Written By: Matthew Hemmings – Corporate Finance
Recently, international companies have turned their attention to the Southeast Asian market to find new sources of funding. The issuance of bonds by US and European companies have mostly taken place in Taiwan, Singapore and Hong Kong. As far as China is concerned, strict regulation on exports of capital makes the bond issuance in this part of the world less attractive. But this recently has started to change.
Until now, Southeast Asian countries were more likely to attract treasurers.
In the first quarter 2017, European companies issued 25 Formosa bonds worth $7.9 billion in Southeast Asia, according to data provided by Dealogic. The majority of the bonds were issued in Taiwan. During the first quarter 2017, US companies issued $9.2 billion.
The reasons why European companies are behind those of the United States could be:
- the very low rates they can get in Europe,
- the necessity to hedge their US dollar-issued bonds against the euro, as most Asian bonds are in USD, and
- Asian investors need time to get acquainted with European companies.
But to mitigate their currency risks and decrease their financial costs, treasurers of big groups that are doing business in China are more and more interested in Chinese bond issuance. Working in China, financing investments with euro bonds means increasing the group’s currency-risk exposure as the investments will be made in yuan. The alternative is to issue Dim sum bonds in Hong Kong, which are in yuan, but the interest rates are higher, and the coupon could cost between a hundred and two hundred basis points more than raising funds directly in China.
China is progressively opening up bond-refinancing possibilities.
Foreign companies can issue debt denominated in yuan in mainland China through Panda bonds. Panda bond volumes reached 120 billion yuan (€16 billion) in 2016. This amount is very small compared to the 1,250 billion raised on the Chinese bond market last year. But the progression is dazzling, with a 12-fold increase in funds raised. And, according to JPMorgan Chase, they could further increase by 50 percent in 2017.
However, Chinese regulators want foreign issuers to spend the proceeds of their bond sales domestically. Until now, regulation has forbid the transfer of Chinese funds raised by Western companies to other countries. However, recently, for the French utilities firm Veolia Environnement SA, the Chinese regulator allowed the overseas transfer of capital raised in China. In September 2016 Veolia was able to take 1 billion yuan ($145 million) out of the country. But it took time to convince Chinese authorities to allow it.
China is progressively opening its currency to the international market.
Chinese authorities have been interested in transforming their renminbi currency into an international one for a while. That’s the opportunity that Philippe Capron, Veolia’s financial director, took with his team in launching its 1 billion bond in September 2016.
The process of issuance was in fact a quite usual one:
- translating the group’s accounts into Mandarin,
- obtaining a rating from a Chinese agency,
- meeting with the National Association of Financial Market Institutional Investors (NAFMII), which acts as regulator on behalf of the authorities, in order to obtain its approval,
- obtaining the final authorization of the Chinese central bank.
But what was unusual for the Chinese authorities was that Veolia did not want to finance a new investment in China but to refinance existing foreign bonds for already-existing Chinese investments, so as to reduce currency exposure. Usually Chinese authorities do not approve of money leaving China and seek to avoid speculation on their currency. Fortunately, the political context favoured Veolia. In June 2016, Chinese authorities were eagerly preparing for the G20 to be held in Hangzhou in early September. And they saw this authorization given to the French group as a concrete signal sent to other countries illustrating their willingness to open their currency to the world. As a result, the environmental-services giant Veolia obtained the right to draw 15 billion renminbi in the Chinese domestic market (€2,025 billion) over two years.
“It is a very large envelope that will enable us, if we wish, to continue our ‘Panda bonds’ issuance in the future,” said Philippe Capron. Veolia took 1 billion yuan ($145 million) from this envelope out of the country to reimburse existing non-Chinese loans. Veolia was helped by the Bank of China; they agreed to an attractive rate for both parties, while opting for a short maturity unlikely to scare investors. “In the future, we hope to borrow at 5, 7 or 10 years. But for now, I will start by going back to China to thank the authorities,” concluded Philippe Capron.
Issuing Panda bonds allows access to the onshore bond market, much deeper than the offshore market, explained Laurent Attali at BNP Paribas CIB—especially as local investors seek to diversify their portfolios and welcome foreign issuers. This has been enough to attract the appetite of the big international banks, which rely on this growth. HSBC Holdings and Standard Chartered, JPMorgan Chase and BNP Paribas have taken advantage of the Chinese authorities’ willingness to open up; they have obtained the precious licenses that allow them to organize corporate issuances.
A big step onto the Chinese financial market has definitely been made by the big groups’ treasurers.