Citic, CICC Reap Fee Bonanza in China’s Protected Bond Market

April 3 (Bloomberg) -- Citic Securities Co. and China International Capital Corp. are reaping multimillion-dollar fees arranging bond sales in a year-old market where China’s 105 other brokerages are barred from competing.

The two firms underwrote a combined 33.7 billion yuan ($4.9 billion) of so-called medium-term notes in the first quarter, according to data compiled by Bloomberg. That compares with 20.8 billion yuan for the whole of 2008.

CICC, the Chinese partner of Morgan Stanley, and Citic, Asia’s largest securities firm by market value, are the only companies besides banks allowed to underwrite medium-term notes and commercial paper. Sales of the securities have swelled as a government moratorium on initial public offerings prompts companies to turn to debt markets, providing CICC and Citic with a cushion as IPO fees vanish.

“We’ll see quite a large increase this year in commercial paper and medium-term note issuance,” said Peng Xingyun, director of the monetary theory and policy research center at the Chinese Academy of Social Sciences in Beijing. “Companies need those two types of bonds to raise cash when selling shares isn’t an option.”

CICC and Citic ranked third and sixth, respectively, in underwriting medium-term note sales this year, Bloomberg data show. CICC worked on 21 billion yuan of deals, more than four times the total for 2008. Citic’s haul was 12.65 billion yuan, or 78 percent of what it garnered last year. The two didn’t arrange any commercial-paper deals, according to Bloomberg data.

Spokespeople for the firms, both based in Beijing, declined to comment.

Others Want In

China introduced medium-term notes, bonds that typically mature in three to five years, in April 2008. Sales of the bonds were suspended between July and September.

Arrangers charge 0.3 percent per year of maturity for underwriting medium-term notes. Fees are paid upfront. Assuming an average four-year maturity on the sales CICC and Citic managed in the first quarter, the two would have reaped 404 million yuan in combined fees.

Companies sold 167.1 billion yuan of the bonds in the first quarter, up from 100.2 billion yuan in the previous three months, according to ChinaBond, the nation’s biggest clearing house.

National Association of Financial Market Institutional Investors, supervised by the central bank, awards permits for underwriting medium-term notes and commercial paper. Sales of other types of bonds are overseen by China’s securities regulator and the nation’s top planning agency.

Rival securities firms have sought underwriting approvals, and “haven’t gotten the green light yet,” He Fei, an official at the association’s medium-term notes department, said in an interview. She declined to say which brokerages applied.

IPO Halt

As the two biggest underwriters of equity sales on China’s two exchanges in 2008, Citic and CICC have the most to lose from the ban on stock offerings.

The securities regulator hasn’t approved an IPO since September, and there have been no stock sales in 2009. Together, Citic and CICC had a 43 percent share of the market for equity offerings in 2008, when companies raised 232 billion yuan, data compiled by Bloomberg show.

Citic’s profit plunged 41 percent last year to 7.28 billion yuan, the company said Jan. 20, citing unaudited figures. The brokerage, which is scheduled to report earnings on April 30, has rallied 44 percent in Shanghai trading this year after falling 60 percent in 2008. CICC is privately held.

‘Great Advantage’

While fees for advising on stock sales are higher at around 3 percent, underwriting bonds requires less work, a banker with direct knowledge of the matter said, speaking on condition of anonymity. A deal typically takes about three months to complete, the person said. That compares with about a year for an IPO.

“Bond underwriting will be a key support for Citic’s profit from investment banking this year,” said Liang Jing, a Shanghai-based analyst at Guotai Junan Securities Co. who rates Citic as “add.”

Arranging bond sales accounted for about a third of the firm’s investment banking revenue last year, Liang estimated. Citic doesn’t break out bond underwriting revenue.

Being the only brokerages able to underwrite commercial paper and medium-term notes offers other advantages, said Tian Liang, a Shenzhen-based analyst at Pingan Securities Co.

“They can use bond underwriting to boost their asset- management portfolios and offer other products to clients,” he said. “Compared with other brokerages, CICC and Citic have a great advantage.”