* Advance notice of offshore issues poses insider-trading
* Practice can distort demand by artificially inflating
* Tough European standards put non-Chinese banks at a
By Frances Yoon
HONG KONG, Oct 13 (IFR) - Chinese issuers are still giving
some investors advance notice of their offerings of offshore
bonds, even as European rules clamp down on the practice to
contain the risk of insider trading.
Debt bankers have cried foul over the handling of lead
orders on recent Chinese bond sales, voicing concerns that the
practice breaches disclosure requirements and presents a
distorted picture of actual demand for a deal.
Some Chinese borrowers routinely ask underwriters to secure
indications of interest before announcing the terms of an
international bond issue, using a tactic commonly used in the
onshore debt market.
Arrangers say the practice puts them under pressure to bend
international rules, potentially exposing them to legal risks as
global regulators tighten their scrutiny of capital-raising
Most international regulators allow market sounding under
certain conditions, but interpretations of those requirements
vary markedly. In some cases, investors must agree not to trade
in related securities once they receive inside information about
a new issue - a practice known as wall-crossing.
"Chinese underwriters take a more liberal view about whether
they need to wall-cross," said a syndicate banker at a Western
bank. "They'll go under the guise that they are not officially
mandated, that they are just pitching the deal, but they know
that they are either mandated or that a deal is coming."
The debate over best practices has intensified since the
European Union expanded its Market Abuse Regulation (MAR) in
July. Among the changes introduced is a formal process for
market sounding that requires banks to keep a record of
interactions for five years, designed to ensure investors do not
misuse sensitive information that could affect the prices of
While those rules apply only to securities listed in the EU,
Western investment bankers say they have revamped the way they
market deals globally, putting them at a disadvantage against
Chinese rivals in soft-sounding investors.
Some bookrunners, especially smaller Chinese firms trying to
win market share in international bond markets, often tell the
issuer they have a proprietary order so as to win bond mandates.
One Chinese banker who invests in US dollar bonds said that he
was often approached on messaging apps rather than through any
"I'm usually asked to sign non-disclosure agreements, but
I've had instances where, if it's a well-known issuer and I am
close to the banker, he will send me information like tenor,
size and comparables on WeChat as long as I keep it
confidential," said the banker.
"NDAs take at least two to three days to process, and it
involves the legal counsel on each side."
The International Capital Market Association (ICMA), an
industry group seeking to promote good market practices, says in
its Primary Market Handbook that managers need to discuss what
information can be disclosed prior to pre-sounding. An ICMA
spokesman said these rules might come under review to align them
more closely with the EU's MAR standards.
Those rules, however, are voluntary, and do not apply to
everyone. Bank of China is the only Chinese underwriter among
ICMA's membership, according to the association's website.
"It's about following global standards ... and those are
there to protect the integrity of the market and investors as
much as the issuers," said another DCM banker. "Not everyone is
playing by the same rules."
The Hong Kong Securities and Futures Commission (SFC), which
regulates all securities listed in the city, declined to comment
on whether or not market sounding ahead of a bond issue breached
The SFC's code of conduct does not contain specific rules
regarding market sounding, but stipulates that corporate finance
advisers should maintain "a high standard of integrity and fair
dealing" and requires registered persons to "act honestly,
fairly, and in the best interests of (their) clients and the
integrity of the market".
While Chinese borrowers want to be sure there is demand for
their securities before they launch a deal, bankers argue that
sounding the market too early may not be in their best interests
as it complicates execution.
Typically, banks keep lead orders anonymous in an effort to
protect their exclusive relationships or prevent competing
bookrunners from taking credit for their work. Rather than
sharing the details with the rest of the syndicate in a pot
deal, orders are simply entered as "Account X".
Those exclusive orders are only validated and confirmed
close to final pricing, raising the risks that actual demand may
be far less than initially expected - especially as more than
one arranger may be claiming the same "exclusive" order.
One syndicate banker said this made it impossible to predict
final allocations, noting that he had worked on deals where more
than half the orders were X orders.
"Pot deals typically work to the issuer's best interest," he
said. "Everyone shares information, there's double and
triple-checking of orders and limits, and it contributes to a
These concerns came to a head recently when China Cinda
Asset Management was said to have mandated bookrunners
based on their ability to bring in early orders for a Hong
Kong-listed Additional Tier 1 offering. Cinda's lead managers
reported orders of over $10 billion minutes after launching
bookbuilding on September 23, but sources said some of the big X
orders in that total disappeared before pricing and Cinda ended
up printing a smaller deal than expected. The final order book
was around half that amount, sources told IFR.
MAR aims to restrict inflated orders by bringing suspicious
orders under the scope of attempted market abuse, but again does
not apply to every international bond issue.
Investors warn there is a growing disconnect between the
messages about demand for a deal and how the new issue performs.
"They need to be more careful because it ends up becoming a
failure of delivery to investors on book orders," said a Hong
Kong-based investor. "Those types of messages don't look good
and it makes it hard for us to gather information."
A Singapore-based investor agreed.
"Sometimes we see a 10 times covered order book and then the
secondary market trades flat. That tells you there is something
wrong with the orders," the second fund manager said.
"There is some correlation between order book size and
secondary performance, but it's not as positive as it was
(Reporting By Frances Yoon; Editing By Steve Garton and Vincent