Investors and bond issuers say that a mixture of measures that generate liquidity, create new benchmarks and strengthen covenants would add a new level of investor and issuer vibrancy to the offshore renminbi, or dim sum, bond market. This in turn would mean more diversity in terms of maturity and deal size.
A group of panellists speaking at the Euromoney Conferences’ Global Offshore RMB Funding Forum on May 8 commented that the dim sum bond market has maintained similar characteristics through its existence, with the majority of bonds issued with tenors of three-to-five years, sized at Rmb1 billion or less.
Chinese names are also the most frequent dim sum issuers. This is especially apparent in 2013, with Chinese names making up 51% of issuance in 2013 compared to 34% in 2012 year-to-date, according to Dealogic.
However, a few key developments could help to attract more diversified issuers to the dim sum market, as well as investors.
Linlin Ma, a fund manager at Prudence Investment Management, said that, despite the interest of existing investors in dim sum issues, liquidity in the CNH market continues to be a real problem. This has spooked away larger institutional investors and global issuers, and could be solved with a repo market. This will provide reliable liquidity and encourage larger-sized investment.
“What the CNH asset class lacks that other currencies have is a repo market – there’s a lack of liquidity and lack of sizes that can be achieved. A repo market will help with that development,” she said. “Then we will be able to enhance our bonds, lending and then our currency hedging.”
Meanwhile, Gordon Tsui, deputy chief investment officer at Hang Seng Investment Management, says that a secondary market is still the most important element to diversifying the dim sum market’s investor base from the traditional buy-and-hold crowd. “Secondary market has got to improve,” he said.
“Both the size of bond issues and then liquidity in the secondary market [need to be improved],” added Angus Hui, an Asian fixed income a fund manager for Schroder Investment Management. “Liquidity in the market depends on the size of the bond market getting bigger. Then larger institutional investors will go for longer-dated bonds [beyond five-to-10 years], but first there needs to be deals in...And if there are constructive developments in regards to covenants and then cross-border investors will enhance liquidity in the market.”
That said, existing dim sum bond issuers have continued to see sizable demand for their debt as investors have CNH to spare and little alternative to place their cash. This has played well to issuers, yet has become expensive for investors.
“The majority of bonds that were issued for under three years are maturing in 2014, so managers are actively trying to seek a replacement for the maturing assets and that’s one of the reasons the market is still welcoming this more expensive pricing,” Kai He, head of fixed income at Bosera Asset Management, said at Euromoney Conferences’ Global Offshore RMB Funding Forum on May 8.
This dynamic itself will help encourage new issuers to tap the market, and will particularly apply to companies lower down the credit spectrum. These names can benefit from a notable arbitrage opportunity between CNH and US dollars.
“There are benefits in cross-currency swap transactions but [issuers] aren’t necessarily connected to the CNH market. There are not many arbitragers who are taking advantage of these pricing differences,” he said.
One issuer which did take advantage of this landscape was Far EastConsortium, which sold a Rmb1 billion (US$162.8 million) three-year bond on February 25. The deal initially targeted Rmb500 million before investors pushed the order book to six times that value.
Chris Cheong Thard Hoong, managing director of Far East Consortium, said the decision to issue dim sum saved the company 130 basis points (bp) over a direct US dollar issue.
“We told the banks that we wanted to see depth in the CNH market, and then at the end of the day we made our decision to issue dim sum [over US dollars] based on the cost of financing. And we were quite surprised that the investor base was much bigger than we expected,” said Hoong. “We did our first bond offering...just below the 6% level. From our perspective we actually needed the funding in US dollars so we did a cross-currency swap and then found that we reduced the cost of funding for our bond by 130bp.”