Dim Sum bond issuance slows amid headwinds
01 November 2012
News, Asia, China, Hong Kong
By Asia Asset Management
Issuance of offshore Chinese yuan (CNH) bonds, known as ‘dim sum’ bonds, slowed by 55% year-on-year over the first ten months of 2012, as potential appreciation of the RMB is no longer a strong enough argument in itself to convince investors to buy dim sum bonds, according to a report from Fitch Ratings published on Wednesday (October 31). At the same time, the proportion of entities issuing dim sum bonds with an international rating has increased substantially – indicating that credit fundamentals, including covenant protection and transparency, are now playing a much more significant role.
The issuance of 68.8 billion RMB (US$11.03 billion) in dim sum bonds out of Hong Kong between January and October is well below the 153.5 billion RMB from the corresponding period in 2011, and implies that total issuance in 2012 will struggle to reach half of 2011's 174.1billion RMB. So far in 2012, only 39 entities have issued dim sum bonds, versus 99 in 2011 and 20 in 2010. Issuance of the bonds fell to 19.6 billion RMB in Q312 from 38.8 billion RMB in Q2 and 9.2 billion RMB in Q1.
A closer look at the data reveals that Chinese entities are largely responsible for the slowdown, as opposed to multi-national corporations (MNCs). Total issuance value by Chinese corporations over the January to October period decelerated by 62% to 51.5 billion RMB in 2012 from 134.9 billion RMB in 2011. By way of contrast, total issuance value by non-Chinese MNCs over the same period slowed by only 6% to 17.3 billion RMB compared with 18.6 billion RMB. In terms of issuing entities, Chinese corporates came down to 18 from 58, whereas foreign MNCs fell to 21 from 28.
Higher coupon rates for Chinese issuers is another reason behind the lower dim sum issuance. The average coupon for Chinese non-financial corporates issuing dim sum has risen to over 5%, compared with under 4% in 2011. In contrast, the cost for the average Chinese non-financial corporate to issue onshore bonds has remained at around 6%.
The data also suggests that it has become difficult during 2012 to issue dim sum without an international rating. During January to October 2011, only 47 or 17% of the total 280 deals were rated by an international rating agency. However, this ratio rose dramatically to 72% for the same period in 2012, with 39 internationally rated issues out of 54. As such, the level of issuance by rated entities is down only slightly, while issuance by non-rated entities has virtually dried up – down to just 15 compared with 233 in 2011.
In particular, the ratio of dim sum bonds issued by Chinese entities with an international rating rose to 56% during the first ten months of 2012 from just 7.5% in the same period in 2011. But the proportion of MNC deals with international ratings was already high at 73% in 2011, and has increased further to 96% in 2012.
Fitch believes the dim sum bond market remains in a nascent stage, with significant growth potential over the medium to long term. For example, 2011's total dim sum issuance of US$27.6 billion compares with a total onshore RMB issuance of US$1.05 trillion. Key hurdles for many international investors to overcome are the need for greater operational disclosure and bondholder protection, together with the general lack of liquidity and scarcity of maturities longer than three years (only 32 issues in 2011, and only 11 so far in 2012). More frequent issuance of long-term dim sum debt by the Chinese government and its quasi-sovereign agencies (such as policy banks) would clearly help establish a deeper yield curve that can be used as a benchmark to price other CNH issues.
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