Offshore renminbi bond issuers and investors have a growing appetite for larger-sized dim sum bonds with longer tenors, yet it remains difficult for corporates to diversify beyond the standard smaller-sized, shorter-dated bonds while cross-currency swaps (CCS) remain illiquid and Beijing limits renminbi repatriation onshore.
Speaking at Euromoney Conferences’ Global Borrowers and Asia Investor Forum on September 24, a panel of bankers and issuers said that the standard dim sum bond – sized Rmb500 million-Rmb1 billion (US$81.68 million-US$163.35 million) and dated three-to-five years – remains unattractive to many potential international issuers. This is because the bite-sized deals only cover a fraction of multinational companies’ (MNCs) funding costs, and the proceeds for anything longer–dated cannot be easily swapped into other currencies because CCS become less liquid beyond five years.
Additionally, issuers now grapple with higher yields in the dim sum market as a result of recent talks on tapering the US Federal Reserve’s quantitative easing programme. This has made the CNH market less appealing as an arbitrage play.
“It will take a period of time before longer tenors come to fruition,” said Ivy Thung, senior credit analyst at Nikko Asset Management. “Only the policy banks will be first to come to issue larger and longer-dated bonds, but there is some resistance in the market for these bonds from corporates, due to the CCS market and [higher yielding] treasuries as well. A lot of issuers had been coming to the five-year market, but then after the tapering talk they went back to the standard three years. So it’s up to the government to push the tenors.”
While these deals can often be cheaper than US dollar funding, depending on the swap market, the fact that they must be refinanced after a few short years could expose issuers to currency risk.
“Before IRS (interest rate swaps), we just relied on CCS. So you swapped US dollars with the renminbi and vice versa. But the IRS has yet to take off because of the wide bid-offer spread based on CNH Hibor, so we’re still relying on the CCS curve,” said Frances Cheung, senior strategist, Asia ex-Japan, at Crédit Agricole. “There are some needs to be met still…in the offshore market, you can see that a liquid CCS market is necessary so you can always swap.”
In addition, Richard Anund, senior director and Asia representative at Svensk Exportkredit (SEK), which has issued three dim sum bonds to raise Rmb850 million, says that repatriating the proceeds of these bonds onshore is also a headache. This causes challenges for would-be dim sum issuers that have a need for renminbi onshore.
“Repatriation is based on timing,” said Anund. “It’s a chicken and egg situation - you can have an onshore entity that does business in China and can do the registration with Safe [State Administration of Foreign Exchange] and then you also need the terms and conditions for the bond before you can apply. There’s a lot of uncertainty regarding the timing of this process – the markets can move. Do the clients want to take that risk?”
Appetite for dim sum
However, when the timing is right, bond issuers can find that shorter-dated dim sum bonds are appealing, both to raise renminbi for operational needs and for clients’ use. This motivation continues to lure global issuers to the dim sum market despite the challenges.
“[Issuing dim sum bonds is] both opportunistic and strategic,” said Anund. “Being an export credit corporation, we need to find sources to obtain local currencies because our clients don’t just need to borrow from us in USD and euros. So it’s strategic, so that we want to create an infrastructure to borrow regularly and lend to our clients who need it.
“It’s also optimistic in the sense that we’re not a bank so we don’t have saving accounts so we’re always looking for new funding sources and obviously China has great potential,” he added. “We have done transactions that are both opportunistic where we’ve swapped CNH into dollars or euros - and the cost is equivalent to where we would find elsewhere - but the first we did was driven by client demand.”
And while investors also have appetite for longer-dated bonds, they do appreciate the diversity that the dim sum market has to offer.
“You have issuers that sell paper in the CNH space but not dollars,” said Gareth Ong, portfolio manager at Fullerton Fund Management, referring to Chinese names that are too small to issue benchmark-sized deals in the US dollar market. “If you want a diversified look of bonds for money, you have to go to CNH. That gives you better, diversified exposure into China.”