Onshore crunch cages Panda bonds

* Foreign issuers hold back in bearish market

HONG KONG, May 22 (IFR) - China’s efforts to deleverage its financial system have dealt a serious blow to the growth of the Panda bonds market.

Several foreign issuers have delayed their plans to sell bonds in the onshore renminbi market amid an extended liquidity crunch that began towards the end of last year.

Higher yields and weak investor appetite have dashed plans for high-profile Panda deals to champion Beijing’s Belt and Road Summit, which concluded on May 15.

“We had worked hard on preparing a few high-quality Panda bond issues alongside the Belt and Road Summit, but, unfortunately, none of those deals were able to float,” said a source close to the mainland regulators.

“Pricing was the biggest obstacle.”

Panda bonds often carry heavy political significance, as with recent issues from National Bank of Canada and the Republic of Korea, which came shortly after Chinese Premier Li Keqiang’s visits to the two countries.

Yet, no Panda deals were announced or launched alongside the Summit to promote Beijing’s new Silk Road initiative, even though around 30 heads of state attended.

SOVEREIGN DELAYS The Republic of Hungary approached some Chinese investors in late April for a proposed offering of 2 billion yuan ($290 million) three-year Panda bonds, according to market sources.

Around the same time, they said, Republic of Poland also talked to investors tentatively about a return to the Panda market, after a 3 billion yuan three-year trade in October 2016. Poland is rumoured to be looking to raise another 3 billion yuan from a sale of three-year notes.

Bank of China and HSBC arranged meetings for both Hungary and Poland. Hungary’s president and Poland’s prime minister both attended the Beijing summit. Neither deal, however, has made it to market.

“Market conditions have turned so bad that even sovereign issuers are unwilling to come to the Panda market now,” said a banker away from the two deals, noting that sovereigns can usually line up more support from big Chinese banks than corporate issuers.

Excluding overseas incorporated Chinese companies, no foreign issuer has done a public offering of Panda bonds for more than six months, since National Bank of Canada printed 3.5 billion yuan three-year such notes at 3.05 percent in early November 2016.

Onshore liquidity has worsened since then. The yield on 10-year Chinese treasury notes had risen about 90bp to 3.63 percent last Thursday on liquidity tightening as authorities cracked down on shadow banking and risky financial practices.

On May 10, the yield on the 10-year Chinese treasury bond peaked at 3.71 percent, the highest since December 2014.

This surge in funding costs saw a spate of cancellations in the mainland debt market. In April alone, domestic offerings of 140 billion yuan, including a 1 billion yuan Panda deal from Hong Kong-incorporated Wing Lung Bank, were postponed.

“The pricing doesn’t look attractive to issuers. Good foreign names can obtain cheaper funding offshore, or, if they want onshore renminbi funding, it is also not difficult for them to get cheaper loans from Chinese banks,” said a DCM banker working on Panda bonds.

CICC noted in a report published on May 12 that yields on five-year AAA rated MTNs had risen to over 5 percent, surpassing the policy interest rate for five-year loans, which was at 4.75 percent. “Such a phenomenon is unprecedented,” said CICC. PRIVATE OUTLIERS The private placement segment has offered some respite for foreign issuers willing to offer higher yields. Two foreign names have bucked the trend, completing three trades in total this year.

Russian aluminium producer UC Rusal made its Panda bond debut in the Shanghai Stock Exchange market in March, raising 1 billion yuan from three-year non-call two notes at 5.5 percent in a tough deal. Rusal has been heard to be planning a comeback with a second offering soon.

Last week, Germany’s Daimler returned to the Panda market for the second time this year, raising 4 billion yuan from a dual-tranche private placement in the interbank market.

Daimler paid 5.18 percent for a 3 billion yuan one-year tranche, 58bp higher than its last trade of the same tenor launched in mid-March. A 1 billion yuan three-year tranche in its latest trade was priced at 5.3 percent.

Market participants suggested that Daimler’s enthusiasm for Panda bonds, despite the rising yields, could be explained if the proceeds were used to grant auto loans.

“If Daimler uses the proceeds for its auto-financing business in China, then the funding cost (of Panda bonds) is quite acceptable given that interest rates on auto loans are usually at 8–10 percent,” said an institutional investor.

Despite the unfavourable environment, some bankers still aim to launch one or two offerings of Panda bonds from SSAs (sovereigns, supranationals and agencies) towards the end of the second quarter.

“The market is tough and can grow tougher at the end of this month,” said a syndicate banker at a foreign bank. “However, a small offering of 1 billion yuan or 2 billion yuan from a high-quality SSA is still possible this month, if strongly supported by relationship banks.” (Reporting by Ina Zhou; Editing by Daniel Stanton and Steve Garton)