IFR Asia Dim Sum Bonds Roundtable 2012: Part 1

IFR Asia - Dim Sum Bonds roundtable
13 min read

Dim Sum Bonds Roundtable (Part 1)

IFR: Welcome. Has the Dim Sum bond lost some of its appeal? Over the last 18 months, Dim Sum bonds have been horrible

investments, haven’t they?

Angus Hui: I wouldn’t say that, but there have been some interesting developments. We’ve gone from expectations of 3%–4% appreciation a year ago to pretty much flat against the dollar. Clearly, some investors got into Dim Sum bonds purely on expectations of currency appreciation rather than for the bond side. So, certainly some of that at interest has been reduced. However, we also saw a huge divergence two years ago in the onshore and offshore bond yields, and now that’s pretty much gone. In some cases, corporates could find lower funding costs onshore and, in some, offshore yields were actually lower. That’s interesting, because the convergence was a big concern a couple of years ago. What we’ve found is that investors are looking at the low yields in other markets. Instead of getting 0.5% interest in another market, you might be able to buy good-quality investment-grade Dim Sum bonds with 3%–5% yields. I think that’s where the demand is coming from.

The currency part is also interesting. It’s no longer very bullish, but the volatility is much lower than other currencies. So, if an investor doesn’t like dollars and is looking for something less volatile, it can also serve that objective. There are more enquiries from institutional investors outside Hong Kong, in Singapore and into other parts of the world. That’s quite different from where we were two years ago.

IFR: Do you still have Dim Sum in your funds?

Angus Hui: We have a dedicated fixed-income fund that invests solely in renminbi, but I also have a portfolio that actually invests overall in credit, or fixed-income. Two years ago, for credit, we pretty much only bought dollars and, right now, we see opportunities in local currencies. Renminbi is one of the larger ones. In some cases, we have 5%–10% of Dim Sum bonds in the Asian fixed-income portfolio. The liquidity of renminbi corporate paper is arguably better than most of the other corporate markets in Asia. So, we manage to move around and get a good diversification from where we were in the past. The currency potential is a bonus. At the end of the day, it’s a more stable market.

John Ho: At one point, we were almost the first one to issue Dim Sum as we had this idea back in 2008—09. At that time, we didn’t do it because there was no benefit. We could get much cheaper funding in other currencies, such as Hong Kong dollars. More importantly, at that time there wasn’t any mechanism to allow you to take that money into China. So, we held back and Hopewell was the first one. We have since done two renminbi issues. The first, early last year, was really good timing. We managed to issue a five-year Dim Sum bond, originally earmarked for Rmb500m, but the response was good, we increased it to Rmb1bn. The cost was fantastic – all-in, it was around 1.5%; without fees, it was only about 1.4%. That was all about timing. When we did it again early this year, the cost had obviously increased substantially. We managed about Rmb300m, but the cost had almost doubled – we had to pay about 2.6%.

So, really, the renminbi has lost some of its attractiveness and, with the mechanism, I can now borrow Hong Kong dollars, US dollars, and still have the money channelled back into China. To some extent, the attractiveness is not there anymore.

Michael Lam: With respect to CNH, we were probably one of the very first to come out and support the market. We did one of the largest deals in 2011 January for a Chinese SOE. Renminbi liquidity now is actually very, very tight. I was looking at a private placement last week by one of the Chinese banks. For a one-year CNH private placement, the cost was 3.25%. A one-year US-dollar placement for the same bank is about 1%. So, the negative basis is 200-odd basis points, which, undoubtedly, has caused some issuers to think twice before they issue another renminbi transaction. Only when the liquidity pool becomes much larger will we see the issuers becoming more mature and more frequent. Rather than looking at it for a one-off low cost, it should become something more longer term. I’m coming to this market every year because I have renminbi liquidity and I want to keep my name here as part of my broader funding strategy. It will take some time and it probably needs full capital control to be relieved before that happens.

Gina Tang: Issuers are still opportunistic, but we’re seeing a more balanced development, with more international issuers. Recently, some financial institutions have issued to swap back to their home currency – dollars or euros. We also have Chinese companies still coming to the market.

IFR: Does it still make sense for them?

Gina Tang: Some policy banks, like CDB, for instance, have been consistent issuers in Hong Kong each year since 2007. They are the core supporters of the market, and they have extended maturities out to 20 years. The Chinese Government is very focused on the internationalisation of the currency and having an active offshore bond market will be a key part of that initiative. After rapid growth last year, it’s actually a healthier development. It’s good to have some consolidation.

After rapid growth last year, it’s actually a healthier development. It’s good to have some consolidation.

