Many sub-investment grade companies facing Rmb5.78 billion (US$942 million) worth of refinancing obligations for their offshore renminbi bonds maturing in the coming months will seek US dollar and Hong Kong dollar loans to swap into CNH rather than reissue expensive dim sum bonds, predict dealers.
The analysis comes as the price of offshore renminbi, or dim sum, bond issuance has risen by as much as 200 basis points (bp) from May this year, closing the market to investment grade and high yield sellers.
The dim sum market has remained shut since US Federal Reserve chairman Ben Bernanke commented on tapering the quantitative easing programme and the People’s Bank of China deliberated a liquidity crunch onshore. On June 26 China’s Ministry of Finance (MoF) became the last issuer of a dim sum bond, making this the longest draught since the dim sum market opened to global borrowers in August 2010.
Dealers polled by Asiamoney PLUS expect the market to reopen anywhere from two to three weeks to two months pending US interest rate stability. When this happens investors are expected to remain cautious and favour investment grade credits, just as they have done in the US bond market. This leaves high yield names with billions of renminbi worth of repayment obligations stuck.
“Many of the names that are up for dim sum refinancing are high yield, one-time issuers and it’s not going very easy for them to raise more CNH from bonds in the foreseeable future,” said Becky Liu, a senior rates strategist at Standard Chartered. “Reissuing a dim sum bond is the most direct way to get refinancing capital but as the CNH primary market could remain closed for HY issuers for a while it would probably be more feasible to refinance in alternative ways such as structured notes or to borrow in other currencies.”
Three high yield companies - Credit China Holdings, Shougang Holding Bonds and Galaxy Entertainment Group – have a combined Rmb2.33 billion maturing in 2013, according to data provider Dealogic. Four high yield issuers – PCD Stores, BECL Investments, RKI Finance and TPV Technology - have Rmb3.45 billion maturing in the first quarter of 2014.
A senior debt capital markets (DCM) banker based in Hong Kong predicts that unrated Credit China Holdings, which sold a Rmb100 million two-year bond paying 9% coupon in September 2011, would have to pay a yield in the low double-digits if it issues a dim sum bond in the next two to three months. This suggests the prices have risen by 100bp-150bp over levels in the first quarter of 2013.
“Similar names were trading at the 7%-8% level earlier this year,” said the DCM banker. “The unrated and low quality names, in my view, would find it hard to get a deal done now unless they pay very, very expensive levels.”
Galaxy Entertainment, which issued a Rmb1.38 billion three-year bond in December 2010 that pays a 4.625% coupon, could expect to pay a smaller premium for a bond. “Galaxy could get a cheaper rate than other issuers because it has a good story and good assets, but the Chinese property companies who may be considering the market would have to pay in the high single digits at least,” added the banker.
Turning to dollars
While high yield names could employ a number of strategies to lower their bond costs, dealers says this is unlikely.
These include finding a bank guarantor, such as one of the big four Chinese banks to back the debt, or revise their covenants to give investors better protection. Yet dealers say that these options can also be costly.
“The price for a guarantee depends on the bank’s profile and its relationship with the lender, but those guarantee fees can be expensive,” said the head of DCM at a Chinese bank. “But if the issuer is a low-quality borrower even having bank credit support may not be enough to get a deal off the ground in this environment.”
Instead, would-be dim sum issuers are considering tapping the US dollar and Hong Kong dollar loans markets for short-term funding and swap the proceeds into CNH, say dealers.
High yield companies can pay anywhere from 200bp-500bp over US dollar Libor and Hong Kong dollar Hibor for one-year loans, depending on their relationships with banks and the quality of their assets. Given that 12-month US dollar Libor was quoted at 0.67594% on July 23 and 12-month Hibor was 0.88%, the pricing is attractive.
“There have been recent announcements that real estate names are signing syndicated and bank loans to raise cash, so it’s apparent that US dollar and Hong Kong dollars is a source of funding for companies with CNH repayments,” said the DCM head at a Chinese bank. “There’s no difficulty for companies to swap their proceeds into CNH for repayments. It’s actually something that the market has encouraged and supports.”
Dealers declined to identify specific issuers.
High yield names turning from the CNH debt market to dollars is a reversal from a trend earlier in the year. Following the deluge of high yield Chinese property issuers into the US dollar market, names including Far East Consortium, Dorsett and Future Land Development cancelled their dollar plans in favour of CNH bonds.
“Earlier this year we were getting ‘B’-rated credits out the door. We had a really strong bull run,” said Karby Leggett, regional head of Northeast Asia capital markets at Standard Chartered. “The reality is that we’re talking about new issuer premiums of around 75bp- 100bp in the dollar market for high yield names. In the CNH market the story is even worse – it’s around 200bp-300bp. That’s an almost impossible number and that’s not something that’s really doable. The market has actually closed for them for now.”