Euroweek offshore RMB report: issuers

Euroweek, July 2011

In recent months it’s become clear that investor appetite for mainland-backed offshore RMB bonds is not limited by sector or credit rating. Indeed, it’s a bigger challenge to find a name that couldn’t have raised funds in this way in the early part of 2011.

Chinese issuers from the state itself to unrated high yield have found willing buyers. And while dollar high yield issues from China have tended, until recently, to be focused heavily on real estate, there is scarcely an industry sector in China from which some issuer or other has not braved the offshore RMB markets, mainly successfully.

Since Sinotruk, the automotive group, became the first red chip to launch an offshore RMB deal in October, a broad spectrum of sectors has been represented. There have been utility and energy issues from China Resource Power Holdings and China Power International Development. Within that sector, there have been alternative energy issues from China WindPower Group, China Power New Energy Development and (for a synthetic deal) solar energy group LDK Solar. Chemicals have been represented by Sinochem; retail by PCD Stores; real estate by a host of names including Beijing Capital Land, Guangzhou R&F and Shui On Land; construction by Road King Infrastructure Finance; computing and technology by TPV Technology; transportation by Singamas Container Holdings; forestry by Shandong Chenming Paper Holdings; and electronics by BYD. Many of these have been unrated.

In short, a market in which investors can tap any sector and almost any degree of credit quality has evolved in the space of just over half a year. It’s an environment in which anyone from the Ministry of Finance or a key policy bank all the way to an unrated, untested alternative energy developer can find an audience. “Before 2010 they [RMB offshore issuers] were all state-owned enterprises and financial institutions,” says Freda Wong, executive director, corporate finance at Citic Securities International. “Since last July more red chip companies [Chinese assets, but Hong Kong incorporated and listed] have issued, and this year the majority of issuers are listed in Hong Kong, engaged in a lot of different industries. And the majority of them – the corporates with PRC backgrounds – will continue to consider issuing RMB bonds in Hong Kong.”

“We’ve seen issuance all the way from 1% coupons up to high yield at 7%,” adds Vishal Goenka, head of local currency credit trading for Asia at Deutsche Bank. “It gives investors a whole credit portfolio to choose from.”

But while there seem to be few limits on who can access funds, there are naturally ceilings on tenor and volume for smaller names. Funding is cheap in this market, but it’s not limitless, and borrowers still have to be realistic about what they can achieve.

“The dim sum bond market offers borrowers a cheaper cost of funds versus where they would be getting those funds either in G3 markets or offshore,” says Terence Chia, co-head of debt syndicate for Asia at Citi. “After swaps, if you compare like to like, dim sum tends to offer cheaper financing. But it is largely focused on the shorter end of the curve: two to three years, or five for a strong credit, whereas in G3 bond markets the typical maturity is at least five years, sometimes 10 or even 30 years. And the size of dim sum issues tends to be smaller versus G3.”

“So dim sum appeals to borrowers who don’t want to get rated, are fine with smaller offerings and shorter-dated funding, and can get approval to remit funds back to the mainland,” Chia says.

This point on remittance is crucial, because so far, it’s been much easier to raise funds in offshore RMB then to repatriate them back to the mainland. Red chips who raise funds in offshore RMB either need to have something useful to do with the money outside of China, or have to be confident that they can navigate the slow and somewhat opaque process of getting approval from the State Administration of Foreign Exchange (SAFE) to move their funds back onto the mainland.

When it comes to raising the funds in the first place, though, mainland issuers are advantaged by a broader investor base than they might previously have expected to encounter. “In the beginning most people believed the offshore RMB market would be very much driven by what we call the traditional Hong Kong dollar investor base: the commercial banks and insurance companies here,” says Augusto King, co-head of debt capital markets for Asia at RBS. “But if you look at the deals done of late, a lot of traditional asset managers that normally only want to be active in the US dollar market are saying: if there are CNH issues, I want to take part in them as well. It caught a lot of people by surprise how quickly asset managers having been prepared to become a participant in the CNH market, driven by the potential appreciation of the currency.”

