Dim sum bonds offer borrowers arbitrage opportunity

Hyundai Capital and IFC both tapped the dim sum market this week, taking advantage of the arbitrage opportunity while swaps are in their favour.

The basis swap, which in the dim sum market refers to the cost of converting fixed-rate offshore renminbi to floating-rate US dollars, touched a historical high of 250bp for the three-year tenor on Monday. A higher basis swap makes it favourable for a borrower to issue in offshore renminbi and swap to US dollars.

Korea issuer Hyundai Capital on Thursday evening was in the market with an 18-month senior unsecured offshore renminbi bond. The Rmb500 million bond ($78 million) offered a yield of 3.45%. Hyundai Capital is swapping the proceeds back to Korean won but it will first have to swap to US dollars. It swaps to three-month Libor plus 105bp in US dollars and 3% in Korean won. ANZ was the sole bookrunner.

On Tuesday, IFC also closed a Rmb500 million two-year SEC-exempt global bond and swapped the proceeds to US dollars. The coupon was fixed at 1.875% and the notes reoffered at 99.854 to yield 1.95% — which rivals deemed to be very tight pricing. Deutsche Bank was the sole bookrunner. The deal was done quietly and no distribution statistics were released. The tight levels at which they priced led rivals to speculate that the bonds could have been taken by the bank.

Earlier this month, ANZ Banking Group had also tapped the offshore renminbi market with a Rmb1 billion offshore bond, which yielded 2.9% and swapped to Libor plus 90bp.

Bankers are hopeful that more foreign issuers will be encouraged to tap the dim sum market. “We are hoping some of the European borrowers might come to market,” said one banker. “However, swap markets move around, so this could be a two-week window.”

Any issuance would boost the dim sum market, which has lost favour among investors as expectations of renminbi appreciation have waned. According to Dealogic, the total amount of dim sum bonds issued year-to-date is $8.9 billion compared to $9.2 billion for the same period last year and $13.8 billion for the whole of 2011. In previous years, the market saw sharp growth.

Bonds issued in the dim market are also showing the first signs of stress, which may dampen investor sentiment further. Global Bio-chem Technology earlier this week said it may be in breach of the covenants on Rmb450 million of bonds due 2014. According to a banker, the company is expected to have to call for a bondholders meeting and seek some kind of waiver, which would be challenging as it is no longer clear who holds the bonds.

Two to three years ago, when dim sum bonds were wildly popular and being sold at unrealistic yields, covenants were not a common feature. But during the past year, investors have been pushing for stricter terms. So far, there have not been any defaults, and Global Bio-chem could be a test case for how a company seeks to remedy any potential covenant breaches. (The company is not in default and has said it has sufficient cash to honour the terms of the bond.)

“A number of the companies have offered covenants similar to their bank loans,” said one banker. “But what they may not fully appreciate is that it is a lot harder to find a remedy for a bond than a loan, as the lender usually has an institutional relationship with the company, whereas an investor does not.”