One of the most striking capital market stories last year was the evolution of the dim sum bond market from a currency play, in which anybody could issue, regardless of their credit quality, into something more mature. “Eighteen months ago, we were seeing B-rated issuers doing deals that were 13 or 14 times oversubscribed,” says Rod Sykes, head of debt capital markets for Asia Pacific at HSBC. “That has changed and we have a very different dynamic now. People are doing a lot of credit analysis, looking at relative value and doing all the homework they would do if they were in a G3 market.”
Augusto King, co-head of debt capital markets for Asia at RBS, adds: “Investors now are looking for investment-grade names, a covenant package and pricing that reflects the reality of what the issuer brings to the table.” That’s good, he says, adding: “The last thing you want is a market that is growing in an undisciplined way.”
Despite this newfound prudence, the market is showing no shortage of groundbreaking transactions, with two standing out in the early part of the year. First, China Development Bank (CDB) priced a 15-year deal on January 12, easily the longest yet achieved in this market. In a sign that, for all the increased investor scrutiny, the market can still offer attractive funding, CDB paid only 4.2% for its RMB1.5 billion issue.
Then in February, América Móvil, the Mexican telecoms group, became the first Latin American name to issue in CNH and, more significantly still, the first SEC-registered deal. This marked the first time an investor in the US onshore, without any international money to put to work, could participate in a primary CNH deal. About 26% of the deal was placed into the US and just under 20% into Europe – by far the greatest distribution outside Hong Kong to date.
Other shifts have been structural. The National Development and Reform Commission has placed a cap on the amount that onshore banks can borrow in dim sum – an aggregate RMB25 billion between 10 state and regional banks. Previously, bigger state banks, such as Bank of China and ICBC, were looking to set up huge programmes that could potentially have been that big in their own right.
“That should be positive,” says Hital Desai, a vice-president in DCM syndicate at Credit Suisse. “There were fears there would be masses of supply from Chinese state banks wanting to take advantage of liquidity, take the funds onshore and lend it out again. China is going to allow some of that liquidity to flow back, but not all of it.”
In another development, Swift, the global payments system, put in place a new mechanism allowing members to complete trades with each other even if the offshore RMB market becomes unusably illiquid. This is an interesting contingency move, since it indicates that at least some bankers are concerned the market could seize up – it is, after all, still the subject of capital controls limiting flows between onshore and offshore markets.
Reflecting this concern, some bankers do appear uneasy about just what the dim sum bond market really is: a market predicated on a currency that isn’t, strictly speaking, real – just an oddly behaving offshore counterpart to an onshore currency.
“My concern with the dim sum market is it’s a construct: it’s not driven by fundamentals of investor demand and issuer need,” says one banker. “It’s driven by the central government in China wanting to experiment with how people can use their currency. It has created an artificial currency.”
Others are alarmed by the appearance of six or even eight bookrunners on a single dim sum deal, many of them local Chinese banks that also serve as cornerstone investors. “That’s just a loan,” says the banker. “You can call it a bond, but it’s a loan.”
There’s also the fact a lot of investors, particularly fund managers who launched products around September, are heavily out of the money after the widening of the bonds in the second half of last year.
“It has left a bad taste in a lot of investors’ mouths that a lot of the bonds they bought last year are trading below par,” says Desai.
However, that’s something of a quid pro quo for the nature of the changing market and the investors themselves becoming more pragmatic. “Currency appreciation has come off the boil, tempered by the fact you are now seeing dedicated dim sum funds with five- to 10-year investment horizons,” says Desai. “You’re seeing it emerge as an asset class, rather than just a play on currency appreciation.”
There are plenty of other challenges the market faces. “The swap market is not particularly liquid,” says Stephen Williams, head of capital markets for Asia at HSBC. “But it’s getting better. This time last year, there wasn’t a market at all.”
RBS believes the swap market is operational up to three years, but most liquid between one and two. And Duncan Phillips, director, Asia debt syndicate at Citi, adds that “the deliverable cross-currency swap market itself remains fairly thin, especially at five years and above.”
Still, despite challenges, there is no denying the exceptional pace of growth in this still-young market. “The dim sum market is a bit of a misnomer,” says Mark Leahy, head of debt origination and syndication, Asia ex-Japan, at Nomura. “This is going to be the euro-RMB market ultimately and will challenge the euro-dollar market. The CNH market has grown far beyond even the most optimistic outlooks.”
