The year so far in bonds could be described this way: busy, busy, dead, busy. The first five months of the year were highly active, only for issuance volumes to get shoved off a cliff in late May by tapering talk, and only then for bond volumes to make a big September recovery.
Hong Kong/mainland credit markets are heading towards a record year, and this despite a three-month summer shutdown. One big factor drives issuance: opportunism. Issuers see that interest rates in US dollars, while still low, are heading up, and they are pushing out as much issuance as they can to lock in low fixed rates.
"Borrowers see that long-term interest rates are still at a bottom, and they are taking advantage of that fact," said Frank Kwong, head of Asia-Pacific fixed-income syndicate at BNP Paribas.
To give that some context, mainland firms in recent years could be counted on to issue each year about US$10 billion to US$15 billion of bonds in offshore markets.
In 2012 such firms issued about US$80 billion offshore, and this year they are on track to raise US$100 billion, predicts Yves Jacob, Asia-Pacific head of debt capital markets at Societe Generale.
The dim sum bond market is exploding. The instrument offers mainland issuers all the advantages of offshore capital but in yuan - and this market is also heading for another record.
Hong Kong and mainland firms are also piling into syndicated loans at a rate never seen. Hong Kong and mainland firms borrowed an astounding US$111 billion through syndicated loans in the first nine months of the year, according to Thomson Reuters.
That is a 48 per cent rise over lending volumes in the same period last year, and it already counts as a record year for borrowing for firms from Hong Kong and the mainland. Officials are tightening capital in the mainland banking system which is sending issuers to Hong Kong, to get cheaper, bigger loans through the international syndicated market.
"Chinese banks lend onshore off the People's Bank of China rate which is 6-odd per cent. For some time, borrowers have had a view, that borrowing in yuan is not optimal, because not only are interest rates higher but they also perceive this to be an appreciating currency and that US dollar borrowings are more beneficial," said Anup Kuruvilla, managing director, loan syndicate at RBS.
At the same time, regulators have relaxed the rules on bringing onshore cash raised offshore. Firms used to have to apply for special permission to bring proceeds back. Sometimes they would get this permission, sometimes they would not, which made planning difficult. In the past 18 months, a relaxation on items like inter-company loans has made transferring cash back onshore fairly seamless.
"The Chinese government has moved from restricting these flows to a policy of controlling these flows," said Jacob.
Bond issuers are maximising the currently prime conditions by extending the tenor on bonds. Last week CNOOC closed a 10-year bond, and Country Garden issued a 7½-year bond. Sinopec in April issued a US$3.5 billion bond with a 30-year tranche, and CNOOC in May also raised 30-year money.
Issuers are also experimenting with new structures - perpetual bonds and other hybrid structures are now in common use - and new markets. Last week's CNOOC deal was the first bond in euros from a mainland firm, and should open a lot more issuance in the currency.
Conditions are also drawing in lower grade credits that are selling bonds at extraordinary coupons.
In April, the small-cap mainland property firms Xinyuan Real Estate and Golden Wheel Tiandi offered bonds with coupons of 13.25 per cent and 11.25 per cent, respectively. There is talk of other developers placing private bonds with equity enhancements that pay total returns in the realm of 25 to 30 per cent.
Such terms raise flags. "To be getting high-teens returns … you have to be taking a lot of risk. People who think this level of return is without risk are deluded," said Gregor Clare, fixed-income investment director at the Fidelity fund house.
Notable Deals
January: Agile Property launches the first perpetual bond by a non-investment grade property company
February: CNOOC takes US$6 billion bridge loan to buy Nexen
April: Xinyuan Real Estate issues US$200 million bond at one of the highest coupons of the year for dollar issues – 13.25 per cent Golden Wheel Tiandi issues 600 million yuan dim sum bond at 11.25 per cent coupon, one of the highest this year for yuan issues
May:CNOOC raises US$4 billion, the largest bond issue by a mainland firm Hutchison Whampoa issues Asia’s first euro-denominated perpetual bond
July: Alibaba closes US$8 billion loan to help pay for Yahoo’s stake Tianjin Binhai Rural Commercial Bank raises 1.5 yuan
September: CNOOC issues first euro-denominated bond by a mainland firm
Ongoing: Shuanghui International raising US$4 billion loan to buy Smithfield Foods