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High Dim Sum yields masking solid credit stories

by on July 27, 2012 11:47 am BST
 

Fri Jul 27, 2012 7:47am EDT

HONG KONG, July 27 (IFR) – Credit investors are beginning to
see a buying opportunity in the offshore renminbi market, where
bond yields have more to do with expectations for the currency
than company fundamentals.

Since March, the foreign exchange market has been pricing in
a depreciation of the renminbi against the US dollar over the
next 12 months. As a result, Dim Sum bonds have to offer
investors an attractive pick-up over the same credit in other
markets to compensate for the expectations of currency weakness.

For instance, Caterpillar Financial Services dollar bonds
due 2014 yield 0.55%, while its offshore renminbi bonds of the
same tenor offer 3.1%. Similarly, Ford Motor’s 2015 Dim Sum
bonds yield 4.57%, compared with its 2015 dollar bonds at 2.4%.

“Most investors are still focused on the currency story and
that is pushing up yields,” said Penny Chen, fund manager with
Manulife Asset Management. “If you don’t look at the currency,
just the credit, the bond prices are attractive. The policy
banks are most attractive – these banks have higher ratings and
give you a 100bp pick up over CTB (China Treasury Bonds).”

The Dim Sum market remains limited by small issue sizes and
fragmented investor holdings, and the majority of bonds come
without credit ratings. But yields have reached a point where
some fund managers are looking at this market anew.

Yields on the benchmark Bank of China Dim Sum index have
stayed above 5% since March, near the highest levels since the
asset class was created. China Development Bank’s offshore
renminbi bonds maturing in 2014 yield 3.1% compared to the
benchmark two-year onshore government bond yield of 2.25%.

“You can get higher yields on the same or similar issuer for
the same maturity in the Dim Sum market compared with bonds in
some other currencies – that’s what is making it attractive for
investors with a natural bias to renminbi,” said Bryan Collins,
fund manager with Fidelity.

Should currency be a concern, investors can hedge their
renminbi exposure and still pocket a respectable profit.

“As a stark example, in the Hong Kong dollar market, a 2015
Hong Kong government bond will give you an annualised return of
less than 0.20% versus 2.5% yields on Chinese government bonds
in the Dim Sum market,” Collins said. “You can even hedge out
the currency exposure, if that’s what you want, and still get a
better return.”

Some investors see Dim Sum as a good defensive bet.

“It may not outperform the rest of EM in a bull market but
on the way down it will do better than the rest,” said Kevin
Daly, portfolio manager with Aberdeen Asset. “In terms of
relative value it will not perform as well as FX in Mexico or
Brazil, but relative to rest of Asia FX it is a low-risk trade.”

Supply concerns easing

The volume of new issues has been a big concern for Dim Sum
investors, with supply another factor driving up yields.
However, the recent spurt of profit warnings from China’s
corporate high-yield issuers means that fewer deals are likely
to come to market.

In addition, the closing gap between onshore (CNY) and
offshore (CNH) yields has dampened the appeal of offshore
funding for Chinese issuers.

****

“CNH yields should be lower than onshore because people are
willing to pay up for access to CNY exposure,” said a Hong
Kong-based trader. “But right now that difference is converging.
Last year it was 200bp-300bp, but now that has dropped to
10bp-20bp.”

Volumes have reflected that trend.

According to Thomson Reuters data, issuance in the second
quarter fell to Rmb34.7bn from Rmb44.2bn. In July, the slowdown
has been even more pronounced with a month-to-date tally of
Rmb6.5bn – less than half the monthly average in the year to
date.

“Yields have risen in the past year and issuers are not
interested in paying up, so many issuers in the pipeline are
waiting for a better timing. At the same time, investors have
become quality conscious, wanting higher-rated issues,” said
Bess Lu, DCM origination banker with SinoPac Securities.

“Renminbi loans are also active. Bank liquidity has come
back, so many companies are looking at yuan loans first.”

Still, even if supply pressures ease and yields stabilise,
there are other technical matters that need addressing.

“The bid offer spreads in the CNH market are still wider
than their dollar bond counterparts, so trading is difficult,”
said Manulife’s Chen.

Size is a big consideration for institutional fund
managers.

“The overall size of the market is more suited for retail
investors than institutional investors. We are interested in the
sovereign and quasi sovereign type names only, and we wouldn’t
touch the corporate names for our portfolios,” said Aberdeen’s
Daly.