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Dim sum bond yields to stay firm

13 Jan 2012

Yields on offshore renminbi bonds will remain stable in 2012 thanks to robust investor demand in the face of a strong pipeline of deals, say analysts. Anita Davis reports.

Market observerssay the10China-based financial institutions authorised to raise up to Rmb25 billion (US$3.9 billion) in offshore renminbi, or so-called dim sum bonds in 2012 will be able to get their funding away without the need to entice investors with higher yields or stronger covenants.

This week China Development Bank (CDB) and Agricultural Development Bank of China (ADBC) opted to sell the bonds. This comes despite a drop off in volume of bond sales at the fourth quarter of 2011.

“Do they [the authorised banks] have to sweeten the deal? I don’t think so,” says one Hong Kong-based analyst, noting that the 10 recipients of the government approval are stable players with strong balance sheets. “You have to ask why these companies are issuing: either they are desperate for cash or it’s a showcase that the financial institution can come to issue. The latter means they aren’t desperate, they don’t have to pay up and they can afford to wait for the market to be good for funding.”

In the fourth quarter of 2011, dim sum bond issues fell 26% from the previous quarter, to just under US$3 billion, according to Dealogic. This is attributed to concerns that the renminbi will not appreciate against the dollar.

The diminished appetite has led yields to rise approximately 150 basis points over the last year, say Linan Liu, Asian rates strategist at Deutsche Bank. CNH bonds are currently offering an average coupon of 4% compared to 2.5% a year ago.

“Most buyers are looking for value and typically buy and hold,” she said. “This contrasts to the second half of 2010, when investors were scrambling for any bonds coming to the market.”

However Becky Liu, a credit strategist at HSBC, says that beating the competition is as good a reason as any to issue, if the issuer has no pressure.

“Although the quota has been approved, most issuers are in no hurry to come to the market right away, especially given current high borrowing costs on the back of high refinancing pressure of certificates of deposit,” she said.

HSBC research shows Rmb55.6 billion of certificates of deposit (CDs) will mature in 2012 equal to one-third of the outstanding CNH bond market, or 75% of total redemption of Rmb74.7 billion for the year. Of these, three-fourths are of CDs issued from Chinese banks’ Hong Kong subsidiaries.

“One of the factors that weigh on the market is the heavy redemption in particular maturing certificates of deposit from Chinese banks, amid a challenging environment,” HSBC’s Liu added.

This rolling over of debt notwithstanding, the dim sum bond market is expect to grow by 50% this year to Rmb350 million, according to Deutsche Bank estimates. This is because market observers believe that renminbi liquidity will expand to mirror the size of market.

This week China’s National Development and Reform Commission announced a list of 10 financial groups which could issue dim sum bonds in 2012.

The group largely consists of government-supported investment banks—including CDB, ADBC and the China units of Bank of East Asia and HSBC Holdings and Bank of Communications. They can raise up to Rmb4-6 billion each and this year apiece.

13 Jan 2012