Offshore bonds — the answer to cash crunch
Cash-strapped enterprises on the Chinese mainland, cornered by a liquidity squeeze that has seen borrowing costs spiraling upward, are turning to offshore bond markets to beat the crunch.
Liquidity has tightened on the mainland as the authorities strive to cut risky borrowing, and funding channels dry up. The squeeze has also been exacerbated by new regulations on asset management products and trust companies, throwing key players in the shadow banking business into disarray.
And, as the market has tilted toward shorter credit maturities, a record $1-trillion debt is estimated to mature in 2018 and next year, leaving borrowers in a quandary as they face mounting costs in rolling over their debts at home or abroad.
Benchmark rates — with the one-year lending rate at 4.35 percent and one-year deposit rates at 1.5 percent which have stayed put since October 2015 — look deceptively attractive but not so in the lending market.
“Last year, loans extended by major banks (to property developers) usually came at around 10 percent above the benchmark rate. But, this year, a 20-percent premium has been added to the benchmark rate. Even so, only leading developers enjoy easy access to the some 5 percent, low-cost bank loans, while the smaller players are having a hard time trying to secure credit from banks,” a senior manager at a Fujianbased builder — one of the 30 biggest mainland real-estate developers in terms of contracted sales — told China Daily.
According to the executive, who requested anonymity, his company had had little problem dipping into funds by issuing various asset management products through cooperation with trust companies in the past few years, but the practice came to an abrupt halt as the regulators flexed their muscles, forcing many developers to turn to bond markets, where borrowing costs are also going up.
Five-year top-rated corporate bonds have seen their yield surge past 5 percent since November last year — from around 4.5 percent in mid-2017; while that for “A-” bonds with the same maturity period had hit 10.48 percent in early April, having climbed nearly 50 basis points since November last year, according to data from China Central Depository and Clearing Co Ltd, the national bond information platform.
After obtaining approval from the National Development and Reform Commission (NDRC), which oversees the issuance of enterprise bonds, the developer issued a USD-denominated bond in Hong Kong with a yield of near 10 percent earlier this year.
With the US Federal Reserve widely expected to gradually raise interest rates this year, borrowing costs for mainland bond issuers in the offshore market are not likely to be much cheaper.
The USD bond market is expected to expand, and investors prefer bonds with a short-term maturity of three years or below, said Annisa Lee, head of Flow Credit Desk, Asia ex-Japan, at Nomura.
Despite rising borrowing costs, mainland companies are still making the beeline for the green light from regulators to tap into the offshore market. “Years ago, you could barely see any mainland-listed developer going to Hong
Tao Dong,
Kong to issue bonds. But, now, many of us are yearning for approval from the NDRC to issue bonds offshore. Despite the narrowing spread in borrowing cost, we also reckon that the offshore financing channel is rather stable and is less susceptible to policy changes,” the executive of the Fujian-based developer said.
Chinese-funded brokerages operating in Hong Kong are at the forefront in reaping the benefits created by the growing interest of mainland enterprises in issuing offshore bonds.
Among them, Haitong International Securities Group — the overseas arm of Shanghai-based Haitong Securities — had underwritten 110 offshore bond transactions involving $8.27 billion last year, topping the list of mainland securities houses operating in Hong Kong in terms of transaction volume.
Among the 110 transactions, only one involved an Australian company, while the rest were all mainland enterprises, said Chen Yi, head of debt capital markets at Haitong International Securities.
“Many of the Chinese institutional investors here are also looking for such assets. The theme of Chinese buying Chinese is really driving demand here,” he said.
In the first quarter of this year, Haitong International had bagged 48 bond transactions, all of which involved mainland enterprises.
According to Haitong, the variety of bond issuers has grown compared with years ago when banks and quasi municipal corporations formed the majority of corporate issuers. More industrial companies are also likely to issue bonds offshore this year.
“Many of our industrial clients had acquired mines and other industrial assets overseas last year, to pay off their debt with capital raised domestically isn’t an easy option under tight capital controls so they’ve resorted to offshore bonds, while a stable yuan has further encouraged them to issue bonds here,” said Chen.
Haitong is optimistic about the prospects of its debt capital market business this year on the back of the growing demand of mainland clients.
Tao Dong, vice-chairman for Greater China at Credit Suisse Private Banking Asia Pacific, told a forum last month that with a new top economic team calling the shots in China, the “chilly winter” is here to stay.
He believed that the mainland authorities’ unwavering deleveraging efforts would persist for at least three years.
“For those facing shortterm funding problems, don’t hold your breath. It’s better to find the funding now instead of hoping for things to turn for the better six months later,” said Tao.
“If you think 10 percent is expensive, think again.”