Since Beijing relaxed restrictions last summer on the types of entities that can issue bonds offshore denominated in the Chinese currency Renminbi, around $11 billion have been raised through the so called dim sum bond market in Hong Kong, according to data tracker Dealogic.
As the nascent market rapidly expands - Deutsche Bank AG expects it to reach RMB 200 billion or around $30 billion by the end of the year - investors’ appetite for risk has grown. This year, almost a dozen high yield RMB bond deals have come to market. Last year, there was only one, according to data provided by Dealogic. The market initially was dominated by companies such as China’s largest state-owned banks and blue chip multinationals including McDonald’s and Caterpillar.
“Investors are more eager to get exposure in the dim sum bond market,” says Paul Au, head of debt syndicate of UBS AG in Hong Kong. “You definitely see a growing number of different types of issuers in the market, both rated and unrated.”
Yet, investors are also demanding a wider risk premium as more companies are seeking to raise capital in the comparatively cheaper funding market. Last month, Pacific Andes Resources Development Limited, a Singapore-based frozen fish supplier, issued a three-year RMB 600 million bond. The unsecured high yield bond had a coupon of 6.5 percent, almost 100 basis points higher than the bond’s initial guidance. A number of companies were also forced to cut the size of their issuances or were unable to get a deal done, according to an investor who commented anonymously.
“As the pool of offshore bonds increases, investors are starting to be more concerned with the quality of the issuer and do not simply buy to get exposure to RMB,” says Scott Wehl, head of banking products Asia Pacific at UBS Wealth Management. “With such a change in investor attitude, issuers have to pay more to attract investors.”
To be sure, companies with solid credit profiles are still able to raise cheap funds. Last week, Hong Kong’s mass transit railway operator MTR Corporation raised RMB 1 billion, or $154 million, in a private placement. The two-year bond has a coupon of only 0.625 percent, one of the lowest yields to date for dim sum bonds.
The dichotomy of higher risk appetite and wider risk premium is expected to be accentuated in the future, observers say. That is because there are RMB 510 billion, or $70 billion, deposits in Hong Kong at the end of April, according to Hong Kong Monetary Authority. Deutsche Bank expects that number to reach one trillion RMB, or around $154 billion, by the end of the year.
The expanding capital pool will on one hand pressure investors to seek higher returns, and on the other increase competition on the supply side. As a result, the market will evolve toward a two-tier structure.
“Demand for dim sum bonds of multinationals is still very strong,” says Tanuj Khosla, a research analyst at 3 Degrees Asset Management, a $400 million-under-management asset management firm based in Singapore. “But investors are more careful now towards local Chinese companies, particularly in light of the recent negative headlines.”
