dim sum bonds

Weaker standards taking steam out of dim sum bonds

Many less well-known Chinese borrowers got away with giving inadequate information amid the huge demand, but more investor protection is needed for the offshore yuan market to develop further.

Poor disclosure and weak covenants are constraining demand for offshore renminbi bonds. The growth in new issuance is expected to slow to less than 100% this year, even though investors are hungry for exposure to China’s growth as an alternative to the uncertainty in developed markets, according to Fitch.

That would be considerably lower than the explosive growth last year, when dim sum issuance rose to $14 billion, up from $5.4 billion in 2010, according to Dealogic. However, that headless rush to renminbi assets led to a lowering of standards among some borrowers, as investors were willing to buy almost anything that was put in front of them.

“Many issuers just filed the minimum of what is required and release circulars with merely annual results and audited financial statements without much detailed information on their operations,” said Matt Jamieson, head of Asia-Pacific research in Fitch’s corporate group.

That is in sharp contrast to high-yield bond issuance in the US dollar market, where issuers “have a lot of explanatory detail on operations, including business strategy, profit margins and key targets for each major product category, which enable investors to understand the details of their businesses and the market in which they operate,” he said.

Covenants in the dollar market include cross-default clauses tying the issuing entity back to the cashflow generating entity, terms on preventing the borrower from using any of its assets for other debt obligations and restrictions on future borrowings, all of which are absent in some offering documents for dim sum bonds, according to Fitch.

The problem is most common among lesser-known, unrated Chinese corporate borrowers. “We are most concerned about the companies that haven’t got any international rating and have little information available,” said Jamieson.

Other types of borrowers, such as international companies with operations in China and global banks seeking renminbi to lend to customers, have offered better disclosure.

But with demand so strong, it is tempting for weaker borrowers to keep the offering process as quick and simple as possible. Getting a credit rating costs time and money. According to Fitch, which makes money from selling ratings to corporate borrowers, the process of getting a credit rating normally takes around four weeks and companies have to provide a lot of detailed information — yet there is always the chance that the end result will not match their expectations.

The problem of poor transparency is hardly unheard of in China. A wide range of entities, from listing companies to governments of all levels, have similar issues, although the country’s securities regulator has recently made unprecedented efforts to improve transparency in the primary equity market.

Despite the strong demand, dim sum bonds are still only available to a very limited investor base. There has been some liberalisation to allow Taiwanese investors to enter the market, but participation has mostly been in Hong Kong and Singapore so far. Improving covenants and disclosure will be key to widening the investor base to a broader range of buyers.

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