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Dim Sum Bond Issuers Facing a 'Great Wall' of Refinancing Are Thinking About Dollar-Denominated Debt

It's all about the currency.

Those looking for clues that a crunch is looming in the global market for yuan-denominated debt need look no further than a small Hong Kong-based maker of solar-powered street lighting.

China Singyes Solar Technologies Holdings Ltd. says it's been thinking about selling U.S. dollar-denominated debt to help pay back 560 million yuan ($81 million) worth of its so-called Dim Sum bonds due in November 2017. China Singyes' situation is emblematic of a recent trend: with the renminbi losing value and money leaving the country, Chinese companies that have historically sold such yuan-denominated bonds overseas are now considering alternative debt products to roll over their borrowings.

"We've been mulling how to refinance the bond, and as the yield has gone up to as much as 10 percent in the [offshore yuan-denominated] bond market, we are also open to issuing a dollar-denominated bond and swapping proceeds to the offshore yuan," Chloe Lau, assistant investor relations manager at China Singyes, said in an interview.

The search for financing arrangements that offer bondholders a greater hedge is expected to intensify thanks to slumping Dim Sum sales sparked by the weakening yuan and accelerating capital flight out of China. The offshore yuan has lost more than 5 percent against the U.S. dollar year-to-date, widening the gap between the premium Dim Sum investors ask for in exchange for lending money and the yields issuers are willing to pay. Buyers typically want higher headline yields to make up for the loss in the currency.

One indication of sapping demand is the recent Dim Sum offering from China's Ministry of Finance, which offered record-high yields on Dec. 8 for bonds issued out of Hong Kong. The Ministry sold 5 billion yuan of the three-year notes at an unprecedented 3.4 percent, compared with the 2.9 percent it had paid for new bonds sold in June. The five- and 30-year bonds were priced at the highest yields since such offshore offerings began in 2009.

"Investors who buy local currency-denominated bonds focus on the currency first, and then credits," Gordon Ip, investment director at Value Partners Ltd., said in an interview. "So it's natural that the yuan depreciation dampens supply."

U.S. dollar-denominated bonds would benefit as a result, according to Arthur Lau, co-head of emerging-market fixed income at PineBridge Investments.

"Dim Sum deposits have been declining so the need to deploy the asset has also dropped," said Lau. "I imagine the need to go back to do Dim Sum is probably lower, which is why we expect more high-yield supply in the dollar market, especially from the property sector, next year."

Yuan- or dollar-denominated loans could also help plug some of the financing gap, according to Conan Tam, co-head of Asia Pacific debt solutions at Bank of America Merrill Lynch.

"There's no silver bullet — if the market is not there, it's not there. But we don't expect investors to jump back in bandwagon anytime soon," he added. "Even if these bonds get redeemed, those funds won’t come back in a form of the yuan — rather, there will be in either dollars or other currencies from portfolios' perspective."

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