Aluminium giant Rusal plans 10 billion yuan panda bond issue in Shanghai

Russian aluminium producer to be first foreign firm to sell panda bonds on Shanghai bourse

PUBLISHED : Thursday, 09 February, 2017, 4:31pm
UPDATED : Thursday, 09 February, 2017, 10:11pm

Russian aluminium producer UC Rusal announced plans to issue 10 billion yuan worth of seven-year yuan-denominated onshore bonds to fund materials purchased in mainland China, becoming the first foreign company set to offer so-called “panda bonds” on Shanghai’s stock exchange.

Companies are shifting from Hong Kong’s dim sum bond market to the mainland when it comes to issuing yuan-denominated debt to take advantage of cheaper costs, higher liquidity and greater exposure to investors, according to analysts.

Panda bonds are yuan-denominated debt issued by foreigners on the mainland, while dim sum bonds refer to yuan debt in the offshore market.

The world’s largest aluminium producer outside China has registered its prospectus for a bond issuance on the Shanghai exchange, and can trigger the bond placement decision within a year, according to the company statement.

The proceeds raised will mainly be used for procurement of materials in China, it said.

“The Asian market, and China in particular, has always been an important strategic location for Rusal. We are actively developing our business in the region, both directly and in partnership with the largest Chinese companies,” said Rusal chief executive Vladislav Soloviev.

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“I am confident that the planned issue of panda bonds as a risk free instrument will also be very attractive for Chinese investors and will further facilitate Rusal’s longstanding collaboration with its Asian partners.”

Ivan Chung, Moody’s associate managing director, said a significantly larger capital pool and lower financing costs in the mainland bond market attract firms that want to raise and use funds in the domestic market.

The mainland Chinese bond market was valued at 36 trillion yuan by the end of 2016, while Hong Kong’s offshore yuan pool shrank to 600 billion yuan amid capital flight due to depreciation of the renminbi, he said.

“The liquidity in the mainland is much higher and issuers can find more investors,” Chung said.

As the yuan continues to depreciate, companies that plan to use bond proceeds in the domestic market are free from currency risk if they issue panda bonds, while those wanting to exchange offshore dim-sum bond funds from yuan to US dollars face exchange risks.

“Companies would prefer panda bonds if they want to use the funds in China,” Chung said. “Dim sum bonds are only attractive if firms are in a hurry to change the yuan proceeds into foreign currencies because it takes longer to move panda-bond proceeds out of China.”

With the Hong Kong stock exchange on track to launch a bond connect scheme between the mainland and Hong Kong, dim sum bond will become even more unattractive once investors have greater access to onshore debt markets, Chung said.

China’s outstanding panda bond market, both interbank and on the exchanges, jumped sharply from 15 billion yuan at the end of 2015 to 130 billion by the end of 2016, according to a research report by Standard Chartered. Outstanding dim sum bonds and certificates of deposit (CDs) dropped 18 per cent year on year to 677 billion by the end of 2016.

Rusal accounted for 7 per cent of global aluminium production in 2015. In February, it issued US$600 million worth of five-year Eurobonds in Hong Kong with a coupon rate of 5.125 per cent per annum, to refinance existing debts.

The company was rated AA+ within China by China Chengxin Securities Rating, and has a Ba3 rating from Moody’s.