Unrated corporates had it easy when tapping the offshore renminbi market back in 2010 and 2011 but circumstances have now changed. These issuers will find it difficult returning to refinance their bonds due to market maturity.
In the first two years of its existence, dim sum bond investors ignored credit consideration and piled into dim sum bonds due to the renminbi’s strong appreciation. Many of these early bonds were issued by unrated companies and had loose covenants.
As the market has matured and depreciation expectations have softened, investors are now more concerned with credit quality. This could make it difficult for corporates, especially unrated ones, to return to the offshore capital market to refinance maturing debt, note experts.
“The unrated names will be in a tricky situation. Although these names can still issue in the market, investors tend to put in a lot more scrutiny on these issuers,” said Augusto King, head of debt capital markets, Asia to Asiamoney PLUS in a telephone interview on February 8. “If they are unrated, they should expect that investors may avoid investing or even if investors would invest, the company has to allow them to do a lot more credit work.”
Investors are now more demanding on covenants to compensate for the additional risk that they would have to bear from holding unrated debt.
“What happened in the early days of the market development, investors rushed into transactions and paid less attention on covenants and structures of the deals offered," said King. "A lot of deals were done with no or light covenants and for some of these names to come again, investors would require covenants.”
Out of the total dim sum bonds that are maturing this year, around 34% or US$759 million are nonrated whereas 16% or US$354 million are high yield, according to Dealogic data. In 2014, 73% of total debt or US$6.4 billion are nonrated while 9% or US$783 million are high yield, according to Dealogic data.
“If they have a rating, it would be easier for them to refinance,” said Ivan Chung, senior credit analyst at Moody’s Investors Service to Asiamoney PLUS. “Those unrated names especially the private enterprises and some high yield qualities that they have a high gearing ratio, are small in operating scale, limited access to financing channels both onshore and offshore market, it would be more difficult for them.”
Another factor that could deter unrated names from returning to the dim sum bond market – apart from increasing level of investor scrutiny – is the rising cost of funding.
Back in 2010 and 2011, majority of offshore renminbi debt was priced within the 3% to 4% range regardless of the credit quality. However in recent months only investment grade names have been able to secure a pricing of that range. The pricing of high yield issuers, on the other hand, could reach as high as 9%, indicating that the yield pickup between credits can range between 200 basis points (bp) to 400bp.
“Now that appreciation expectations have been largely reduced, assuming other things being equal, investors will ask for a higher return. From that perspective if these corporates really want to refinance, they would have to pay a higher cost,” said Chung. “Improving the covenant structure would also mean higher costs for them. That will erode into their profitability.”
Corporates from specific industries are more likely to suffer than others. For example, Chinese industrial companies that have been experiencing shrinking profitability and dampening revenue growth because of slowing economic conditions and a decline in domestic exports could struggle to raise additional CNH financing.
“In fact a lot of these names that have done deals two or three years ago and are deemed non-investment grade or small-to-mid-sized companies that should not have come to the bond market in the first place,” said a head of debt capital markets to Asiamoney PLUS. “In fact, there’s a lot more liquidity in the market these days where a lot more banks can get hold of renminbi. These names should do syndicated loans and bilateral loans because they may not be at a level that is suitable for a capital market transaction.”
In separate news, the People’s Bank of China (PBoC) made ICBC the renminbi clearing bank in Singapore on February 8. This could pave the way for the start of an offshore deliverable market similar to the ones in Hong Kong and Taiwan.