The decision by a Middle Eastern bank and a Korean company to make their debut in the dim sum market through a private placement shows that issuers and investors are seeking alternative routes to the public market gain renminbi exposure.
Abu Dhabi Commercial Bank issued a Rmb200 million (US$31 million) five-year euro medium term note (EMTN) via Mizuho on June 22, as reported by out sister publication EuroWeek. It pays a coupon of 3.7%.
Korea Gas Corp also made it first appearance in the offshore renminbi market through a private placement on June 20. Barclays placed the Rmb160 million five-year bonds paying 3.25% and issued at par.
Dealers are fielding more requests from investors and issuers in access the offshore renminbi bond market through private placements, which unlike syndicated bonds typically have a single dealer and a single investor.
“We are definitely seeing interest, we are seeing more interest from both issuers and investors in the last six to nine months than we have previously,” said a head of EMTNs Asia.
Samson Lee, head of debt capital markets at Bank of China International (BOCI) agrees: “There are a lot opportunities but it depends on the type of issuer. With investment grade or implied investment grade issuers the key hurdle is about pricing level.”
“Onshore and offshore rates are now getting closer so there might not be much attraction in the dim sum market for quality Chinese issuers who have the ability to tap the local CNY bond markets. High yields borrowers, on the other hand, may be more willing to pay up for funding rather than straightly looking for the lower costs.”
Private placements usual work on a reverse enquiry basis whereby an investor approaches an investor via a dealing bank about issuing a bond. The process is simpler and quicker with borrowers that have EMTN programme as the documentation is in place but investors are also showing demand for borrowers without bond issuance programmes.
“We do see investors asking for issuers do private placements that only have standalone documentation, i.e. names that do not have EMTN programmes,” said the head of EMTNs. “Definitely seeing interest from both sides but it’s much harder discussion because the speed of getting the trade done. All the discussions take time and the market is moving, it’s dynamic and all that makes these deals as difficult to execute as a pubic deal.”
The nature of private placements also means pricing is decided directly between issuer and investor. Although in more mature markets, private placement funding is normally cheaper for issuers than public deals, the opposite is true in the dim sum market. In addition, issuers and investors have very different expectations for pricing. Insurers, which have been large buyers of public dim sum bonds, are the typical investors for private placements and are trying to meet minimum yield requirements.
The [pricing] gap still exists for the good borrowers, generally speaking, they may get better pricing in the public market than in private placements, said BOCI’s Lee.“The funding in dim sum private placements can be higher by 25bp to 50bp or even more for equivalent public offering. For investors, there’s the balance of secondary market liquidity and scarcity value. But, these days, most investors view secondary market liquidity as more important.
“Investors who are looking to invest in a name on a private placement basis want a premium. The gap is definitely larger with standalone issues than when you have an EMTN programme as then you publish pricing levels,” said the head of EMTNs.
Although the advent of private placements signals a maturing of the dim sum bonds, they do help the market in terms of liquidity or transparency pricing along the yield curve, elements which are often cited for keeping some issuers and investors out of the market.
“I hope the market is not going in that direction at this early juncture with it just opening up last year. Hong Kong is more of a revere enquiry market than a public market so there is a concern to dim sum market could go the same way,” said an Asia Pacific head of fixed income.”This market needs a lot more transparency and deals with secondary market support for more issuers and investors to get involved.
“When I talk to an issuer I say if you are trying to diversify away to new sources of funding, then I don’t think reverse enquiry is the way to go and also you will have an uncertain entry point when you next enter the market.”
Dealogic data shows that 19 dim sum bonds totalling Rmb7.9 billion have identified as private placements. Of those, 16 have been placed by a single dealer, while there are three which have a banking syndicate.
Offshore renminbi private placements with single dealer 2010 to 2012