Bank of China nabs Panama's Panda mandate

Bank of China nabs Panama's Panda mandate

Capital Markets Bonds Panama

Bank of China (BOC) has been mandated to lead proceedings for Panama's inaugural Panda bond, a transaction that would likely advance with a three- to five-year maturity and up to as much as $500m-equivalent in issue size.

"Panda [bonds] are interesting right now.. There is a lot of regulatory approval with all the bells and whistles," said one source following the Chinese bond market. "It can be a politically-driven process, but you are able to tap into one of the largest bond markets in the world."

Panama's President Juan Carlos Varela said in a statement the Central American nation could reduce its funding costs by a quarter, or even as much as half a percentage point, by printing Panda bonds over more dollar-denominated securities.

The transaction is expected to hit screens in the second half of this year. But while the sale opens Panama to a deeper investor base, a stronger dollar may lift swap costs for the sovereign issuer.

"Rates have gone up and basis points are wider," a second DCM banker said. "There are some market windows that are cost-effective.. But that is not the case right now."

He also said the Panda space was a growing market, along with Taiwan's Formosa investor base. "These markets have been virtually untapped [by LatAm issuers] until now," added the source.

Total Panda bond sales were about CNY71bn ($11bn) at the end of 2017, compared to CNY116bn a year earlier, data from JPMorgan showed.

Strict currency outflow restrictions from China's government has made it difficult for foreign investors to repatriate profits in the past. But efforts are underway to loosen these financial restrictions and invite a wider investor base to the Panda market.

The need to adhere to different accounting standards has also kept would-be issuers from tapping into the Panda market, but government-to-government cooperation may allow Panama and China to iron out an agreement that will help advance a new bond issuance.

In Panama's case, both sources agreed that the sovereign would likely attract a greater domestic investor base for its maiden Panda issuance and is expected to seek approval to swap its proceeds back to dollars.

According to the government statement, President Varela and Siqing Chen, Governor at the BOC, met last week to discuss the BOC expanding operations in Panama.

Panama first told LatinFinance of its plans to sell Panda debt in March, while in April the country's finance ministry said it wanted to deepen its investor base throughout the Middle East and further into Asia.

Ba2/BBB/BBB rated Panama sold $1.2bn in 2050 bonds in April and has roughly $3.6bn in external funding needs for 2018.