British Columbia tests appetite for "dim sum" bonds

Thu Dec 6, 2012 3:21pm EST

* B.C. gov't working with HSBC on potential yuan bond deal

* Officials on way to Hong Kong, Singapore for investor tour

* No deal yet; size and duration undetermined

By Claire Sibonney

TORONTO, Dec 6 (Reuters) - British Columbia is looking to sell "dim sum" bonds denominated in Chinese currency, a local official said, in what could be the first time a foreign provincial government has sampled the offshore debt market of the world's second largest economy.

The western Canadian province's treasury officials are on their way to Asia, with stops in Hong Kong and Singapore, to meet institutional investors and gauge appetite for B.C. bonds issued in the yuan currency, formally known as the renminbi.

"It reflects our desire to promote stronger relations between B.C., Canada and China and the potential for accessing a new source of global liquidity," Jamie Edwardson, director of communications for B.C.'s ministry of finance, said on Thursday.

Edwardson said the government has hired HSBC bankers to work on the deal.

He cautioned that the work was still exploratory and described the tour as a non-deal road show, designed to raise the west coast province's profile with overseas investors.

Strong growth in the offshore yuan bond market has been luring more global corporate issuers to tap the emerging market as China has stepped up efforts to open its capital markets and internationalize its currency.

REFLECTS STRONG ASIA LINKS

British Columbia has a large Chinese population, much of it based in and near the coastal city of Vancouver, and China is the province's second largest trading partner after the United States. B.C. exports more goods and commodities such as pulp to China than to any Canadian province.

The Globe and Mail newspaper, citing an unnamed source, said that if the "dim sum" bond deal goes through, the sale would raise a minimum of 500 million yuan or about $80 million. Edwardson declined to comment on the potential size of the deal.

Like most Canadian provinces and the federal government, British Columbia saw its budget deficit spike during the financial crisis and has looked abroad for capital.

About 18 percent of B.C.'s gross outstanding debt is issued in foreign currencies including U.S. dollars and euros, Edwardson said.

The government needs to borrow about C$7 billion ($7.08 billion) in the current fiscal year, ending March 31. So far, the ministry said it has borrowed more than C$5 billion.

The province has promised to balance its budget by 2014 by keeping tighter control on spending growth, increasing healthcare premiums and selling some government assets.

The government said last month its deficit for 2012-13 had grown to C$1.47 billion from the C$968 million projected in February.

The B.C. government has one of the strongest provincial credit profiles in Canada, equal to or just slightly below the top triple-A rating the federal government enjoys.

"As the first government to issue into this market, and one of the few AAA-rated issuers in the renminbi market, B.C. bonds should be attractive to investors looking for a safe place to invest," added Edwardson.

B.C.'s abundant natural resources, travel and leisure industries and its role as "Canada's gateway to Asia" have been a big support to its economy, though a cooling housing market, especially in Vancouver, has caused investors some concern.

Claudio Ferri, senior fixed income portfolio manager at State Street Global Advisors in Montreal, said the bonds would be positive in encouraging more trade between Canada and China. But he noted he is slightly underweight B.C. provincial bonds.

"If you have another downturn in the economy and globally, B.C. can get impacted. There's a double whammy play there in the sense that it can get hit from the downturn from the U.S. and the downturn that you're seeing coming out of China," said Ferri.

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