IFR: Have the rating agencies noticed a decline in the number of people approaching the market?

Ivan Chung: Of course, in the short term, it’s not so positive, but, from our perspective, it is actually encouraging. People didn’t care about the credit risk 12 months ago. They looked at the currency upside. A number of investors shied away from the market because they didn’t think the yields compensated for the risk. Now, there are more conventional institutional investors looking at this market because credit risk is becoming a more important factor, even though there may be limited upside in the currency. We see investors putting more emphasis on the credit risks, the ratings and the secondary market liquidity, and that will form a stronger foundation for sustainable development in this market. If you solely rely on FX, I don’t think a fixed-income market will be sustainable.

“After rapid growth last year, it’s actually a healthier development. It’s good to have some consolidation.”

IFR: Given that the market did develop very fast, are all the benchmarks already there?

Michael Lam: I think, largely, yes. In this market, we’re not lacking in reference points for any particular transaction. People can assess the pricing. That’s not the market’s biggest problem. If you’re look at how it’s developed, the biggest problem is low liquidity. There’s a general lack of hedging instruments. So, for an investor like Angus, he can have a positive view on a particular credit, but, unless you have a positive view on the currency, it’s a big leap of faith to lock up money for five years unhedged, or not hedged in a sizable way. The instrument itself is also important. Most transactions are Rmb500m–Rmb1bn in size. If you think about early last year when the game was synthetic renminbi, those trades were US$500m–$1bn equivalent. Those were big liquid trades that an investor can dip in and out of whenever they like. The order book for Sinochem in January 2011 was among the better ones. It was extremely diversified, with decent ticket sizes, and not too clustered around one type of investor. As the market moved on in 2011, most of the orders were from private banks and, naturally, those investors were looking at currency upside. As that expectation came down, all trading stopped completely.

Angus Hui: I don’t believe that the offshore renminbi market has cooled down that much. Certainly, two years ago, the currency angle was the big issue, but, since then, it has actually come quite a long way. The yield curve has gradually developed, the policy banks have established a routine, the onshore-offshore convergence has been gradually happening, you see more rated issuers, and there are more central banks that are looking to invest. It’s just more diversified than it was in the beginning.

I think, liquidity-wise, I agree with Michael that, since 2011, it has got significantly lower, but, if you look at the growth of the pure corporate market over the last two years, I would actually say liquidity has been far, far better than in most other markets. There is still room to improve; the market size is still small, but, overall, it has actually gone in quite an orderly manner. For example, there are the recent developments with Taiwan assigning a clearing bank and also more renminbi deposits flowing into other parts of the world. All these developments are quite gradual, but, if you look at all these small pieces together, I think the market is developing quite nicely rather than slowing. Since you start at zero, every move is exponential growth. So, from a percentage point of view, growth has slowed, but isn’t healthy to grow at four or five times a year. It’s more balanced.

IFR Asia Dim Sum Bonds Roundtable 2012: Part 1

IFR: Some of these early deals are down at 60–70 cents on the dollar. Is there a credit quality problem in Dim Sum?

Chris Lee: We don’t know because we don’t rate them. I agree with Ivan’s point that the market is now more rational, but a lot of the standard practices have not been adopted. For example, proper covenants, better information disclosure and transparency are still missing.

“In the pure corporate market, liquidity has been far, far better than in most other markets.”

IFR: Is that why issues haven’t been rated, then – because issuers may not get the rating that they want?

Chris Lee: Well, you also have a very different investor base. Angus mentioned some of the traditional investors that are starting to look at CNH. I know some of the other fund houses, for example, take a much more cautious approach because they do not understand these credits, and they don’t have the resources to do the research on these credits. So, they’re shying away. They want to see how this market develops and they want to see more of the standard practices that you’d expect in the US-dollar market. It’s a chicken-and-egg situation.

Angus Hui: With regard to the ratings, it’s quite interesting. We do find that rated transactions tend to be more liquid, and more supported by the market, which is consistent with what we observe with rated and non-rated issuers. As investors, we like bonds to be rated, have good liquidity and this is a good way to develop the market. However, at the same time, we do find there are times when the deal is not rated and a lot of people don’t look at it, and there could be an interesting opportunity in the sense that some of these bonds are mispriced.

IFR: So, more ratings would remove that pricing mismatch?

Angus Hui: That should be the trend. As we’ve seen in the dollar market, where most deals are rated, there are some that aren’t rated for whatever reason that could offer some interesting opportunities.

Dim Sum Bonds Roundtable (Part 1)
IFR Asia Dim Sum Bonds Roundtable 2012: Part 1
IFR Asia Dim Sum Bonds Roundtable 2012: Part 1