Eastern Europeans assault pandas

A new wave of panda bonds are expected in June as the first Eastern European and first non-investment grade issuer make final preparations to enter China's onshore market.
Pandas: Poland and Hungary get their skates on
Pandas: Poland and Hungary get their skates on

The Republics of Poland and Hungary are said to be in their final stages of preparation to launch debut panda bonds in June, marking a new stage of development for China's fast-growing onshore bond market. 

The two sovereigns will represent the first issuers from Central and Eastern Europe (CEE) and, in Hungary's case, the first non-investment grade transaction by a foreign issuer. 

Like all the sovereign panda issues in the pipeline, the two transactions are deeply symbolic on a number of levels. As part of its One Belt One Road (OBOR) policy, China has been developing links with the region through its 16+1 CEE framework, which was established in 2012 when Premier Wen Jiabo visited Poland.

Since then, many CEE countries have vied to become China's bridgehead to Western Europe, the OBOR's end point. The Polish city of Lotz, for example, will be linked to Chengdu by high-speed train, while China is also financing the development of a high-speed line between the Hungarian and Serbian capitals as part of the OBOR branch extending to the Mediterranean. 

Specialists said both nations are also keen to establish their Rmb credentials so they can become offshore financing centres as the currency further internationalises.

However, China's desire to mitigate Rmb outflows means both transactions are likely to be swapped back into euros. The final issue sizes are said to be still under discussion but, in line with other recent panda bonds, they will have three-year maturities - the furthest point of the curve, which has a liquid swap market. 

Bank of China has the mandate to lead both deals with HSBC joining it for A2/A-/BBB+ rated Poland's transaction. The Chinese bank also recently brought Hungary to the dim sum market. 

The Ba1/BB+/BB+ sovereign raised Rmb1 billion ($153.15 million) in late April from a three-year deal with a 6.25% coupon. 

The deal closed 2.5 times oversubscribed and hit a sweet spot in a market that has been back on a roll. The HSM iBoxx Offshore Index returned 1.79% in March, one of its best months in a long time and the momentum continued in April, with the index rising a further 0.61%.

The onshore/offshore differential is also narrowing. At the three-year point of the curve it stood at 72bp at the end of April, compared to 113bp in March.

A supply/demand imbalance also appears to be developing given BOCI estimates of Rmb528 billion redemptions in the second quarter, up 45% year-on-year and 55% quarter-on-quarter.

Adding to the overall impetus, Hungary's dim sum deal has traded well over the past few weeks. On Friday, one broker was quoting it at a mid-price of 102.8% to yield 5.2%. 

This positive momentum fits in with the overall direction of its credit curve, which has been on a tightening bias for the past year. Its $2 billion March 2024 deal was yielding 3.659% on Friday, up from 4.42% last June.

When Hungary’s dim sum deal came to market some bankers suggested the sovereign opted to go offshore because onshore investors would not be receptive to a high yield deal even though many of the country's domestic bond issuers would be deep into high yield territory were they to be rated by international standards.

However, bond specialists said this was not the rationale for the move. Instead the deal has been used to set a good marker for the sovereign to do a quick turnaround and venture onshore. 

Here there are also signs that growing instances of defaults (Shanxi Huayu, China Railway Materials and Dongbei Special Steel in April alone) are encouraging onshore investors to pay more attention to credit fundamentals. In a recent research report, BOCI also noted that the spread differential between single-A and triple A-rated rated debt in the onshore market widened from 19bp to 63bp over the course of April. 

The last panda bond issue came from Canada's AAA-rated Province of British Columbia in late January, also led by Bank of China and HSBC. This Rmb3 billion three-year transaction was priced with a coupon of 2.95% and set a ratings precedent that other sovereigns are now following. 

"The panda bond regulations stipulate that issuers need one domestic credit rating," commented one specialist. "However, the People's Bank of China (PBoC) granted an exemption to British Columbia and it's generally now accepted other sovereigns can follow this template."

However, the same cannot be said for surpranational issuers such as the International Finance Corp and Asian Development Bank, which are both keen to come back to a market they opened in the mid-noughties. Specialists said they are struggling with a second restriction, which requires the preparation of Chinese accounts. 

Bankers have long been hoping for a new set of guidelines, which will lead to a speedier approval process and enable them to standardise documentation. They also hope the central bank will scrap restrictions on use of proceeds, the major drawback where foreign corporates are concerned.

The lengthy time it takes to get the documentation ready is the main reason why there have been lulls since the market re-opened last year when Bank of China, HSBC, Standard Chartered and the Republic of Korea all executed their first deals. 

However, with Poland and Hungary almost ready to press the button, it seems some new momentum is building at last. 

And last week Volkswagen highlighted a second important trend in the onshore market's development when it raised Rmb2 billion on May 12. The three-year deal carries a 3.6% coupon and an AA+ domestic rating.

But it does not classify as a panda since it was issued by the German company's Chinese operating entity. The huge number of multi-national corporations with businesses to fund in China make this a fruitful source of future business for international investment banks hoping to break into China's domestic bond markets. 

Joint lead managers were Morgan Stanley Huaxin and Bank of China. 

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