Issuers seeking to issue dim sum bonds are frustrated with investors and underwriters who are unable to set and deliver substantial price differentials between various credits.
The advantage of having a high credit rating is recognised in markets like the US and Europe, but issuers are struggling to get the same kind of treatment in the dim sum bond market, express panelists at Euromoney Conferences’ Global Offshore RMB Funding Forum’ held in Hong Kong on May 8.
“One of the key challenges for us is the credit differentiation and as a ‘AAA’-rated entity, we are always compared with lower rated entities,” said Sven Lautenschlaeger, international funding officer at L-Bank on the panel. “The advantage of having a high credit rating will benefit us in the US dollar and euro market but here [CNH bond market], it does not exist.”
For example, when the issuer talks to investors who are interested in short-dated renminbi paper – of one or two years – investors tend to use the yields quoted in the certificate of deposit (CD) market as a reference point.
But given L-Bank’s ‘AAA’ rating status – rated by Standard & Poor’s (S&P), Moody’s and Fitch – it is unwilling to pay the yield demanded by investors because it does not effectively reflect the difference in credit ratings.
“We are talking about ‘A’ or ‘AA’-rated banks. From an issuer’s perspective, I cannot pay a similar yield because that would give the wrong impression to the market of how we see our own credit,” said Lautenschlaeger. “At this stage, it even makes it difficult for an issuer like us to be active in the market.”
But this is likely to change as savvier international investors – who are more focused on the credit differentiation – become more open to investing in CNH products. They will contribute to the price discovery process of these instruments, adds Lautenschlaeger.
L-Bank issued its fourth dim sum bond in May 2012 – a two-year Rmb250 million (US$39.3 million) note that is its largest CNH-denominated deal to date. The bond priced at 2.25% saw interest from both investors in Asia and Europe.
While there are still ongoing concerns with the treatment of the pricing for different credit quality in the CNH bond market, panelists are confident that the recently announced CNH Hibor fixing due to take place in June will boost market transparency.
“The introduction of the CNH Hibor will have a significant influence on foreign issuers like ourselves on how we see the market,” said Lautenschlaeger. “We are starting to see the emergence of a more independent benchmark for the evaluation of credit risk. It’s not a risk free rate but you can get an idea of the credit quality of the curve.”
Rating agencies concur
Gary Lau, managing director for corporate finance group at Moody’s agrees that it is vital for pricing to reflect the underlying credit risk of both rated and unrated credit issuers, especially for the long-term development of the dim sum bond market. However, borrowers should only get a credit rating if it values the extra benefits it brings.
“Credit ratings will play an important role in setting the scene of the primary market as well as secondary market,” said. “But a rating should only be obtained when the issuers see the value of getting a credit rating. They should not be forced into getting a credit rating.”
Choon-Hong Tee, global head for CNH capital market products at Standard Chartered agrees: “For a broader development of the dim sum bond market, it’s definitely ideal to get a credit rating especially if the issuer is a repeat issuer.”
By obtaining an international credit rating from S&P or Moody’s, investors would be able to gauge whether issuers are complying with the covenants or not, highlight panelists. This will then again boost the profile of the renminbi and its role in capital markets.
“Insurance companies not only from Hong Kong but across the world will invest in CNH. But we need to wait for the size of rated portion to grow to a serious size before investors will put their money into the market,” said Ken Hu, chief investment officer, fixed income at Bank of China (Hong Kong) Asset Management.
Currently around 40% of total dim sum bonds issued in the Hong Kong market are rated, according to Moody’s Lau.