Demand grows for dollar bond launches

Chinese companies climbing on bandwagon to refinance debt: experts

Low interest rates, and ample money supply overseas, are luring more Chinese companies to issue dollar-denominated bonds to refinance debt, according to financial industry specialists.

Issuers on the mainland and in Hong Kong have sold $18.8 billion worth of bonds so far this year, more than six times the total for the same period last year, data from Bloomberg show.

At the start of May, CNOOC, China's largest producer of offshore crude oil and natural gas, issued dollar-dominated notes worth $4 billion through CNOOC Finance, a wholly owned subsidiary of the company. These guaranteed notes will be due from 2016 to 2043.

Companies such as Country Garden Holdings, Hainan Airlines and China Ocean Shipping have also jumped on the bandwagon in the first quarter, issuing more than $10 billion in dollar bonds.

"International investors are seeking higher interest return as worldwide quantitative-easing monetary policy continues, which can be provided by Chinese high-quality enterprises for raising funds," said Fang Fang, CEO of China investment banking at JPMorgan, which underwrote bonds for 10 companies in the dollar market in January.

Richard Dawson, partner and head of debt advisory with KPMG, said that besides increasing liquidity, banks' limited lending capacity and the "very quiet" mainland IPO market are also driving Chinese companies' overseas bond issues.

Data from Bloomberg indicate that companies on the mainland and in Hong Kong have borrowed about $25.2 billion in loans to mature this year, 76 percent more than last year.

Dawson says these bonds will allow the diversification of sources, and enable issuers to take down existing bank lines in the institutional market.

"With historically low interest rates, issuers are taking the opportunity to refinance existing debt and lock in these rates while they can," he said.

On May 1, yields on 10-year Treasuries touched 1.61 percent, marking the lowest for this year and the lowest since December 11. On average, Chinese companies are paying 45 basis points less for dollar loans compared with 2012, according to Bloomberg.

Ivan Chung, vice-president at Moody's Asia Pacific, said some Chinese State-owned enterprises will have lower interest rates for dollar bonds than renminbi bonds, and it is comparatively easier for them to extend the maturity date from 10 to 30 years.

He considers this offers a good opportunity for global fund managers to tap the Chinese market, especially in some stable and profitable industries.

He says fund managers have reduced their emphasis on Europe amid continuing fallout from the European sovereign debt crisis, and will increase exposure of emerging markets in their portfolios.

"Previously, these funds could mainly focus on three major oil companies in China, while now, since more SOEs are issuing dollar notes, they will have more choices to diversify their portfolios and reduce risks," said Chung.

"With overseas financing channels, these companies will have more flexibility to raise money overseas. Otherwise, they would have to bear the exchange risk," he said.

Dawson said this trend helps to build access to China for overseas investors.

"The bond market on the mainland continues to be difficult to access in any real volume. This allows investors to build exposure to China in well-regulated securities markets such as Hong Kong and Singapore in US dollars, and often to well-rated names with strong business in China and internationally," he said.

Dawson also said the rapid increase in volume still represents a tiny proportion of global bond issuance. For investors, the long-term impact should be analyzed case by case.

Chung said investors should not be concerned, unless there is a significant increase in debt ratio, or use of the money changes companies' capital structure.

"If companies are using the long-term bond to replace bonds which are about to mature, they will have lower risks in liquidity and financing costs; while financial risks will be raised when the debt ratio gets higher, or companies use the money for improper investment."

Fang said the overseas financing activities of Chinese companies will be "very vibrant" this year, showing investors' positive expectations on economic growth.