High-yield dim sum is back ... but investors want pandas

An Indian issuer breaks a long drought in the high-yield offshore renminbi market. But it is onshore panda bonds that are getting investors excited.

The moribund offshore renminbi bond market got a shot in the arm on Thursday, with the arrival of its first high-yield deal in some 18 months. But investors with a craving for so-called dim sum bonds may be disappointed – panda bonds are set to devour all in their path.

IL&FS, an Indian roads and infrastructure firm, Rmb900 million ($138 million) from an upsized three-year dim-sum bond on Wednesday. On the face of it, that should give cause for optimism that the dim sum market can revive.

Yet foreign investors and bankers remain cautious on the prospects for meaningful recovery in the dim-sum market in the near term. While dim sum makes sense to IL&FS – which needs the money offshore to refinance an existing Rmb650 million note that matures in April – many non-Chinese issuers, including sovereigns, are lining up to issue renminbi bonds onshore.

As David Liao, president and chief executive officer of HSBC Bank China, put it last year: "There is a huge interest in raising money in the onshore China market and the potential of the panda market is plentiful."

Why are panda bonds, which China first allowed in 2015, so attractive? Well, at $9 trillion, China's bond market is now the world's third largest, offering issuers abundant liquidity; what's more, overseas investors are not locked out – they can access the market through China's Bond Connect link with Hong Kong.

And optimism is growing that China, which is keen to promote the panda bond market as part of its efforts to internationalise the renminbi, will cut away at some of the complex regulatory requirements surrounding onshore bond issues.

David Yim, a China-focused debt marker veteran at Standard Chartered, said he expected new guidelines on the panda bond market in the coming weeks, as Beijing pledges to further open financial market to overseas issuers and investors.

“The market expects the Chinese regulators will provide more clarity in terms of the approval process and issuance guideline, giving a higher level of certainty to potential issuers,” Yim told FinanceAsia. “On the other hands, foreign investors want to start off with some international names they are familiar with.”

And a healthy pipeline of likely issuers means investors will have plenty of choice.

Countries like Turkey, Russia and the Philippines say they’re planning to sell their first renminbi bonds onshore this year, while Japanese lenders Bank of Tokyo-Mitsubishi UFJ and Mizuho Bank also said they had received quotas to sell panda notes.

That growing interest also explains why issuance of dim-sum bonds by governments and corporates has dropped significantly in the past three years.

Sales of offshore renminbi bonds dropped to $3.1 billion last year, down from $9 billion in 2016 and $17.9 billion the previous year, Dealogic data shows. Issuance reached a record $33.4 billion in 2014, and has declined annually since.

Both reflected, in part, uncertainty over the strength of the renminbi, after its dramatic devaluation in August 2015. Indeed panda bond issuance also dropped to $7.8 billion last year, down from $16.7 billion in 2016, Dealogic data shows.

One reason panda bonds suffered far less than dim sum bonds was the introduction in July of the long-awaited Bond Connect scheme, allowing them to trade China-listed bonds without setting up an onshore account. Foreign investors held Rmb1.1 trillion of onshore bonds as of September, up from Rmb891 billion in June, offical data shows.

Although a pick up over the quarter, overall foreign participation in the domestic market remains fairly low. Foreign investors account for less than 2% of total outstanding onshore bonds – suggesting plenty of scope for growth.

Why IL&FS was an exception

In the case of IL&FS, however, heading to the panda market would have involved waiting for approval from Chinese regulators. Meanwhile Beijing has yet to clarify whether money raised in a panda bond issue can be taken offshore or must be used for onshore purposes.

 “For IL&FS, the dim-sum bond sale helps the company refinance its outstanding bond maturing in April,” a senior banker running the bond told FinanceAsia. “The overall cost of funding in the onshore market could be cheaper, but issuing panda bonds requires layers of regulatory approvals and it is unclear if the issuer can move the money raised onshore for general corporate purposes offshore.”

In the IL&FS deal, the unrated issuer garnered Rmb2.2 billion of orders at peak level, before settling at Rmb2 billion, according to bankers running the deal.

To be sure, IL&FS won't be the only borrower facing similar circumstances. And other concerns linger, including the fact China recognises only its own accounting standards and those of Hong Kong and Europe, not US standards.

But it seems likely dim sum bonds will be in the shadow of the panda.

“The dim-sum bond has become an asset class for investors who cannot easily access the onshore bond market or are not eligible to express their currency views," Jean-Charles Sambor, deputy head of emerging markets debt at BNP Paribas Asset Management in London, told FinanceAsia.

“The dim-sum market can be a channel for investors without taking the onshore settlement issues, but the landscape has changed due to the introduction of Bond Connect.”

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