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CORRECTED-CNH Tracker-Credit ratings elbowed aside in hunger for yield
May 9, 2013 / 4:20 AM / 4 years ago

CORRECTED-CNH Tracker-Credit ratings elbowed aside in hunger for yield

(Corrects billion to million in 2nd graf)
    By Saikat Chatterjee
    HONG KONG, May 9 (Reuters) - When Sven Lautenschlager,
international funding officer at Germany's L-Bank, was talking
to potential investors on selling shorter-dated bonds in the
offshore yuan market, he was surprised to find they were asking
him to pay at least similar yields offered by bank paper.
    Even though the state bank of Baden-Wuerttemberg has sold
four yuan bonds amounting to nearly 700 million yuan ($114
million) in the last two years, he was unwilling to do so
because he said it didn't reflect the difference in credit
ratings between an AAA-rated lender such as L-Bank and some of
the lower-rated bank paper floating in the secondary market. 
    "From an issuer's perspective we are not willing to pay that
yield as that gives a wrong impression to our investors on how
we see our credit rating in the market and this lack of
differentiating between credits remains one of the key
challenges for this market going forward," Lautenschlager said
at a euromoney conference this week.
    Calls for credit ratings to more adequately reflect the
underlying risks in the three-year old "dim sum" market have
been drowned out by bulging order books from Asian private banks
and funds who have displayed their better knowledge of these
issuers as an offset to credit ratings. 
    When the market began in late 2010, investors were drawn to
the prospects of investing in an asset class denominated in a
currency that was expected to strengthen at such a healthy rate
that investors began to reach for funky products like synthetic
products in no time.
    When those bets were upended in a market selloff in late
2011, investors began to pay more attention to credit risk in
these bonds and the demand for ratings grew, but those calls
remained far more prevalent among overseas issuers than from
mainland Chinese names who tapped into strong demand for yuan
assets from Asian banks and funds.
    Indeed, Gary Lau, managing director of corporate finance at
Moody's Investor Services in Hong Kong, estimates that only a
third of the outstanding bonds in the CNH markets are currently
rated compared to an overwhelming majority of bonds sold in U.S.
dollars. That proportion in favour of unrated bonds grows more
when it comes to the Chinese sector.
    Investor demand for yuan bonds remains robust especially
because the bulk of the demand for these bonds emerge from
investors in Hong Kong and Singapore which makes this market,
"unique and technically strong," according to Jon Pratt, the
head of Asia debt capital syndicate at Barclays Capital.
    Indeed, the first quarter of 2013 saw the second biggest
issuance of yuan bonds on record, according to Thomson Reuters
data. The total volume of issuance this year may be a record
even though large institutional investors like central banks and
global pension funds are noticeable in their absence.
    The growing demand for CNH bonds also emerges from the
strengthening yuan, the launch of more yuan funds and regulatory
changes such as establishing a benchmark for issuers and the
likelihood for more capital market reforms.
    The yuan has been setting near-daily record highs in recent
sessions. 
    So while L-Bank may understandably feel miffed about the
absence of a credit rating differential in the dim sum market,
it may have to wait for a while before investors start looking
at that barometer while buying bonds.

    WEEK IN REVIEW:
    * Eddie Ye, deputy chief executive at the Hong Kong Monetary
Authority, said this week that increased cooperation between
different offshore yuan markets is conducive to the growth of
the CNH markets. To that end, Hong Kong has lengthened the
operating hours of the RMB Real Time Gross Settlement systems to
facilitate trade settlement.
    * On the heels of Hong Kong regulators establishing a
benchmark reference rate in the CNH markets, HSBC recently
executed its first CNH HIBOR interest rate swap for a notional
value of 100 million yuan for a one year tenor and a forward
start in July. A fixed rate of 2.64 percent was swamped against
3-month CNH Hibor which will be launched in June.
    * Chinese property firm Greentown raised a 2.5 billion yuan,
3-year bond at 5.63 percent, the lower end of price guidance.
One of the biggest bond offerings in the CNH market, it achieved
significant cost savings compared to the U.S. bond markets.  The
final order book of the offering was in excess of 16 billion
yuan, with 126 investors participating.
    * A weekend SAFE regulation asking onshore banks to adhere
to new foreign currency loan to deposit ratios have sent
offshore yuan markets in a tizzy as banks were forced to unwind
previous long yuan positions. While the sharp market moves
earlier this week have subsided for now, traders say the yuan
may be a lot more volatile in the short term.    

    CHART OF THE WEEK:  
    Deposits in Hong Kong banks: link.reuters.com/nez26t
    Yuan deposits have begun to rise again.  Deposits in Hong
Kong banks grew to RMB 670 billion in the latest data ending
March Cross-border trade settlement in yuan registered an even
more impressive jump (54 percent on a month-on-month) basis to
341 billion yuan.        
       
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More stories about the CNH market                 
Daily onshore yuan reports                        
Daily China money market reports                  
  
Offshore yuan rate    Onshore yuan rate  
Offshore yuan dealt Onshore yuan on CFETS 
  
THOMSON REUTERS SPEED GUIDES  
       

($1 = 6.1410 Chinese yuan)

 (Additional reporting by Umesh Desai; Editing by Kim Coghill)

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