It has been a quiet year for offshore renminbi (CNH) bonds, made less attractive by lower onshore funding costs and, until the end of May, a falling Rmb. According to Dealogic, Rmb16.4bn ($2.4bn) of CNH notes have been sold so far in 2017, of which only Rmb7.6bn were publicly syndicated deals. This marks a whopping 68% drop compared to the same period last year, when Rmb51.2bn of bonds were sold.
The decline is even more dramatic when compared to full year numbers for 2014 and 2015, when issuance hit Rmb205bn and Rmb110bn, respectively.
But five issuers have tapped the market with public deals worth Rmb4.9bn since the end of September. They came from a variety of backgrounds too. In addition to BOC Aviation, which is a regular in the market, there were two Canadian lenders in Royal Bank of Canada and the National Bank of Canada, German car maker BMW, and, most recently, Commonwealth Bank of Australia.
And as the renminbi stabilises, the time has come for those who have been sitting on the fence to hop off and into the primary market.
For starters, the cross-currency basis swap (CCS) curve has moved to favour those looking to swap renminbi proceeds into something else. Three year CCS dollar/CNH was quoted at 3.85% on Tuesday. That is a whole percentage point higher than where it was over one year ago, representing a 100bp improvement in the cost of funding over that time.
Liquidity has also improved given that year to date, some Rmb127bn of CNH bonds have matured. There is plenty more to come. Most dim sum bonds have been sold with two or three year maturities. Since issuance peaked in 2014 and the first half of 2015, even more bonds will be redeemed, and that cash recycled, in the coming months.
This was evident in a recent deal from Aa3/AA-/AA- rated Commonwealth Bank of Australia, which went into the dim sum market last week aiming to raise a modest Rmb500m, but ended up with a deal that was three times that size. That made it the issuer of the joint-largest dim sum bond to date, and the largest by a foreign entity.
Bank of China’s Johannesburg branch in April also snapped up Rmb1.5bn as part of the Chinese lender’s blockbuster four currency, six tranche $3.1bn-equivalent deal in support of the country’s Belt and Road Initiative.
In the secondary market, despite S&P’s recent downgrade of China’s sovereign rating, trading of CNH bonds is “overall stable with a good performance”, according to a report by Bank of China on its Credits Investment & Financing Environment Difference Index (BOC CIFED Index), which tracks the yield differentials between offshore and onshore renminbi bonds.
The dynamic between the onshore and offshore cost of funds has also shifted, according to the index. The index closed at 24.3 at the end of September, but between the beginning of 2015 and until May this year, it had been negative, meaning onshore yields were lower than offshore.
Such a shift makes dim sum bonds a more attractive funding instrument than domestic bonds for offshore subsidiaries of mainland corporates.
Dealogic data shows a further of Rmb110bn worth of dim sum bonds – most of which are public bonds – are coming due by end of 2018. For those with refinancing needs in the near term, the market is ripe for rolling the debt into new deals.
Others, such as BMW, which had never visited the public dim sum market before, should consider opportunistic diversification while conditions allow. That basis swap advantage will naturally erode as more new bonds need to be swapped back into other currencies.
A warm welcome from the buy-side is almost guaranteed for now, but issuers should note that, at least in the bond market, nothing lasts forever.