Yuan financing on the rise for China’s airlines
Increased volatility is driving mainland players to seek renminbi-based financing to mitigate currency risks and diversify funding channels
With turbulence in the yuan, Chinese airlines may be heading towards more renminbi-based financing – be it debt or equity – for aircraft bills as they seek to mitigate high currency risks.
China Southern, which is due to report results at the end of the month, is now faced with the burden of having to generate more revenue in renminbi to repay its 105 billion yuan (HK$127 billion) worth of US dollar-based debts after last week’s surprise devaluation of the Chinese currency by 3 per cent – its biggest weekly fall since 1994.
But it is spared the pain in one deal at least. Its recent purchase of an Airbus A330 with offshore renminbi financing supported by European export credit, the first of its kind, may be the start of a new trend in mainland airlines’ efforts to diversify their financing channels.
“RMB is already the second most used currency in trade finance after the US dollar and we fully expect to support many more such deals in the future,” David Godfrey, chief executive of UK Export Finance, said at the time of the aircraft’s delivery in June. It teamed up with HSBC to provide US$100 million worth of renminbi loans for China Southern, the first time an export credit agency had supported a loan in offshore yuan.
William Ho, the lawyer who acted for the airline in the deal, told the South China Morning Post: “There is a trend in utilising more RMB-based international loan debts and RMB-based Hong Kong dim sum bonds by mainland airlines. This means that mainland airlines may use their RMB income to repay RMB-based debts, thus eliminating currency risks.”
China Southern’s chief financial officer Xiao Lijun said in an April briefing in Hong Kong that the company was seeking to borrow more in renminbi and also utilise euro-based financing to reduce currency risks as it had the highest US dollar exposure among its peers.
Its forex sensitivity analysis shows a 5 per cent devaluation of the yuan would dent its bottom line by more than 3.8 billion yuan, cancelling out its forecast first-half earnings for this year.