Companies looking to tap the offshore renminbi bond market to refinance maturing debt in this quarter will face a market increasingly wary of the Chinese currency, in the biggest test of investor appetite since issuance dropped off in 2015.
Bank of China International data shows that Rmb52.8bn (US$8.1bn) offshore renminbi bonds, or Dim Sum bonds, will mature in the second quarter, up 45% year on year and 55% quarter on quarter.
A handful of property companies are starting to trickle back into the Dim Sum bond market in Hong Kong, but rising default risks mean investors will be smaller in number and will ask for higher premiums, keeping borrowing costs high for some time.
“Our Dim Sum pipeline is gradually building up and we have several deals from Chinese names that are expected to be completed this month via private placements,” said a debt capital markets banker at a Chinese bank in Hong Kong.
PRC issuers of both renminbi and US dollar bonds offshore switched to raising funds onshore last year because of ample liquidity, a weaker Chinese currency and government efforts to allow easier access to its US$7trn onshore market.
However, at the same time, Beijing’s tighter foreign exchange curbs to staunch a sell-off in renminbi assets have hurt investor demand in the offshore market.
The exodus of firms to the onshore market last year led to a decline in annual primary Dim Sum issuance, the first since it was launched nearly a decade ago.
Tentatively dipping back, these renminbi-shy investors now want better yields on their Dim Sum bonds.
Meanwhile, Beijing’s cross-border curbs make it harder for issuers to use funds raised onshore to refinance offshore debt.
“Companies will have to rely mainly on the offshore market to refinance their existing Dim Sum bonds, though funding costs are cheaper onshore as Beijing is controlling fund outflows,” said Nathan Chow, an analyst at DBS in Hong Kong.
Refinancings
In April, China property developer Fantasia Holdings Group Ltd sold three-year offshore bonds of Rmb600m at 9.5% - highest in the primary market since October 2014 - to refinance debt.
Fantasia, a B+ credit to Standard & Poor’s, sold three-year Dim Sum bonds with a coupon of 7.875% in 2013. The bonds matures on May 27.
The company’s onshore subsidiary paid 7.29% in China for five-year money earlier this year.
Although Fantasia had raised some funds onshore, it could take months to move the money offshore and the cost would be high, said a debt capital market banker involved in the deal.
Property firms Yanlord Land Group and Powerlong Real Estate Holdings Ltd are among a clutch of others with Dim Sum bonds maturing this year.
Dim sum bonds could benefit from narrowing interest rates between offshore and onshore markets seen in recent months, BOCI analysts said in a report.
However, for now, most Dim Sum issues were likely to be only small private placements with just one or two investors due to weak demand for renminbi assets, bankers said.
Only Fantasia and the Republic of Hungary have publicly sold renminbi bonds in Hong Kong this year.
Bankers said delays over reforms, including the release of new rules for “Panda bonds” or renminbi-denominated bonds that foreigner sold on the mainland, could help demand for offshore issue.
The pointed out that proceeds of most Panda bonds sold so far were only used within China and it was difficult for an issuer to take proceeds out of the country.
Additional reporting by Ina Zhou from IFR