And that’s without mentioning retail, who have supported many of these deals. The breadth and hunger of the investor base is the main reason that such a broad range of issuers – both in terms of sector and quality – have been able to raise funds so readily. And that issuer base is going to broaden. Singapore is likely to be the next centre for RMB offshore issuance, while in due course markets like London or New York could develop their own markets. Already, the participation in RMB offshore deals is broadening beyond the Hong Kong buyers that were the mainstay of the market in its early years: Volkswagen’s RMB1.5 billion deal in May went only 49% to Hong Kong, with 25% to Singapore and European investors an unprecedented 26%. Clearly, Volkswagen is not a mainland issuer, but the deal did demonstrate that appetite for RMB-denominated paper is becoming much more widespread than it used to be even a few months earlier.

That said, issuers may find that these more far-flung investors are more fastidious in their due diligence and credit homework than some in Hong Kong appear to have been. There is a sense that the easiest money has already been taken.

In particular, as the article on page xx explains, there is already a shift from the environment that existed in April when deals could get away with almost no covenant packages. While covenants are still far from onerous – and almost implausible to enforce anyway in the event of default, given that generally the holding companies that issue the bonds don’t have a direct or guaranteed link to the assets of the parent – the fact that investors are requesting them at all suggests that future issuers may have to put more effort into getting investors comfortable with their credit. “The market has evolved over time and people are now more disciplined in terms of what they need to see in a covenant package,” says King. “That is a healthy development.”

“Investors are starting to differentiate between rated and unrated CNH,” he says. “They demand a premium for unrated. But at the moment they will do all their credit work because they want to participate and be involved. The market will evolve over time – hopefully not a long time – and investors will then try to differentiate more clearly between rated and unrated CNH transactions.” It will also be interesting to see whether the vibrant unrated issuer market continues, or if investors will also start pushing for ratings.

So what advice to give mainland issuers considering an offshore RMB bond? Firstly, that there may never be an easier time to raise capital, as an imbalance of supply and demand like the one that exists in Hong Kong deposits today is unlikely to come around again. Secondly, that already the very easiest period of time has passed, and that increasingly issuers are going to have to come up with a credible story to give investors confidence to compensate for the lack of useful guarantees on the issues. Thirdly, that even if yields start to rise as the investor base becomes more discerning, there is still plenty of headroom before offshore RMB funding costs get anywhere near debt capital market costs at home. And fourth, that there’s not much use in raising funds if you’re not sure you’ll ever get approval to take them home again. While all of these themes work themselves out, though, there’s every reason to suggest the offshore RMB bond market could crack RMB200 billion in outstanding issuance by the end of 2011; whatever the merits of some of the deals, it’s been a startling evolution.

BOX: Evolution of a corporate sector: bonds from Chinese issuers and their subsidiaries over time

June 2007: China Development Bank becomes first issuer in offshore RMB.

September 2007: Bank of China brings first commercial bank bond.

September 2009: HSBC brings first offshore RMB issuer by a foreigner, albeit the China arm of HSBC

July 2010: Hopewell Highway Infrastructure brings first investment grade corporate bond, banks excepted

October 2010: Sinotruk is the first red-chip issuer

November 2010: China Resources Power Holdings broadens market to mainland utilities sector

December 2010: Shui On Land, by most reckonings a high yield issuer, opens the synthetic RMB bond market

January 2011: Sinochem debuts the chemicals sector; PCD Stores does the same for retail

February 2011: Beijing Capital Land is the first corporate mainland real estate issuer in dim sum markets (barring synthetic issues). Road King Infrastructure adds construction to the market

March 2011: TPV Technology adds computers and electronics to the market.

April 2011: Singamas is the first mainland transportation issuer, Shandong Chenming Paper Holdings brings forestry and paper coverage, while Zhongsheng Group Holdings adds another auto issuer. Guangzhou R&F adds to the real estate pool and BYD adds a second electronics issuer.