Why Trafigura embraced a private panda bond

The private route offers a new financing channel for foreign issuers to borrow from China's $9.5 trillion debt market.

When the commodities trading house Trafigura opted to sell its first-ever bond in China this week, it shunned the public market and instead selected a handful of investors to invest in its three-year panda bond.

The Rmb500 million ($78.6 million) bond sale, which was conducted via a private placement, rekindles interest in a so far rarely used funding channel for foreign companies and issuers looking to borrow from a subset of the $9.5 trillion Chinese debt market, the world's third-largest after the US and Japan. 

With a private transaction in China, the lead manager will typically reach out to a group of about 20 investors with some initial price guidance. After evaluating the credit fundamentals of the issuer and the potential pricing, investors will then, separately, submit their bids and indicate the size of the stakes they want to take.

In the Trafigura deal, the yield range on the bond was marketed at 6.1% to 6.7%, before fixing at 6.5%.

Among the advantages of raising funds through a private placement is that it helps an issuer avoid having to pull a deal in the event of lacklustre demand by giving the issuer and lead bank sufficient time to identify the right investor base before deciding on pricing and structure.

While small, the panda bond market -- renminbi-denominated debt issued by foreign entities -- is part of Beijing's long-term commitment to open up China's domestic capital markets and internationalise its currency, the renminbi.

Data from Dealogic shows issuers, mostly sovereign borrowers, have raised $4.6 billion from public panda bond offerings so far this year, compared with $7.7 billion for the entire last year.

And David Yim, head of debt capital markets for greater China and North Asia at Standard Chartered, expects more issuers, both corporate and sovereign/quasi-sovereign, to tap the panda bond market this year, especially if they have meaningful operations in China.

Whether some go via the private route or not remains to be seen, although Trafigura's success should yet encourage others.

To be sure, this is not the first time a foreign issuer has sold a private panda bond. Daimler AG, the German maker of Mercedes Benz cars, has previously done so too in December 2013.

The fact remains, though, that the private channel is still a small subset of the panda bond market.


For Trafigura, the private route provided it with greater certainty of execution given its relatively low corporate profile in China.

“Not being a household name in China, we need to take extra steps to ensure the success of our debut domestic bond debt issuance in China,” Laurent Christophe, global head of corporate finance at Trafigura, told FinanceAsia in a phone interview, explaining why he had chosen the private route over the public market.

“After speaking to our financial and legal advisors, a private offering was the most obvious route to follow as it fulfilled our objective to diversify our financing sources whilst limiting the risk of execution," the Geneva-based executive said.

“As a first-time issuer in the panda bond market, there were lots of local requirements for us to clear,” said Christophe, a former structured finance banker at Bank of America and BNP Paribas. “One important aspect was to explain to the regulatory authorities that some of the funds raised onshore will be used for offshore working capital requirements linked to the trade cycle of a commodity trader.”

The National Association of Financial Market Institutional Investors is a Chinese securities regulator backed by the country’s central bank, overseeing the country’s interbank bond market. It sets guidelines and industry standards for different bond products including credit-debt swaps.

“For the repatriation of funds, we held constructive discussions with the regulatory authorities for over two years to adjust the offering structure to get a nod from the regulators,” Christophe said, underscoring just how tricky it can be to gain regulatory approval to issue onshore bonds in China.

Trafigura’s newly raised bond proceeds will be used for its onshore financing needs only. The debut sale is part of the group's quota to issue up to Rmb2.35 billion in the onshore market.

“We have been doing business in China for over a decade, and we’re already the largest domestic player in metal trading in the country,” Christophe said.

“The Rmb500 million debt sale is our first batch; we will not rule out doing a public panda bond offering in the future,” he said, citing strong demand from onshore investors for its debut issue.

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