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Opinion: Now is the time to build a dim sum identity

27 Feb 2012

A flurry of activity in Hong Kong’s dim sum bond market suggests that conditions are ripe for borrowers after a sluggish end of 2011 – and now is the perfect time for new issuers to take the plunge.

Favourable market conditions such as FX basis swaps and improving CNH liquidity have set the stage for first-time issuers such as América Móvil and Laxess to make their first debt sales, while Emirates NDB is said to be close to an issue.

More should join this group because, as market insiders suggest, there is very little drawback to making a first-time CNH bond sale right now, if for no other reason than to create data points in anticipation for a more mature bond market.

Debt syndication sources have suggested that foreign corporates are intrigued by Hong Kong’s burgeoning CNH market but are still too timid to test the waters with a bond sale. They are unsure what to do with their CNH once acquired as there are still limited investment channels for the currency. While they want portfolio diversity, they are skittish of global market conditions taking addition turns for the worst.

However, waiting while they observe the landscape’s progression may lead to lost opportunities – getting in now while the going is good may be the best strategy, and will enable these issuers to take full advantage of other positive changes in the market as soon as they happen.

And the sooner corporates can prepare for this the better as change is already occurring. Regulators in both Beijing and Hong Kong have voiced their support in loosening capital controls to deepen the global CNH market, and debt syndication sources have estimated that CNH liquidity is increasing at about US$2 billion a day, approximately double what the market was experiencing six months ago. Just last week the People’s Bank of China (PBoC) released a report saying new channels for offshore renminbi inflows and outflows will be created in the coming years, which will support activities such as trade settlement.

Other favourable market conditions include competitive pricing. If a corporate is considering issuing a three-year bond in China's onshore market, the PBoC's interest rate is 6.65%. However, Baosteel was able to sell three-year bonds at 3.675% offshore. And with approximately Rmb600 billion (US$95 billion) worth of deposits sitting in Hong Kong banks, issuers can rely on a strong pipeline to sustain their raises. There are also arbitrage opportunities. Debt specialists tell Asiamoney PLUS that, one year ago, a three-year cross currency swap was trading at -0.5%. Now, a three-year on the NDS curve is trading at 1.3%, translating to an improvement of 180 basis points.

Some issuers have shown that taking the leap into dim sum isn’t such a daunting task, and these are the models that timid corporates should consider. It’s not uncommon to see corporates come to the CNH market to raise small amounts, predominantly to indicate that they’re looking for alternative funding, diversification, and that they support the market. For example, Unilever raised Rmb300 million in its dim sum issue, and British Petroleum only raised Rmb700 million. These are tiny amounts compared to the size of these companies’ earnings, but the issues have become iconic as the bonds show that these players want to be participants in the burgeoning market.

The upside here is that this positions them well for subsequent bond issues to keep up with the market’s growth. Mitsubishi UFJ Lease & Finance shows how important it is to create data points early. It made its first, Rmb200 million dim sum 2-year issue yielding 1.65% in March of last year. It now looks to build the beginnings of a yield curve by making a second, Rmb300 million 3-year sale, taking advantage of the favourable market conditions.

A final lure is that issuers now have more opportunity now to create a bespoke bond structures than before, with the option to issue slightly longer-dated bonds as opposed to the two-to-five-year options that have been traditionally available to the market. One debt syndicate source suggested that 60%-70% of CNH notes issued last year fell had tenors of less than five years, and while that will predominantly be the case still in 2012, investors have exhibited an appetite for longer-dated notes.

Despite global economic conditions casting a shadow on the worldwide debt market, multinational corporations should take heed of the bullish attitude toward the CNH market, and make their move before conditions change or the enticing market fosters crowding. Even if the full advantages of an issue aren’t yet apparent, it’s highly likely corporates will be thankful they took the plunge while the going was good.

27 Feb 2012