank with global

operations

Premier commercial bank in China and

Hong KongOther Businesses

100%

BOCI China

(Domestic Debt and

Equity Markets)

49% Controlling Stake

Bank of China is China's oldest and pre-eminent commercial bank since 1912

BOCI is Bank of China’s wholly-owned Investment Banking arm


Strength of BOC Group

BOC Group’s strength is demonstrated by being ranked #2 in the Asia (ex-Japan) bond issuance market since January 2005 to date, according to Finance Asia

According to AsiaMoney, BOCI ranked #7 in the Hong Kong G3 currency bond issuance market (incl. Red Chips) within a short time frame of one year

Bond Issuance – Asia( ex-Japan )

Korean Development Bank

BOC Group

Citibank

HSBC

JP Morgan

ICBC

Deutsche Bank

China Construction Bank

Agriculture Bank of China

Woori Finance Holding

Ranking

1

2

3

4

5

6

7

8

9

10

Underwriter

G3 Bond Issuance – Hong Kong (Incl. Red Chips)

JP Morgan

HSBC

Deutsche Bank

ABN Amro

Morgan Stanley

Merrill Lynch

BOCI

Citigroup

CSFB

Ranking

1

2

3

4

5

6

7

8

9

Underwriter

Source ： Finance Asia Source ： Asia Money

1st Half 2005 1st Half 2005


Corporate Bonds Up to Oct. 30, 2006, we have led and participated in 47 corporate

bond offerings. From 2002 to 2005, the annual amount of corporate bonds we underwrote grew from RMB 285 million to RMB 4.5 billion

In early 2003, BOCI joined the underwriting syndicate for exchange-listed Government bonds. In 2004, we became a tier one member of the treasury bond syndicate and a member of the underwriting syndicate for China Development Bank’s financial bonds. From then on, BOCI has continuously kept the first position among all securities companies in those two syndicates

Thanks to our research capabilities, we constantly design and promote new fixed income instruments tailored to meet our clients’ financing needs. New products such as subordinated bonds, Asset-Backed Securities, structured financing facilities, are also well received among institutional investors

Governmentand Financial

New Products

Leadership In The Domestic Debt Market


Lead

CITIC GuoAnCorporation

RMB 1.5 Billion

2004

Sole Lead

Zhejiang TrafficCorporation

RMB 1.4 Billion

2004

Joint Lead

China ResourcesCorporation

RMB 3 Billion

2005

China Railway Department

RMB 5 Billion

2005

Joint Lead

Co - Lead

State Grid

RMB 4 Billion

2005 2005

Co - Lead

China NuclearIndustry

RMB 2 Billion

Air China

RMB 3 Billion

Co - Lead

2005

Sole Lead

Asian DevelopmentBank

RMB 1 Billion

2005

Sole Lead

Fujian IndustryBank

RMB 10 Billion

2005

Leader In The Domestic Bond Market

Joint Lead

Petro China

RMB 1.5Billion

2003

Joint Lead

2006

Sole Lead

Yuntianhua Group

RMB 1 Billion

2006

China ResourcesCorporation

RMB 3 Billion

Sole Lead

Fujian IndustryBank

RMB 5 Billion

2006

2006

Zhongyuan Expressway

CompanyRMB 1.5Billion

Co-Lead

2006

SinohydroCorporation

RMB 1.2BillionCo-Lead


BOCI is the only Chinese institution that has the capacity of issuing and trading bonds in the international capital market

BOCI is establishing itself as a major force in G3 currency debt issuance by Chinese and Hong Kong corporates, governments and quasi-government organizations

Combining our dedication to a single issuing client market with significant international debt markets expertise

Ability to navigate local regulatory framework through strong relationships with the Ministry of Finance, PBOC, CSRC, National Development and Reform Commission and other regulatory bodies

Access to major international investors through sales teams in Hong Kong, Singapore, London, Shanghai, and Beijing

In addition, we are introducing to the fixed income investment market a new class of investors: PRC institutions investing in foreign currency assets

We have participated in major foreign currency transactions Arranger, Joint Global Coordinator and Bookrunner for Hong Kong SAR Government’s Ina

ugural Multi-currency Global Bond and China Merchants Holdings (International)’s US$500m global offering

In 2005, BOCI was a Joint Lead Manager in China Eximbank’s US$1.0bn Global Bond Offering

Co-lead manager in the PRC Sovereign Issue, China Eximbank and China Development Bank in 2004 and 2005

Unique Position in International Debt Markets


Senior Roles in Major G3 Currency Bond Offerings

Arranger, Joint Global Coordinator & Bookrunner

HKSAR Government

HK$20.0billionInaugural Multi-Tranc

he Global Bond

2004 1997

Joint Lead Manager

US$300mFixed Rate Notes

Co-lead Manager

Bank of China


1999

Co-lead Manager

CNOOC Limited


2002

Co-lead Manager

Peoples Republic of China


2004

Senior Co-lead Manager


US$1.0billionFixed Rate Notes

2001

Co-lead Manager

China Development Bank


2003

Co-lead Manager

China Export-Import Bank


1999

Senior Co-lead Manager

China Agricultural Bank

US$140mFixed Rated Notes

1999

Co-lead Manager


DM500mFixed Rate Notes

1997

1999

Joint Lead Manager

China Mobile (HK)


2005

Chaoda Modern Agriculture

US$225m

High Yield Offering

Co-lead manager Co-lead Manager


US$600m/Euro 325mFixed Rate Notes

2004

Co-lead Manager

China Export-Import Bank


2004

US$1.0billionGlobal Bond

2005

Joint Lead Manager

China Export-Import

BankUS$500millionGlobal Bond

2005

Arranger, Joint Global Coordinator & Bookrunner

China Merchants International

US$375mPrivate Placement

2005

Advisor/Investor

Shui On Land

Co-lead Manager


US$100billionFixed Rate Notes

2005

Contact Details

BOC INTERNATIONAL (China) Limited

Room 705, Tower E1, Oriental Plaza, No.1, East Chang An Ave., Dong Cheng District, Beijing, 100738, China Internet: www.bocigroup.com

Cynthia Wang

Fixed Income

Tel: 8610 – 85184028

Fax: 8610 –85184072

e-mail:

[email protected]

issuance and marketing strategy in the local currency market – a case study of the adb “panda...

Documents

customer of boci group

adb panda bonds

lead manager boci

panda bonds case study

offering slide

information purposes

debut of panda bond

overview of chinas bond