Friday, 19 July 2019

High hopes

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The CNH market is emerging as an alternative even to the booming US dollar high-yield bond market, with a flurry of new issues in April from China’s property sector.

A visitor takes a picture in front of Two IFC, Hong Kong's highest commercial building, on a sunny day in the SAR’s business Central district.

Source: Reuters/Bobby Yip

A visitor takes a picture in front of Two IFC, Hong Kong’s highest commercial building, on a sunny day in the SAR’s business Central district.

The offshore renminbi market, having sprung back to life after last year’s lull, has emerged as an attractive alternative for Chinese issuers at the lower reaches of the credit curve. While the US dollar market remains the dominant source of funding for Asia’s sub-investment-grade issuers, a flurry of new issues from China’s property sector is proving that the Dim Sum format is becoming competitive.

So far in 2013, 10 China high-yield property deals have emerged in renminbi, totalling Rmb16.2bn (US$2.6bn), with records set in both the number of deals and total raised in the CNH offshore market.

The China property sector has also been the richest source of Asian high-yield bonds in the offshore US dollar debt markets. However, companies that have tapped the Dim Sum pool have benefited from meaningful cost savings versus term funding in dollars without overloading their existing investor bases. With renminbi deposits again rising – and the currency appreciating – that development is set to continue.

Indeed, Rmb1.8bn of property supply came to the market in just one week in mid-May, via three-year deals from Powerlong Real Estate Holdings and Fantasia Holdings. A Hong Kong syndicate banker suggested, perhaps ironically, that this issuance represented the “top of the market” for high-yield CNH issuance. However, as long as the bid remains in place and issuers continue to find funding costs competitive after the basis swap back into US dollars, which, in the past few weeks, has tightened around 40bp at the three-year tenor point, further issuance is assured.

“Issuance has been driven by the advantageous pricing after swapping into US dollars and has been met with demand from investors, who see continued cash inflow in their CNH funds with expected renminbi appreciation in the medium term. While both factors remain in place, we are going to see more issuance from low-grade credits in the CNH market,” said Chao Li, head of Greater China bond syndicate at Standard Chartered in Hong Kong.

Fantasia issued its Dim Sum bonds at the equivalent of dollar Libor plus 608bp, or roughly 150bp inside its due 2017 dollar paper, while Powerlong did so at dollar Libor plus 770bp, through its blended US dollar curve, based on its 2015s and 2018s, which stood at Libor plus 945bp when the new issue priced.

This new source of business comes after the Dim Sum market last year failed to live up to the promise arising from the Rmb4.1bn of high-yield issuance in the third quarter of 2011. According to data from Thomson Reuters, only Rmb5.45bn of high-yield issues were completed in CNH last year, with none in the second quarter

The fall-off in issuance last year was the result of a modest decline in the renminbi against the US dollar, as well as a stagnation of CNH deposits in Hong Kong, the source of the bulk of Asian demand for CNH bonds. Since January, however, the CNH deposit base has increased to a record Rmb650bn, having held steady at Rmb550bn for most of last year.

A large proportion of this money sits in private bank accounts, a willing audience for the yield pick-up that the sub-IG bond product – with or without the rebates often offered to private banks as incentive to book primary paper.

Of Powerlong’s Rmb800m issue, 64% was allocated to PBs and, of Fantasia’s Rmb1bn trade, 39% went to same type of investors, while the optically attractive 7.875% and 9.5% coupons, undoubtedly, piqued the interest of customers looking to beat the meagre yields available on CNH time deposits or CDs.

This dynamic mimics that seen in Asia’s G3 market, where the PB bid is increasingly anchoring demand for low-grade issuance in the ongoing quest for yield. The good news for potential high-yield issuers is that investors are showing a willingness to embrace challenging debut credits – if returns are sufficiently attractive.

So, developer Golden Wheel Tiandi priced on April 17 a Rmb600m three-year CNH trade, marking its debut in the offshore public markets. It paid up for the privilege, printing the highest coupon for a property name in the CNH market at 11.25% – a level that represents true high-yield in a global market, where high-yield coupons fall more typically in the 5%–8% range and anything higher signals extremely challenging credits.

The next step for the CNH market, from an issuer’s point of view is to prove that it can deliver in the same size and tenor as the offshore US dollar market. That, however, may take some time, since the longest viable tenor available in Dim Sum is five years, with cross-currency swaps unavailable at longer tenors, and most of the CNH issuance concentrated at the three-year mark.

To see the digital version of this report, please click here.

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