Société Générale’s raised Rmb500m ($78.8m) from a two year bond last week, pricing the transaction almost half a point tighter than it might have done in the dollar market.
In doing so the French financial institution has given much needed hope to bank treasury teams and bond bankers that the dim sum market is finally on its way to becoming a genuine funding source alongside other alternative markets such as Australian dollars and Swiss francs.
SocGen priced the notes at 4.15%, 48bp tighter than the secondary prices of the French lender’s outstanding two year dollar bonds, after a big drop in the cost of swapping renminbi into dollars.
Unlike its first transaction in the dim sum market in April when the proceeds were used to help its subsidiary in China meet its funding needs, this time, SG swapped the proceeds into dollars.
SocGen’s success comes as the dim sum bond market posts strong growth figures. Issuance by entities from outside of China and Hong Kong has more than doubled to 40 from 19 just a year ago, while the total dollar volume rose 67% to $3.992bn during the same period, according to Dealogic.
But despite the impressive numbers and excitement around the SocGen deal, it is important that treasury teams and their coverage bankers do not get ahead of themselves. The fact remains that for offshore issuers to benefit from the favourable renminbi/dollar swap rate they depend on the cross-currency swap market itself, which is still in its infancy and therefore has limitations.
The size of the CNH cross-currency swap market is still too small to provide comfort for most offshore issuers, particularly those seeking to raise a large amount. While the average daily volume of transactions has grown steadily to around $200m from only $20m a year ago, it’s still too small to meet the funding needs of most offshore issuers.
The rates are also volatile and can easily move in the other direction from where SG swapped its renminbi funds, making it more expensive for offshore issuers to convert the proceeds into dollars. In the last two weeks alone, the rates have risen and fallen by 20bp, according to traders.
Another problem is the maturity in the cross-currency swap market. The longest maturity in the market is three years, limiting the ability of these borrowers to tap the longer end of the curve.
With global regulators pushing banks to term out their debt, the dim sum market is unlikely to feature heavily in banks’ funding plans until longer maturities can be regularly achieved.