November 4, 2016 / 9:05 AM / a year ago

National Bank of Canada in inaugural panda bond sale

HONG KONG, Nov 4 (Reuters) - National Bank of Canada (NBC) has issued a 3.5 billion yuan ($517.7 million) panda bond, the first North American financial institution to do so, after Beijing approved its 5 billion yuan bond programme in September.

Market participants say the yuan bond is unlikely to trigger a flurry of issuers to the market, however, unless borrowers require funding in the Chinese currency as the dollar, euro and yen are the currencies of choice for international companies.

Panda bonds, or yuan-denominated bonds sold by foreigners on the mainland, were first issued in 2005 but Canadian issuers have had little need for yuan funding until now.

“One of the real things is just nexus. Canadian banks have historically not been as big in the China sphere - panda bonds give you an onshore hedge, so it is really whether you need the RMB,” said Keith Pogson, a Hong Kong-based partner with EY.

The Canadian bank said in a statement issued late on Thursday, the 3-year bond was sold at a coupon of 3.05 percent via China Merchants Securities, Standard Chartered Bank (China) Limited, Agricultural Bank of China Limited, Industrial and Commercial Bank of China Limited and Bank of China.

That compares with the 1.5 percent the lender paid for a 3-year bond it sold in a $100 million issue in August.

NBC, Canada’s sixth-largest lender, has a AAA rating from China Chengxin International Credit Rating. International rating agency Fitch has rated the lender A-plus.

“Panda Bonds represent a new diversified funding source and will help us in supporting Canadian companies doing business in China and bilateral investment flows,” said Denis Girouard, executive vice-president at NBC.

Panda bond growth had until recently significantly lagged similar yuan bonds sold offshore, or so-called dim sum bonds, but the tide turned last year as issuers switched back to China’s onshore market in a bid to raise cheaper funds.

In the first nine months this year, panda bond issuance amounted to 84.2 billion yuan, compared with 89.4 billion yuan for dim sum bonds, statistics from Bank of China International showed.

Analysts say panda bond issuance will continue to close the gap with dim sum bond issuance in the near term because of a funding advantage in a liquidity-driven onshore market, and could ultimately overshadow the dim sum market.

Still, there is little chance panda bonds will start dominating debt capital markets, such as the debt products in G3 currencies.

“At this stage, panda bonds will not become mainstream quickly like the yankee bonds or the samurai bonds,” said Steve Wang, head of research at BOCI. “International companies with operation exposures to the Chinese market will continue to issue panda bonds opportunistically but that is a moving target.”

Foreign companies that operate in China will still depend on cheaper banking and international bond markets for finance.

“The approval process is not as flexible as they like, paperwork, including the accounting standard applied, is complicated and there are hurdles to move funds across borders - Panda bonds will take time to develop into a significant market segment in the international bond market,” he said.

$1 = 6.7618 Chinese yuan Reporting by Umesh Desai; Editing by Jacqueline Wong

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