Get more with myNEWS
A personalised news feed of stories that matter to you
Learn more
An oil tank at Saudi Aramco’s Shaybah oilfield in Saudi Arabia. Photo: Reuters

Saudi Aramco’s panda bond may be an endangered deal as market’s small size hinders fundraising by oil giants, bankers say

  • While Saudi Aramco has listed the yuan as a potential fund-raising currency for a debt issuance, bankers say the market size could hinder the deal
  • Year-to-date issuance of panda bonds is down 50 per cent compared to 2018, though some analysts see it picking up in 2021
Saudi Aramco, the record holder for the most capital raised in a stock sale, created a stir when it said in November that it may sell bonds denominated in yuan, potentially challenging the US dollar’s dominance of the petrodollar market.

But it may be easier said than done, according to bankers who arranged the oil giant’s US$20 billion worth of bond fundraising this year and last. Listing the yuan as a possible currency choice is one thing, but it is quite another to actually raise vast amounts of capital denominated in the Chinese currency.

At issue is the pool in which panda bonds – yuan-denominated bonds sold by non-Chinese issuers – trade. In the first 11 months of this year 30 sales of such debt generated US$6.1 billion, down from US$6.5 billion raised through 21 deals in the same periods of 2019, and less than half the U$13.1 billion raised from 45 deals a year before that, data from Refinitiv shows.

For the world’s second largest bond market, that is a mere puddle compared to the 13 trillion yuan (US$2 trillion) generated in the onshore yuan corporate bond market in the first 11 month of this year, according to mainland media reports citing data from CSCI Pengyuan Credit Rating.

The panda bond market has remained relatively small, because the deal size is limited to between 1 billion and 3 billion yuan by the lack of liquidity in the market. An application process which lacks certainty for issuers is also hindering bigger deals, said David Yim, regional head of capital markets for Greater China & North Asia at Standard Chartered.

“Given the relatively small issue size, panda bonds are unlikely to form a significant part of these oil groups’ overall bond issuance,” said Yim.

He said the US dollar remains the main transaction and funding currency in the oil sector.

Few foreign commodity players have issued panda bonds in the last three years. Russian aluminium producer UC Rusal in 2017 issued one worth 500 million yuan for refinancing purposes, according to media reports. Then in 2018, commodity trading group Trafigura raised the same amount in a three-year deal.

Non-financial corporate issuers need to submit their registration to the National Association of Financial Market Institutional Investors (NAFMII), an industry body under the supervision of China’s central bank. Some in the industry say there is uncertainty around the timing of when approval is likely to come through.

Issuers must file a prospectus in the Chinese language for panda bonds, before issuing an amount based on a total quota approved by the regulator within a two-year time frame. Bankers say this can lengthen the lead-time and costs for foreign issuers.

It generally takes up to 60 business days for a prospective issuer to complete the registration process. Still, “as to how long the registration process would [actually] take it varies on a case by case basis,” said Shirley Wang, a partner at law firm FenXun Partners.

Regular panda bond issuers today include some leading foreign car makers. Among the top 10 deals this year, Daimler and BMW occupy the top two spots, each having raised 2 to 3 billion yuan per deal this year.

Such deal sizes look small compared to Saudi Aramco’s global issuance programme. In April 2019 the oil giant completed its inaugural international bond sale, which comprised a five-tranche issuance totalling US$12 billion. Last month, it raised US$8 billion through a five-tranche global bond deal.

Still the 15-year old panda bond market has drawn in a wider array of issuers in recent years.

For example, in June the Asian Infrastructure Investment Bank, a triple-A rated issuer, made its debut with a three-year, 3 billion yuan panda bond which pays a 2.4 per cent coupon. Part of the proceeds was used to finance projects in China to combat Covid-19, said George Sun, head of global markets for Greater China for BNP Paribas, which was a joint lead-underwriter in the deal.

“We expect a gradual pick-up in issuance next year. This is because as the scale of operations of foreign corporates and multinational companies in China increases, so does their funding needs,” said Sun.

Foreign fund managers who are looking for yuan-denominated debt will increasingly look at panda bonds as the issuers tend to be names their investors are already familiar with, said Sun.

This article appeared in the South China Morning Post print edition as: panda bond market is hindered by small scale