UBS Sees Golden Window for China Issues Before Fed Taper
Chinese companies may boost dollar-denominated bond sales next month as higher onshore borrowing costs encourage overseas issuance before the Federal Reserve pares stimulus, said UBS AG (UBSN), the second-largest arranger.
China National Offshore Oil Corp., the nation’s biggest offshore energy explorer, may sell dollar securities, two people familiar with the matter said earlier this month. Road King Infrastructure Ltd. (1098) will meet global investors this week, a separate person said. Meiya Power Co. sold 2018 dollar notes last week at 4 percent, less than the average 5.2 percent yield on onshore top-rated yuan debt with similar maturities.
“September is a golden window for Chinese issuers,” Patrick Liu, head of international debt capital markets in Hong Kong for UBS China, said in an Aug. 19 interview. “They will probably rush to sell instead of waiting.”
Chinese companies, which issued a record $22.8 billion in the second quarter, have since trimmed offerings in the U.S. currency as fund outflows prompted a 0.6 percent loss since July 1 on dollar notes in Asia. The region’s local-currency bonds performed worse, shedding 1.9 percent. As yuan borrowing costs rise after China’s worst cash crunch in at least a decade, corporates are again considering offshore issues.
That trend may continue even after the Fed begins reducing its note purchases, amid concerns that fundraising costs in China will remain elevated, according to UBS’s Liu.
Policy makers at the central bank were “broadly comfortable” with Chairman Ben S. Bernanke’s plan to start reducing bond buying later this year if the economy improves, with a few saying tapering might be needed soon, minutes of their last meeting released yesterday show. The Fed will probably reduce its monthly purchases at its Sept. 17-18 meeting, according to 65 percent of 48 economists in an Aug. 9-13 Bloomberg survey.
“Even though offshore liquidity will no longer be excessively loose, given the outlook for onshore liquidity, I don’t think the Fed tapering would cause a reduction in offshore dollar bond issuance,” Liu said. He added that total issuance in 2014 may be at the same level as this year.
Dollar note sales by mainland and Hong Kong companies total $46.4 billion so far this year, compared with $50.5 billion for all of 2012, data compiled by Bloomberg show.
Chinese regulators have tightened money supply since June in an effort to force investors to shift funds out of so-called shadow banks. The seven-day repurchase rate, a gauge of interbank funding availability, has averaged 4.11 percent in the second half, compared with 3.85 percent in the previous six months, according to a daily fixing rate compiled by the National Interbank Funding Center.
“Yields are surging in the onshore primary market because of the tight liquidity,” said Dong Hui, a bond analyst at China Securities Co. in Beijing. “The weak demand in the onshore market will probably drive more and more companies to try cheaper offshore financings.”
Rising costs have curbed yuan bond sales in the mainland. Chinese borrowers have issued 173.9 billion yuan ($28 billion) of onshore bonds so far this month, compared with 291 billion yuan in July, set for the least since January 2012, according to data compiled by Bloomberg.
The yield on five-year AAA rated corporate bonds climbed 28 basis points this month to 5.24 percent, the highest level since November 2011. Rates on investment-grade offshore dollar debt for Chinese companies advanced 22 basis points to 4.17 percent, according to Merrill Lynch indexes.
“A lot of companies are doing non-deal roadshows after their results announcements this month so I wouldn’t be surprised if they come to the market before the Fed’s announcement on tapering,” said Annisa Lee, a credit analyst in Hong Kong at Nomura Holdings Inc. “There’s no safe haven so if one focuses on high-yield, one can’t ignore China.”
Signs that a slowdown in China’s economy is stabilizing have assuaged concerns that some companies may fail to pay off debt. While expansion slowed to 7.5 percent last quarter from 7.7 percent in the previous three months, sentiment has improved as data released this month showed pick-ups in trade, manufacturing and services. The latest sign came today when the preliminary reading of 50.1 for the manufacturing Purchasing Managers’ Index released by HSBC Holdings Plc and Markit Economics topped a final figure of 47.7 in July.
“We’re sanguine on the growth outlook,” said Hayden Briscoe, a Hong Kong-based director of Asia-Pacific fixed-income at AllianceBernstein Hong Kong Ltd. At the same time, two more months of improving activity is needed “before we can say we’re getting comfortable with a turn in the economy,” Briscoe said.
China’s credit-default swap contracts insuring the nation’s debt against non-payment have dropped 24.5 basis points from a high for the year in June to 122.5 basis points, according to data provider CMA. The yuan traded at 6.1265 per dollar as of 9:49 a.m. in Shanghai, China Foreign Exchange Trade System prices showed.
Real estate companies will remain the dominant Chinese issuers of dollar bonds due to their limited channels to raise funds onshore, according to UBS’s Liu. Global investors prefer the securities for their relatively higher yields, he said.
Poly Real Estate Group Co. sold $500 million of five-year bonds with a 4.5 percent coupon on July 29. UBS was one of the lead arrangers. The rate on the company’s onshore yuan bonds due October 2019 was at 5.2 percent on the same day.
China’s new home prices rose the most last month since January 2011 in the nation’s four major cities on speculation the government will refrain from imposing tighter curbs. Prices in 69 of 70 cities tracked by the government climbed from a year earlier, data released on Aug. 18 showed.
China’s real-estate dollar bonds have returned 3.3 percent this quarter, the third best-performing industry after electronics and textiles, according to Bank of America Merrill Lynch indexes.
“Among all the high-yield dollar bonds, property bonds are the easiest to sell,” said UBS’s Liu. “Property companies have had no problem in repaying interest and principal over the past few years.”
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