L-Bank, the state bank of Germany’s Baden-Württemberg, aims to be a consistant issuer in the offhsore renminbi, or CNH, bond market in a bid to strengthen its capabilities and expertise in anticipation of greater renminbi trade settlement activity in the state, Sven Lautenschlaeger, L-Bank’s international funding officer, tells Asiamoney PLUS.
Lautenschlaeger was speaking after L-Bank issued its fourth dim sum bond on May 31 – a two-year Rmb250 million (US$39.3 million) note that marks its largest CNH-denominated deal to date. The bond, priced at 2.25%, saw interest from investors in both Europe and Asia.
This is L-Bank’s fourth tranche of dim sum bonds following the sale of five- and seven-year-dated bonds in May and September last year. It raised Rmb150 million apiece for five-year notes due on May 23, 2016 and September 28, 2016, and Rmb120 million for the seven-year, due on September 28, 2018.
Lautenschlaeger said that the time was right to re-enter the market given strong investor appetite for investment-grade bonds (L-Bank’s two-year note is rated ‘AAA’ by Moody's, Standard & Poor’s and Fitch), and after Kreditanstalt für Wiederaufbau (KfW) – a German government-owned development bank – paved the way with its benchmark two-year Rmb1 billion CNH bond issued on May 9, priced at 2%.
“KfW set the benchmark in terms of liquidity and pricing distribution, and this is something that other market participants can use as a benchmark – and that’s why I’m also pleased to see KfW issue,” Lautenschlaeger said. “If you issue smaller transactions as we do you don’t always get much attention but KfW’s Rmb1 billion deal did gain attention for the market, and we were able to follow that momentum to issue a larger-sized bond as well.”
Asian accounts took 29% of the deal while Europeans accounted for 71% - with Swiss investors alone taking nearly 42%, Lautenschaleger says. He adds that the short-dated tenor is a direct result of investor demand.
L-Bank decided to swap the proceeds of its Rmb250 million bond, as well as its predecessors, into euros rather than use the currency for its renminbi business.
While Lautenschlaeger says that arbitrage will continue to be L-Bank’s strategy for issuing in the dim sum market, this agenda may change as renminbi trade settlement oppportunties widen. He explains that L-Bank is looking to strengthen its market knowledge and capabilities while the CNH market is still developing, and by the time businesses in Baden-Württemberg are prepared to use CNH as a transaction currency, L-Bank will be in a strong position to immediately issue bonds to meet clients‘ funding needs.
“At this stage we have no plan to lend the [the CNH proceeds] or transfer it to mainland China, but we do want to accumulate expertise in the market now because we never know how At this stage we have no plan to lend the [the CNH proceeds] or transfer it to mainland China, but do want to accumulate expertise in the market now because we never know how L-Bank’s owner and guarantor, the State of Baden-Württemberg, will want to use this expertise to support its companies and their trade,” said Lautenschlaeger, highlighting the strong economic ties between the state and China.
China is the fourth-largest export destination of Baden-Württemberg-based companies. The state, which borders Switzerland, is the headquarters of firms including automakers Audi, Daimler and Porsche, car part manufacturer Bosch, optics maker Carl Zeiss, and software developer SAP.
Companies in Baden-Württemberg sold €13.3 billion (US$16.6 billion) of goods to China in 2011, which represents approximately 7.7% of the state’s overall exports, says Lautenschlaeger. Conversely, the state imported €10 billion of products from China in the year, translating to a €3 billion trade surplus with China.
“When you keep in mind that more than 45% of the state’s gross domestic product (GDP) goes into exports, then around 3.5% of the state’s overall GDP exports are from China. This is why we want this expertise in the dim sum market, in addition to increasing investor and product diversity,” he said.
“Most of the trade settlement that these companies see occurs in US dollars and euros, but settlement could be done in renminbi. An investment need can emerge, so we’re trying to work out various points on how to bolster this, and that’s why the market is quite important to us as we need to learn and understand more,” he added. “It is always good to be prepared.”
In the meantime, swapping CNH into euros provides favourable abitrage opprotunties. Though Lautenschlaeger is tight-lipped regarding what at what level he swapped the returns, he concedes that the return was “significnatly better“ than the 2011 swaps due to a boost in liquidty in the market and currency movements.
Lautenschlaeger adds that the CNH market will be L-Bank’s primary bond focus in Asia Pacific, though it will consider Hong Kong dollar and Singapore dollar issues pending the arbitrage opportunities.
In fact, L-Bank completed its first Hong Kong dollar deal since 2007 on June 5. That two-year private placement raisedHKD300 million (US$38.7 million), paying three-month Hibor plus 66 basis points (bp). It was based on an enquiry by a single investor and the proceeds were also swapped into euros.
L-Bank won’t likely stray from the CNH, Hong Kong dollar and Singapore dollar markets as the state bank doesn’t look to overextend its resources, says Lautenschlaeger. But given that the bank’s 2012 international bond programme is €7-9 billion, L-Bank will access the possibilities in other Asian currencies as they come.
“We can always look at new markets, but we don’t want to rush into new markets,” he said. “We are a smaller issuer with smaller issue volume and we can’t afford to be too active into too many other markets.
“But if we have to prioritise, you have to choose a focus and the renminbi market is clearly a large market that is emerging,” he concluded. “We’re looking to strengthen our focus on a currency that is going to be a global reserve currency. We want to be part of that market’s development.”