| HONG KONG
HONG KONG Jan 23 A wave of bond sales from
Chinese firms in Hong Kong has led nervous investors to seek
higher yields to compensate for weak debt structures that offer
less protection against default.
Companies have rushed to raise relatively cheaper funds
offshore compared with the mainland where benchmark interest
rates have spiked recently on concerns over tight liquidity.
January is shaping up to be the second-biggest month for
issuance on record in the offshore "dim sum" market.
Riding on widespread consensus that China's yuan will lead
Asian currencies this year after a 3 percent rise against the
dollar in 2013, about 15 billion yuan ($2.48 billion) of debt
has been raised in the first half of the month.
That flood of sales has also washed up weak bond structures
on Hong Kong's shores.
This week, Ping An, China's No.2 issuer, issued
a 1.6 billion yuan bond which barely scraped past the finishing
line, while Powerlong, a property developer, had to
postpone its offering as investors demanded higher yields.
"The dim sum market is an issuer's dream," said Adam Mccabe,
head of Asian fixed income at Aberdeen Asset Management who
manages more than $5 billion in assets.
"If demand is in excess of supply, then there is going to be
some mispricing of risk and that is the problem with the dim sum
From its humble beginnings in July 2009, the dim sum market
has exploded with outstanding volume of more than half a
trillion yuan and maturities stretching out to 30 years.
Despite robust growth, the dim sum market is awash with
unrated paper and bonds carrying weak covenants as investors
seek leveraged bets on yuan appreciation and banks trapped with
excess deposits have nowhere else to go.
The percentage of rated bonds to total debt issued by
Greater China corporates was 47 percent in 2013, respectively,
according to Moody's. That compared with more than 80 percent
issuing in dollars, euros or yen, various estimates show.
Ratings and strong covenants offer protection to bond
investors either by preventing issuers from selling more senior
debt or spending excess cash unless bondholders' agree.
But compared with the stricter covenants in the
dollar-denominated high-yield debt, dim sum bonds usually do not
have stringent controls such as fixed charge coverage, more debt
incurrence and the scope of triggers are limited, said Ivan
Chung, a senior credit officer at Moody's Corporation in Hong
But as optimism over further yuan appreciation fades,
returns from dim sum bonds will reflect more of the underlying
credit risks, he said. And without adequate protection from
covenant package, investors will be more hesitant to invest in
high-yield issuance, he added.
Refinancing pressure and a widening yield gap between the
onshore and offshore markets may also accelerate that change.
More than half of the outstanding dim sum debt estimated at
more than 300 billion yuan will mature within the next 12
months, prompting some issuers to look at raising funds earlier
to avoid a possible liquidity squeeze.
The gap between the onshore and the offshore market has only
widened in recent months. One-year offshore treasury bonds yield
2.50 percent compared with nearly 3.8 percent onshore, according
to Thomson Reuters data.
China Shipping's latest bond this week may be a sign of
things to come for the dim sum market.
While the shipping company sold $500 million of five-year
debt, the order book was disappointing despite the bond having a
relatively stronger structure.
The bond had a standby letter of credit structure which
meant that in case of default, a bank would fork out money to
bond holders, a stronger structure compared with the usual one
of a parent company in onshore China backing its subsidiary
selling a dim sum bond.
Due to this very reason, SBLC-backed bonds have been popular
since 2012 but have seen a slowdown in issuance after reports
that Chinese regulators told banks to stop using that structure
on concerns that SBLCs should be used for trade financing rather
than offering bond guarantees.
($1 = 6.0513 Chinese yuan)
(Additional reporting by Nethelie Wong; Editing by Jacqueline