A growing demand from Asian investors for Latin American credits has led to a little flurry of bonds sold in the region denominated in offshore Chinese renminbi (CNH).
In November, Santander Chile became the second LatAm credit to sell a public dim sum transaction – debt sold by non-Chinese institutions in CNH – and was closely followed by Corporación Andina de Fomento (CAF), which sold a dim sum last month.
There have also been some private placements of dim sum transactions, pointing to a growing trend for 2013, although bankers say there are a number of constraining factors that will limit the speed of this market’s growth.
In early December, CAF, the LatAm regional development bank, sold a CNH600 million ($97 million) three-year bond. The Aa3/A+/A+ priced at par to yield 3.55% and was two-times oversubscribed, with nearly 40 accounts participating in the trade.
Investor comfort
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| Katia Bouazza, co-head of global capital markets, Americas, at HSBC |
HSBC and Standard Chartered managed the transaction, and Katia Bouazza, co-head of global capital markets, Americas, at HSBC, says the deal establishes the development bank in a market that will become more important, and at a time when the all-in-cost, including a swap of the proceeds back into dollars, was attractive. "CAF is diversifying its investor and currency base," says Bouazza. "There is a higher degree of comfort from Asian investors with the Latin American names and with the dynamics of the region.
"There is a lot of educational work that has gone into this – it hasn’t just popped up overnight. Asia’s investors are now very familiar with several issuers from the region, whether they are from Chile, Mexico, Brazil and increasingly from Colombia."
The investors for the CAF deal came from Hong Kong (44%), Taiwan (27%) and Singapore (17%). The rest of Asia made up 3%, but there was also demand from Europe, which accounted for 7% of demand.
Offshore US funds have also been active in CNH-denominated deals and the demand is predicted to grow next year. The more likely restriction on deal volumes is limited supply, according to Chris Gilfond, co-head of LatAm credit markets at Citi, which has led on some private placement transactions.
The first ever dim sum, for América Móvil, was to raise local currency to pay Chinese suppliers, but the universe of these issues is small. CAF swapped the proceeds back to dollars and it is believed the recent dim sum private placements issued by Bradesco (CNH300 million of 2014 bonds, which priced at par with a yield of 3.9%) and BTG Pactual (CNH107 million of 2013s, which priced at par to yield 3.50%) were also swapped back into dollars.
BNP Paribas managed Bradesco’s deal, with Standard Chartered leading BTG Pactual’s. Banco do Brasil added a CNH300 million deal in December – self-led with Société Générale – to its previous private placement of CNH166 million, which was a three-year deal and yielded 3.5%.
In mid-November, Santander Chile became the first LatAm financial institution to sell a public dim sum transaction with its CNH500 million 2014s. The Aa3/A/A+ deal priced at par to yield 3.75% and was swapped back to dollars. Europeans took 17% of the deal that was led by Deutsche Bank and Standard Chartered.
"Arbitrage is obviously the key driver for a lot of offshore issuance but lately we haven’t seen that arbitrage being positive or material to the decision," says Gilfond. "For the most part, the swap back into the issuer’s currency isn’t compelling, so a lot of the time it is a company that is looking to fund their onshore renminbi businesses in China."
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Gilfond also says that Basle III will further impair the economics of swap-driven dim sums by raising the frictional counterparty costs. He adds there are considerable "softer" benefits to conducting these trades. "These deals highlight that the issuer is active in the region and the local banks see that the issuer is committed to the region and that can have advantages for the cost of financing for the local subsidiary," says Gilfond.
Bouazza says she predicts the numbers of public and private dim sum deals from LatAm will grow, but only slowly until the Chinese currency itself internationalizes. The renminbi is not likely to become fully convertible for years to come.
"The process of this market’s growth will be a long one but there are a number of issuers that are looking to establish a presence in a growing market," says Bouazza. "As the currency continues to gain importance in the international markets, we will see a bigger shift in the volumes from what we are seeing today."
