More “dim sum” bonds for McDonald’s and lots of others, too, as attractive features beckon.
Yuan-denominated offshore bond issuance, deliciously nicknamed dim sum, has seen continued explosive growth since 2010, fueled by more foreign corporations and banks tapping the relatively low interest rates on loans. One of the original Western dim sum devotees, American fast food giant McDonald’s, is now planning a second yuan-denominated bond issuance in Hong Kong soon, with an offering size expected to exceed its first dim sum bond issuance – which was equal to about $29mn (see related story here).
The first overseas yuan-denominated bond issuers were mostly from China or Hong Kong, until McDonald’s became first non-financial foreign company to issue a dim sum bond in September 2010; machinery equipment maker Caterpillar followed suit in November of the same year. By far the biggest single user of dim sum bonds is the Chinese government, according to a report from Singapore’s DBS Bank, which has raised 14 billion yuan ($2.1bn) since October 2009.
Nevertheless, renminbi bond issues by non-Chinese companies have taken off in 2011. There have been 36 deals raising a total of $4.2bn so far this year, compared to just four deals raising $351mn last year, according to Dealogic, the investment banking research provider. European non-financial companies have also been involved, with Unilever dipping its toe into dim sum bond market in March 2011 and raising 300mn yuan ($46mn) to finance its expansion in China.
Good financing tool. By his own account, Dave Yang, McDonald’s corporate controller in China, sees that the dim sum bond market is the best financing tool for the company, referring to low financing costs, 3 percent with dim sum bonds vs. 7 percent through banking lending in China. Furthermore, he reportedly said during a financial forum in Hong Kong, that increasing funding in the Chinese currency can also help the company compensate for foreign exchange risks.
This is not to say there are no worries when it comes to dim sum bonds, however. One of the biggest hurdles for issuers is obtaining approval to repatriate the funds raised in Hong Kong; this at a time when China is struggling to control the inflow of “hot money” into its economy. Currently foreign direct investment in yuan requires case-by-base approval from regulators in Beijing.
Administrative delays aside, recent issuance in the growing offshore yuan bond market has experienced turbulence after scandalous fraud allegation against Chinese company Sino-Forest, whose headlines in the press put a spotlight on the creditworthiness of Chinese borrowers.
What bad news? Despite the negative views circulating in the market, regulators and banks expect continued explosive growth in the dim sum bond issuance, because the expanding pool of Chinese currency deposits offshore will actively seek assets to be invested in. Yuan deposits in Hong Kong have grown nearly six-fold in the past year to 511bn yuan ($79bn) at the end of April. But most see investors becoming more careful towards local Chinese companies and demand wider risk premiums as more companies are seeking to raise capital.
Bloomberg reports that the investor base is becoming increasingly international and will make up between 40 percent to 50 percent of the market as assets manager from Latin America, US and UK “who do not have an Asia presence” buy the debt. Bond underwriters are also becoming more international and competitive. This year, Chinese underwriters are losing out to international banks. Bank of China, which was number one in dim sum bond sales last year, slumped to 15th, and ICBC slid to 20th from 4th. Meanwhile, HSBC, RBS and JPMorgan Chase are currently the top three in dim sum bond sales table.
In the meantime, more dim sum for the table?