Cross currency swap (CCS) rates between the US dollar and offshore renminbi, or CNH, currencies have yet again become favourable for international dim sum bond issuers looking to swap their CNH proceeds into US dollars, creating an opportunity for global names to tap the market after months of staying away.
Rates analysts say that earlier this year, around the time that Latin American and Russian banks BTG Pactual, Russian Agricultural Bank and Gazprombank tapped the dim sum market, USD/CNH swap rates were high, at around 1.9% for three-year CCS. Yet swap levels continued to drop through to early May to a low of 1.3% - or a 70 basis point (bp) decline. This was attributed to the strength of US dollar market as well as new regulation by the Hong Kong Monetary Authority, which removed the 20% cap on banks’ renminbi net open position on April 25.
The HKMA’s move increased liquidity in the CNH market and gave banks less motive to engage in the CCS market, leading rates to drop.
This has kept international issuers away from the market despite voicing interest in making repeat issues.
“When we issued our bond, we swapped the proceeds back into US dollars. With that pricing, we swapped slightly below our dollar curve, so that was very attractive,” a treasury official at a Latin American company which issued a dim sum earlier this year told Asiamoney PLUS in mid-May.
“The market is very volatile and the CNH window opened and shut relatively quickly, so soon after rates reverted back to become more expensive than issuing in dollars...The idea is issuing for diversifying our funding is great but costs are now more expensive than they were earlier in the year, so when the costs are flat or slightly cheaper and then we are more hesitant to tap the market again,” added the official.
However, following the State Administration of Foreign Exchange’s (Safe) newly implemented regulation that limits speculative inflows, as well as strains within the dollar market, which led Treasury yields to increase, CCS rates are rising once again. As of June 3, three-year CNH/USD swaps were at 1.88% - nearly a return to the levels at the start of the year.
Safe imposed restrictions on banks’ ability to short the US dollar on May 6 in an effort to control the flow of hot money into China. In the aftermath, banks with extra renminbi liquidity became more active in the CCS market, which has helped to drive up rates.
And even better news for potential global issuers is that rates are expected improve even more.
“Globally, there have been some strains in the dollar market in the past two weeks. This is coupled with sentiment that the renminbi’s appreciation is expected to slow down, and then Safe’s regulation which tightens onshore liquidity. This drives CCS up and makes the market more favourable for issuers looking to swap,” said Ju Wang, foreign exchange strategist at HSBC. “This is a trend that will likely continue for at least a little while, and CCS rates will go up even higher.”
This could mark a departure from the surfeit of China high yield names which have tapped the dim sum market in the second quarter, many keeping their proceeds in renminbi. This surplus of supply has exasperated investors keen for greater diversity.
Only in the past week have non-Chinese issuers such as National Australia Bank, Taiwan’s Uni-President and the World Bank’s IBRD begun tapping the dim sum market. This gave a boost to second quarter issuance: just three non-Chinese companies sold dim sum bonds in April and two issuers sold bonds in early May, according to Dealogic. But since May 27, five non-China names came to the market.
This contrasts the first quarter of 2013 when 19 non-Chinese issuers tapped the CNH bond market: nine in January, three in February – due to the Chinese New Year lull – and seven in March.
“These rates are quite good for any kinds of issuers who want to do swaps. Three-year swaps is just about at 2% and last week it was even higher. This is so much better than the 1.3% we saw a month ago, so definitely a good time to issues. You can expect to see some activity,” said one CNH-focused debt banker. “The dollar market is weaker and recent CNH deals have performed well in the secondary market. Yields are attractive and investors have appetite – this is basically what we were seeing earlier in the year, and there should be issuers who want to take advantage.”
However, global issuers eyeing the market may want to act quickly. Becky Liu, senior rates strategist at Standard Chartered, points out that the swap market is still relatively illiquid, and already CCS rates fell 10bp in the past week alone after recent dim sum issuers swapped their proceeds into dollars, depleting the market.
“There are a lot of issuers who can be waiting for a better window – which is quite possible as Safe’s rules have driven rates up higher - but over the past week rates have been moving up very aggressively,” she said, noting that three-year CCS rose from 1.79% on Friday to 1.98% by the week’s end, but [by June 3] swaps fell to 1.88%.
“I suspect this drop is because some recent issuers started doing swaps,” added Liu. “When there’s an opportunity, a lot of issuers will be taking advantage. It’s a good idea to look the opportunities and consider the direction which rates are going, so issuers can get in before the competition drains rates.”