Can Dim Sum provide flavour for China high-yield?

Wed Aug 31, 2011 8:00am EDT

* Offshore yuan bond pricing driven by Chinese banks' appetite for local companies

* Sino-Forest Corp debacle provides further hammer blow to China high yield

* So-called Dim Sum issuance struggles to hit benchmark size, longer tenors

By Prakash Chakravarti

HONG KONG, Aug 31 (IFR) - If global investors continue to spurn Chinese high-yield credits the offshore yuan bond market in Hong Kong could become a beneficiary, cementing its rise as an alternative funding centre.

This would further emphasise the growing appeal of yuan funding in the territory at a time when monetary tightening in China is pushing borrowers offshore, as foreign investors' renewed risk aversion is keeping the G3 currency debt markets closed.

Industrial names from China have already taken a fair bit of hammering in secondary bond markets with yields on outstanding bonds widening significantly on the back of the Sino-Forest saga and the Moody's 'red flags' report.

West China Cement , which sold a $400 million five-year in January at a 7.50% yield, has dramatically underperformed since launch, currently yielding 10.69%. The Ba3/BB-/BB rated company (Moody's/S&P/Fitch) attracted the highest number of red flags (12) of any company in the Moody's report in July which addressed governance and accounting problems in dozens of Chinese companies.

"Sentiment in the high-yield market is very fragile. The latest developments relating to Sino-Forest do not bode well and the risk premium for high-yield credits, particularly those from China has gone up a notch," said one DCM banker in Hong Kong.

FACING DEFAULT?

Sino-Forest Corp , a Toronto-listed PRC forestry company has its back to the wall, following the resignation of its CEO, a halt to its shares trading and a ratings downgrade to junk after allegations of fraud first surfaced in early June.

Its bonds are trading at around 30 cents to a dollar in price terms suggesting the market expects a default.

Under such circumstances, and with the overhang of the financial crisis in Europe and the US, it is hardly surprising the Chinese high-yield market is shut - all of the $9.73 billion raised from 23 deals ( for an average size of $423 million) year-to-date was transacted in the first five months of 2011.

Meanwhile, the offshore yuan bond markets in Hong Kong, nick-named Dim Sum, present a different story. Even as volatile market conditions turned off the high yield dollar market spigot, Dim Sum bonds continue to be transacted.

Sub-investment grade or unrated Chinese borrowers have raised 25.93 billion ($4.06 billion) year-to-date from 26 offerings (representing an average size of $156 million), with 10.05 billion yuan coming in the past three months.

"The Dim Sum bond market is a natural outlet for weaker Chinese credits as the investor base is more varied than that for a dollar bond," said one high-yield origination banker in Hong Kong.

Chinese banks are the most important investor base in the Dim Sum market and they take a different view to PRC credits compared to investors in global markets.

"There is more divergence in views among investors in the Dim Sum market. The beauty or the ambiguity of this market is that a lot of the borrowers are unrated. In the dollar markets, ratings are necessary and therefore investors can more clearly determine what is black and white," said a debt syndicate banker.

New energy companies from China best reflect this dynamic. Earlier this month, Solargiga Energy , a maker of ingots and wafers for solar products, raised 300 million yuan through a three-year Dim Sum bond at 4.75 percent. Solargiga's deal is said to have been sold to less than a handful of PRC banks.

"It is amazing that a borrower like Solargiga can raise money at such rates. It is much smaller in size than GCL Poly Energy Holdings and LDK Solar and yet priced its bond 800bp inside the levels of LDK [in secondary]," said the high-yield origination banker.

In mid-February, LDK Solar, the world's largest producer of solar wafers, completed a 1.2 billion yuan three-year bond denominated in yuan, but settled in US dollars. The bond priced at a 10% yield.

Meanwhile, volatile market conditions have put paid to GCL Poly's plans for a debut dollar bond with the borrower still cooling its heels after completing investor meetings in mid-May.

"The Dim Sum bond market is still nascent and in some instances functions like a surrogate for China's bank market, which is willing and keen to take exposure to sub-investment grade or unrated credits," said another DCM banker in Hong Kong.

"However, getting a decent size and tenor is still a challenge even though pricing is quite attractive for these borrowers."

Indeed, in mid-July, China Shanshui Cement, rated BB/BB- (S&P/Fitch), raised 1.5 billion yuan from a three-year Dim Sum bond at a 6.5 percent yield, just weeks after it had completed a $400 million via a five-year non-call three at 8.5%.

The largest corporate Dim Sum bond this year was from Sinochem, which in January raised 3.5 billion yuan from a three-year offering, while the longest maturity achieved was on the 3 billion yuan five- and seven-year offering in early May for Singapore-listed Global Logistics Properties. (Reporting By Prakash Chakravarti; editing by Alex Chambers)

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