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The growth rate in the issuance of offshore renminbi bonds (CNH bonds), known as dim sum bonds, will slow in 2012 even as the demand increases from investors seeking to gain from the Chinese economic growth as an alternative to uncertainties posed by developed markets.
A Fitch Ratings report released on March 12 notes that the issuance of CNH bonds out of Hong Kong in 2011 rose significantly to 174 billion renminbi (USD28.06 billion), compared with 40 billion renminbi in the previous year, with the number of issuers surging about 5x from around 20 to 100 during the same period. The total issuance volume in the first two months of 2012 already amounted to 48.5 billion renminbi, which Fitch says implies a full year potential issuances of 290 billion renminbi.
Fitch points out that investors so far have been willing to sacrifice covenant protection to gain exposure to the renminbi. “For most international fixed income investors seeking to diversify their currency holdings into the renminbi, the offshore CNH market in Hong Kong is the only viable option,” it says.
Still, investors are concerned about the paucity of covenant protection structured on the CNH bonds, as well as the poor level of operational disclosure compared with a typical US dollar high yield bond. Fitch says the CNH bonds lack many of the covenants that investors would expect to see in the offshore dollar high yield bonds from the same issuers.
The missing covenants include cross-default clauses tying the issuing entity or special purpose vehicle back to the cash flow generating entity; negative pledges preventing the company from using any of its assets for other debt obligations; and restrictions on future borrowings.
“Compared with the US dollar high yield bond documents, the CNH bond documents have limited operational disclosure beyond the audited financial statements of the issuing entities,” Fitch notes.
Another key hurdle holding back many international investors from the Dim Sum bond market is the absence of maturities longer than three years. Only nine percent of the issuances in 2011 were longer than three years and just three percent so far in 2012. The notable exceptions include the 15-year 1.5 billion renminbi offering by China Development Bank Corporation in January this year and a 10-year issuance by the
Chinese government in August 2011.
“More frequent issues of long-term Dim Sum debt by the Chinese government and its quasi-sovereign agencies, such as the policy banks, would help establish a deeper yield curve that can be used as a benchmark to price other CNH issues,” Fitch adds.
