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Issuance of Dim Sum bonds focuses on credit quality
By Fitch Ratings |
November 2, 2012, Friday
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Print Edition
Print Edition
ISSUANCE of offshore Chinese yuan bonds, known as "Dim Sum" bonds, slowed by 55 percent year-on-year over the first 10 months of 2012, as potential appreciation of the yuan is no longer a strong enough argument in itself to convince investors to buy offshore yuan bonds. Meanwhile, the proportion of entities issuing offshore yuan 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.
Issuance of 68.8 billion yuan (US$11 billion) in offshore yuan bonds out of Hong Kong between January and October is well below the 153.5 billion yuan in the corresponding period of 2011, and implies that total issuance in 2012 will struggle to reach half of 2011's 174.1 billion yuan. So far in 2012, only 39 entities have issued Dim Sum bonds, versus 99 in 2011 and 20 in 2010. Issuance of offshore yuan bonds fell to 19.6 billion yuan in the third quarter of this year from 38.8 billion yuan in the second quarter.
A closer look at the data reveals that Chinese entities are largely responsible for the slowdown, as opposed to multinational corporations.
Total issuance value by Chinese corporations over the January-October period decelerated by 62 percent to 51.5 billion yuan in 2012 from 134.9 billion yuan in 2011. By way of contrast, total issuance value by non-Chinese companies over the same period slowed by only 6 percent to 17.3 billion yuan compared with 18.6 billion yuan. In terms of issuing entities, Chinese corporates came down to 18 from 58, whereas foreign multinational companies 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 offshore yuan bonds has risen to over 5 percent, compared with under 4 percent in 2011. In contrast, the cost for the average Chinese non-financial corporate to issue onshore bonds has remained at around 6 percent.
The data also suggests that it has become difficult during 2012 to issue Dim Sum without an international rating. During January-October 2011, only 47 or 17 percent of the total 280 offshore yuan bond deals were rated by an international rating agency. However, this ratio rose to 72 percent for the same period in 2012, with 39 internationally rated issues out of 54.
In particular, the ratio of Dim Sum bonds issued by Chinese entities with an international rating rose to 56 percent during the first 10 months of 2012 from just 7.5 percent in the same period in 2011.
Fitch believes the Dim Sum bond market remains in a nascent stage, with significant growth potential over the medium to long term. 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. 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 offshore yuan bond issues.
The article first appeared on the Fitch Wire credit market commentary page. All opinions expressed are those of Fitch Ratings.
Issuance of 68.8 billion yuan (US$11 billion) in offshore yuan bonds out of Hong Kong between January and October is well below the 153.5 billion yuan in the corresponding period of 2011, and implies that total issuance in 2012 will struggle to reach half of 2011's 174.1 billion yuan. So far in 2012, only 39 entities have issued Dim Sum bonds, versus 99 in 2011 and 20 in 2010. Issuance of offshore yuan bonds fell to 19.6 billion yuan in the third quarter of this year from 38.8 billion yuan in the second quarter.
A closer look at the data reveals that Chinese entities are largely responsible for the slowdown, as opposed to multinational corporations.
Total issuance value by Chinese corporations over the January-October period decelerated by 62 percent to 51.5 billion yuan in 2012 from 134.9 billion yuan in 2011. By way of contrast, total issuance value by non-Chinese companies over the same period slowed by only 6 percent to 17.3 billion yuan compared with 18.6 billion yuan. In terms of issuing entities, Chinese corporates came down to 18 from 58, whereas foreign multinational companies 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 offshore yuan bonds has risen to over 5 percent, compared with under 4 percent in 2011. In contrast, the cost for the average Chinese non-financial corporate to issue onshore bonds has remained at around 6 percent.
The data also suggests that it has become difficult during 2012 to issue Dim Sum without an international rating. During January-October 2011, only 47 or 17 percent of the total 280 offshore yuan bond deals were rated by an international rating agency. However, this ratio rose to 72 percent for the same period in 2012, with 39 internationally rated issues out of 54.
In particular, the ratio of Dim Sum bonds issued by Chinese entities with an international rating rose to 56 percent during the first 10 months of 2012 from just 7.5 percent in the same period in 2011.
Fitch believes the Dim Sum bond market remains in a nascent stage, with significant growth potential over the medium to long term. 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. 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 offshore yuan bond issues.
The article first appeared on the Fitch Wire credit market commentary page. All opinions expressed are those of Fitch Ratings.
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