Dim sum bonds: here today, gone tomorrow
China’s offshore renminbi bond market has made a strong start to the year, with two foreign issuers already selling dim sum notes. The signs for a robust 2018 are there but the market’s return to form will be contingent on more than just issuer interest.
Australia’s Westpac Banking Corp threw open the dim sum market last week when it sold a Rmb500m ($77m) three year bond. India’s IL&FS Transportation Networks quickly followed suit, sealing a Rmb900m 2021.
The offshore renminbi market could not have had a better beginning to the new year. The involvement of two foreign issuers within the first two weeks of January is a boon and will allow dim sums to build, and hopefully flourish, without hindrance from China's ever-watchful regulators. It is clear that for the dim sum market to survive in the long term, it needs to attract issuers from outside of the mainland that are looking at renminbi for more than just scoring political points with the Beijing government.
IL&FS’s sale was particularly notable as it was the first high yield dim sum in 16 months.
Last year, just 14 public offshore renminbi deals (including Formosa bonds, or RMB bonds issued in Taiwan) worth Rmb25.06bn were sold, according to GlobalRMB data. Three of those trades came from corporate issuers and none of them were sub-investment grade.
Needless to say, the dim sum market cannot be one just for investment grade credits, or the majority financial ones at that. Such a market would rule out many of Asia’s issuers and offer little yield — or appeal — to investors, putting the market on a road to nowhere.
IL&FS’s success could be the opening high yield issuers have been waiting for before they try a similar transaction. Such a knock-on effect could drive more demand from investors, attracted to the yield opportunities.
For dim sum, market conditions are everything. In 2017, only four offshore renminbi deals were publicly sold in the first half, while seven were sold in the last quarter. IL&FS first approached investors during a non-deal roadshow in September, but found little interest at the time. But by the end of September, the market began to shift in favour of the offshore market, as yields on onshore bonds crept higher than offshore as a result of the Chinese regulators’ deleveraging push. Appealing cross-currency swap rates also allowed issuers to grab cheaper deals than in dollars.
While many have said that onshore renminbi Panda bonds are affecting dim sum issuance, the market conditions are right for tables to turn. Last week, bankers on the IL&FS trade saw a 50bp-100bp advantage to issuing renminbi notes offshore versus a potential onshore outing. On Friday, Mitsubishi UFG Financial Group sold a Rmb1bn 5.3% 2021 onshore Panda bond, while Mizuho Bank sold a Rmb500m 5.3% 2021 Panda. In contrast, Westpac’s offshore 2021s offered a lower coupon of 4.35%. The Australian bank is rated Aa3/AA-, while MUFG is rated A1/A-/A and Mizuho A1/A-/A-.
Bankers on the dim sum trades also noted the accommodative swap rates for issuers to switch to dollars if they so wished. The swap rate was similarly cited as an appeal for dim sum issuers hitting the market late last year, many of which were dubbed opportunistic trades.
But it is not clear how long that attraction will last. The three year cross-currency swap rate was cited at 4.05% when Westpac priced, already higher than the sub-4% levels of last year.
A shift in onshore yields or cross-currency swap rates could quickly cool issuance. Sure, more issuers could take advantage of the opportunity now, but be ready for the interest to shift back to the onshore market — or away from renminbi as a funding currency altogether — just as fast.