A planned Rmb1.5 billion renminbi-denominated bond issue by Maoye International suggests demand for dim sum bonds might not be dependent on the currency’s appreciation.
Maoye International, a Shenzhen-based department store operator in China, is looking to tap the offshore renminbi bond market for the first time.
Deal arrangers Citi and Deutsche Bank started a series of roadshow presentations to professional investors on Monday, according to sources familiar with the situation.
The Maoye deal comes after China Construction Bank (Asia) and China Eastern Airlines separately priced their Rmb4 billion two-year notes and Rmb2.5 billion three-year notes last week. The two deals received strong demand and were 2.8 times and 1.7 times covered, respectively.
All three deals highlight that the offshore renminbi bond market is not purely driven by appreciation of the currency, according to Clifford Lee, head of fixed-income at DBS Bank.
The offshore renminbi (CNH) spot rate fell 1.4% in February, the biggest loss in a single month since the European sovereign debt crisis in 2011, ending some investors’ expectation that the currency would continue to appreciate.
However, what maintains dim sum deal flow is that the current account surplus and capital inflows still support a gradual renminbi appreciation in the longer term, according to credit analysts.
One reason for the attractiveness of the CNH bond market is the consistent gap between the onshore renminbi (CNY) and CNH spot rates.
The gap for 5-year government bonds is 110bp lately, although this tightened from 150bp at the end of last year, a HSBC report said.
Chinese issuers can benefit from the gap. For example, Maoye has to pay a yield of 6.5% to 7% for longer-term debt in the onshore market but could manage to get a yield below 6% through the dim sum issue.
“It means the company can save 0.5% to 1%, as the cost of the proposed offshore bonds will be lower than its existing onshore loans," says Alan Gao, a Moody's vice-president and senior analyst.
Maoye will use about 60% of the bond proceeds to refinance Rmb3.1 billion of onshore bank loans, and use the remaining for general corporate purposes, according to the company.
Meanwhile, credit analysts also spell out some challenges for the CNH bond market this year.
“Although the market is getting firmer, there are still headline concerns over [any] unexpected news, globally. The market will continue to be choppy this year,” said DBS’s Lee.
He gave as examples of such news as the recent Ukraine conflict, the tapering plan of the US or China’s shadow banking potholes.
The HSBC report shows that, if the CNH spot rate weakens beyond 6.20, it would accelerate investors’ unwinding of renminbi long positions and dampen their sentiment, which may lead to selling of renminbi and products in the currency.
