Dim sum market stirs U.S. borrowers

by Andrea Johnson

BRADENTON/NEW YORK, July 7 (IFR) - One of the U.S. high-grade market's favorites, Caterpillar Financial Services, is becoming quite the regular issuer in the offshore yuan-denominated market, also called the dim sum or CNH bond market.

On Wednesday CAT <CAT.N> priced a 2.3 billion yuan ($355 million) bond, its second trade in a market that is looking increasingly interesting to U.S. corporations that do business in China.

So far, only five foreign multi-nationals have tapped the dim sum market, McDonald's <MCD.N>, Caterpillar, Unilever <UNc.AS>, Volkswagen <VOWG_p.DE> and Fonterra. But the market averages a good five to 10 deals per week, and outstanding bonds have swelled to more than 130 billion yuan so far. Many expect that volume to exceed 200 billion yuan by the end of the year.

What's more, a greater proportion of that volume is likely to come from U.S. companies that produce revenue in China. The dim sum market is becoming more user-friendly and American companies are investing more in China.

"For us, it's part of Caterpillar Financial's normal strategy that we look to fund in the local market," said Jim Dugan, spokesman at Caterpillar Inc. "In that sense there's a great deal of interest in the renminbi market but for us it's part of our broader strategy."

Borrowers in need of renminbi funding generally have two options to raise capital directly in the currency. They can access the mainland-China bank loan market where rates are regulated by the People's Bank of China (PBOC) or, as Caterpillar and McDonald's before it did, they can issue in the offshore renminbi bond market, where rates are market driven, and remit the proceeds to China.


In the current economic climate at least, the offshore market is by far the cheaper alternative for borrowers.

The 6.4% loan rate is generally for a strong issuer like CAT. The PBOC sets the base rate and allows mainland China banks to charge borrowers as low as 90% of that rate for the highest quality borrower. It's essentially a PBOC-set floor put in place so banks don't try to get market share by undercutting and putting themselves in jeopardy. However, banks can, and do, charge well over 100% of the base rate for riskier credits.

For the cost savings alone, the dim sum bond market looks like the better alternative for companies in need of renminbi funding. But there is another big factor motivating borrowers to choose a bond over a loan.

"Ultimately, the central bank controls the tap on mainland lending and it can take measures to dry up liquidity," Owen said. "However, by funding via the CNH bond market, issuers have the security of knowing they have access to funds when they need them."

All the obvious advantages of the dim sum market are naturally drawing a lot of interest.

"Although the market is still in its infancy, we have very quickly seen the emergence of a variety of credits, ranging from high quality household names to high yield and unrated issuers," Owen said.


That said, the dim sum market can still be tough to swallow. The ability to bring CNH bond proceeds into China is strictly controlled by the Chinese regulators. In fact, the approval process to do an offshore yuan-denominated bond is quite lengthy.

"The full potential for growth in issuance volumes, however, is limited by the amount of proceeds issuers can remit into the mainland to finance their operations," Owen said.

Deal size is essentially capped at what Chinese authorities allow issuers to bring across the border -- and is determined by what is known as the foreign debt quota, the difference between the total investment and minimum registered capital.

Issuers seeking to remit bond proceeds to the mainland must apply for approval from the regulators stating the amount they wish to bring into China. Typically, issuers will wait for the required remittance approvals before bringing the deal. Approval from regulators could come within weeks, or within months. Once issuers get approval, they then hit the bond market and hope to get enough demand to reach their approved amount.

Caterpillar, for its part, got the green light for a sizeable haul. The 2.3 billion yuan deal was large compared to its predecessors. Only eight issuers have ever attempted a deal 2 billion yuan or larger, and five of those were government affiliated. The other three, Guangzhou R&F, Melco Crown and Ping An <2318.HK>, got done in a much better market environment and actually priced at much higher rates. CAT impressively priced in size in shaky market conditions.

The demand for CNH bonds is high in part because investors don't have many other options.

"Investors who have access to renminbi really have very limited investment alternatives. They can place their cash in CNH deposit accounts paying about 50-60bp - not a lot, especially when you factor in inflation - or invest in offshore yuan-denominated bonds at a relatively higher yield," said Owen.

Demand has caused yields on CNH bonds to come in quite dramatically. When Caterpillar made its dim sum debut in November 2010, it paid 2% for a 1 billion yuan two-year bond.

The majority of investors so far are in Asia. But Wednesday's trade actually saw 20% participation from European investors. It was the largest European participation in the CNH bond market this year.

Standard Chartered, Caterpillar's lead arranger, is ranked number two behind HSBC in offshore yuan-denominated bond league table.

(Reporting by IFR senior analyst Andrea Johnson in Bradenton, Florida; Additional reporting by IFR reporters Nethelie Wong in Hong Kong and Timothy Sifert in New York; Editing by Timothy Sifert)