Hybrid and convertible bonds will begin to play more prominent roles in the CNH debt market, cropping up as corporates begin to diversify their renminbi funding strategies, predicts Barclays.
“Multinational corporations are issuing CNH bonds to either match their balance sheets in China or to match their future renminbi cash flow,” said Philip Tsao, head of global finance and risk solutions for Barclays Greater China.
He notes that hybrid bonds – or debt securities that have a loss-absorbency feature – will be the next to reach the market, paralleling Basel III compliance measures.
Future issuers would follow in the footsteps of Industrial and Commercial Bank of China (ICBC)(Asia), which sold a 10-year, Rmb1.5 billion non-call five hybrid bond, in October, with a feature that writes off bondholders’ principal amount if the bank is deemed non-viable by regulators. That note was priced at 6%, touted as a success at the time because of its uniquely low coupon for a note containing such a stringent write-down feature.
“Hybrids will come next to the market. The most obvious issuers of these will be banks,” said Tsao. “Because of the loss-absorption ability - which means that the bonds must be sold by a transparent and high-quality issuer – [banks] will be candidates for this.”
He explains that ICBC (Asia)’s issue was successful because the bank was able to tap retail investors with which the bank has a relationship. These investors trusted ICBC (Asia)’s brand and bought the hybrid notes, regardless of the high yield and added risk.
Barclays predicts that a third product – convertible bonds – will become more mainstream in the dim sum market in the coming months, as they can be used by corporates looking to enhance their CNH capital.
“[Convertible bonds] are instruments most issuers and investors are familiar with and have done either in their home currency or in US dollars,” said Tsao, noting that, in the past five years out of the US$15 billion issued by Chinese entities, one-third have been renminbi convertibles. “This is a rapidly growing space so the next natural development is convertible bonds in US dollar and in renminbi by Chinese companies.”