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Participants at the AsianInvestor/FinanceAsia second annual Asia-Pacific debt investor forum touched on a wide range of topics — from the tight liquidity in mainland China to the challenges of repatriating funds in the dim sum market and concerns over the growing trend of loosening of bond covenants.
The conference — held at the Grand Hyatt in Hong Kong last week — drew executives from Country Garden, Kaisa, CLP Holdings, Hong Kong and China Gas Company, as well as investors, rating agencies and banks.
For the scores of companies out there aspiring to tap the dim sum market, John Hon-Ming Ho, the chief financial officer of Hong Kong and China Gas Company, imparted this piece of advice: “If you really want to do it, you have to do the ground work. Use your relationship at the local level: with the local PBoC and Safe. Make sure they know what you want to do [with the funds]. If they are clear on that, it will be easier."
Hong Kong and China Gas issued its debut Rmb1 billion dim sum bond earlier this year and the company plans to issue a second dim sum bond with a longer tenor later this year.
Ho also noted that the onshore borrowing cost for Hong Kong and China Gas’s joint venture in China would have been about 6.3% for one year versus the 1.4% coupon it is paying on its five-year dim sum bond. But approval to remit the funds was imperative. “The reason for [issuing a dim sum bond] was because we were able to repatriate the funds back. Without that, it didn’t make sense.”
Another theme that participants touched on was the tight liquidity that Chinese developers face. Kaisa’s vice chairman and executive director Lai Ling Tam, expects to see a “long overdue consolidation” among the small, unlisted Chinese property companies.
He noted that property issuers have turned to “trust financing” — a wealth management product — to raise funds and such financing typically offers a yield north of 20%.
Chinese developers are restricted from borrowing onshore for land acquisition and construction loans from the domestic banks tend to be short-dated, which helps explain why a flood of property companies are tapping the dollar bond market. However, due to an over-supply of bonds from the sector, property companies have to pay up compared to their peers in other sectors.
Tam pointed out that China Forestry — whose stock is currently suspended from trading — paid a yield of 7.75% when it issued its $300 million bond back in 2010. At that time, it was rated Ba3 by Moody’s and B+ by S&P. In comparison, a similarly rated property company would have had to offer a much higher yield.
But times have changed and, in today’s market, a non-property-related Chinese issuer would have to pay more. Indeed, research firm Muddy Waters’ recent report questioning Sino Forest’s audited accounts has shaken investors and led to intense scrutiny on Chinese industrial names.
“It’s definitely had an adverse impact on the market but I would say, at this point in time, it’s been mostly focused on the Chinese non-property sector. Those names are down an average of five points,” said Jim Veneau, director of Asian fixed income at HSBC Global Asset Management.
Gregor Carle, an investment director for fixed income at Fidelity, was cautious about discouraging investors from investing in the high-yield sector, pointing out that the allegations against Sino Forest may or may not be true.
Carle also suggested that investors play a greater role in setting the rules for best practices. He argued that investors should not agree to loosen covenants for a quick upside. “Investors should stand by what was agreed at that time,” said Carle. “The covenants are there for the long term.”
However, the key problem in Asia is the lack of a concentrated investor base that wields enough power to push back — collectively. There is a fear that the majority of investors will vote in favour of loosening covenants and that those who don’t will lose out on the fee.
“The investor base in Asia is much more fragmented. In Europe, where you have a more concentrated investor base, you do have more power ... to influence covenants,” said Henrietta Gourlay, a portfolio manager at Western Asset Management.
