* 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
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.
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
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
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
"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
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)