美银美林2011年香港人民币债券市场深入报告

c58da9b710df662c BofA Merrill Lynch does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Refer to important disclosures on page 22 to 24. Analyst Certification on Page 21. Link to Definitions on page 21. 11015826 Credit primer: Off-shore RMB market Dim sum (bonds) anyone? „ State of the CNH (dim sum) bond markets The CNH bond market has grown at a phenomenal rate in the last year although the outstanding market size was still relatively small at RMB76bn ($12bn) at YE2010. HG issuers dominate the market with banks and funds being the main investors. Trading liquidity is relatively weak due to the small deal size (RMB1- 1.5bn) and the short tenor (2-3yrs) of bonds. In general CNH bonds trade at a premium to CNY bonds but a discount to USD bonds for IG issuers although there has been some arbitrage for HY issuers relative to USD bonds. History and drivers of off-shore RMB growth/development The CNH market started in 2007 but growth really took off in 2H2010 when HKMA allowed a larger range of issuers to participate. Also driving the growth are the rapid accumulation in RMB deposits and increasing pool of RMB holders and range of RMB-settled investment products offered after the regulatory relaxation. Synthetic bonds: The “other” RMB market This is not a new market per se as Chinese companies have issued synthetic RMB CBs, but a relatively new market for straight bond issuers. Interestingly we have seen more issuance in synthetic format than we have seen in CNH format since the start of the year, but only from HK and Chinese property companies to date. The average deal size is larger, duration is longer and liquidity is greater than for CNH bonds as the investor base is bigger and more diversified. Pricing is similar to USD market incorporating RMB appreciation. We compare and contrast the CNH and synthetic RMB markets for issuers and investors. Transferring bond proceeds on-shore Similar to bringing FX onshore, the CNH bond proceeds can be repatriated onshore via shareholder loans or equity injection subject to regulatory approvals, though the process is less straight forward and may take 4-8 weeks. Although shareholder loan method provides more flexibility and tax benefits for the issuers and better protection for the bondholders, not all issuers have this option. As an investor it is important to understand that off-shore corporate bonds for Chinese companies are all structurally subordinated to onshore creditors, despite the name ‘senior guaranteed’ and that bringing money back off-shore to pay coupons/principal may not be straightforward. Overview of on-shore and Panda bond markets The onshore bond market started in early 1990s and has grown into a size of RMB20tn by end-2010. The domestic bond market comprises of a wide range of instruments, including bonds issued by foreigner issuers. The Panda bond market, despite its early start in 2007, remains small in size with eligible issuers restricted to locally incorporated foreign banks and international development organizations. We compare the regulatory framework for the Panda bond market and the CNH bond market. Emerging Markets Credit Strategy | Asia 07 February 2011 Michele Barlow +852 2536 3750 Research Analyst Merrill Lynch (Hong Kong) michele.barlow@baml.com Joyce Liang +852 2536 3817 Structured Product Analyst Merrill Lynch (Hong Kong) joyce.liang@baml.com Chart 1: Off-shore RMB bond market issuance 0 5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000 45,000 50,000 2007 2008 2009 2010 2011YTD RM B m n CNH Bonds Sy nthetic RMB Bonds (Non-CB) CNH CDs Source: Bloomberg, BofA Merrill Lynch Global Research Rules of thumb for converting RMB bonds to USD and back: „ USD equivalent coupon = RMB linked coupon + $IRS rate – (ND) CCS rate „ RMB linked coupon = USD coupon - $IRS rate + (ND) CCS rate „ To get spreads over Libor (for comparing to CDS) take the coupon +/- (ND) CCS rate only. „ Use CNY ND CCS for synthetic bonds and CNH CCS for CNH bonds „ Choose $IRS and (ND) CCS rates for years equivalent to bond duration. (See Appendix 3 for details) Cred i t p r imer : Of f -shore RMB market 07 February 2011 2 Off-shore RMB Bond market overview The off-shore RMB market, also known as the CNH1 or the Dim Sum2 market, was established in 2007 after the People’s Bank of China (PBOC) announced “Interim Measures for the Administration of the Issuance of RMB Bonds in Hong Kong Special Administrative Region by Domestic Financial Institutions”. Unlike other markets where foreign companies issue in local currency (like the Kangaroo market in Australia and the Samurai market in Japan etc.), the Dim Sum market is made up of both foreign issuers (like McDonalds and Caterpillar) as well as Chinese issuers. This is because of the separate development of on- shore and offer-shore RMB markets. Foreign issuers in the on-shore market (or CNY market), called Panda bond issuers, have been limited. The development an off-shore market provides both an avenue for channeling RMB funds back to the Mainland and an investment avenue for RMB funds held in deposit accounts off-shore, a first step towards internationalizing its currency. For now, the Chinese government controls RMB inflows and outflows which require two separate markets. Longer term, we would expect the on-shore and off-shore markets to eventually become one market as the RMB becomes fully convertible. (For more on “CNH and the path to CNY internationalization”, please see GEMs Strategy Viewpoint, 31 January 2011). In this report we look at where the CNH market is today, the history and drivers of growth/development of the off-shore RMB bond market and how the RMB synthetic market is developing in tandem with the CNH market. We compare and contrast the CNH and synthetic RMB markets looking at issuance in terms of bond tenors, deal sizes, pricing and liquidity and look at some of the reasons that a company would issue in CNH or synthetic RMB, including what is required for them to bring the bond proceeds on-shore in China (and back out again to pay coupons/principal). Finally, we provide a quick overview of the on-shore CNY bond market and the Panda bond market. Current state of the CNH (dim sum) market Small market but growing quickly The CNH bond market has grown at a phenomenal rate in the last year with the outstanding size of the market reaching RMB75.7bn (US$11.4bn) by the end of 2010. In 2011 we have already seen RMB6.05bn (US$918mn) in new bond/CD issuance from eight issuers. The potential for growth remains strong given that (1) outstanding CNH bonds (including CDs) only make up 22% of RMB deposits and (2) RMB deposits in HK have been growing exponentially since the government has allowed trade settlement in RMB and on expectations of currency appreciation. Mainly institutional investors: Increasing diversification Historically, banks have been the main investor in CNH deals (~70%) along with retail (~30%). However, there has been a shift in investor base since August 2010 after (1) Haitong International launched the first dim sum bond fund which has led to more funds being set up to invest in CNH bonds and (2) the PBoC 1 Contraction for Chinese Yuan (CNY) deliverable in HK. Note that RMB (Renminbi) or the People’s Money is the official currency in China while the Yuan is the base unit for RMB similar to Dollar in USD. 2 Dim Sum is a Cantonese term for a type of Chinese dish that involved small individual portions of food, usually served in a small steamer basket or on a small plate. (Xao Long Bao (soupy pork dumpling) is a favorite of the author.) Chart 2: Off-shore bond and CD supply 0 5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000 45,000 2007 2008 2009 2010 2011YTD RM B m n Bonds CDs Source: Bloomberg, BofA Merrill Lynch Global Research Cred i t p r imer : Of f -shore RMB market 07 February 2011 3 announced that foreign central banks, CNY clearing banks and cross-border CNY trade settlement participating banks could start participating in the on-shore interbank bond market, subject to quotas, which enables banks to invest at higher yields directly in the CNY market. Looking at recent deal statistics (since late 2010), funds have taken 44% of the new deals on average with banks allocated 36%, retail 16% and other (insurance) about 4%. (See Chart 3 below) Short bond tenor & small deal size limit trading liquidity The average tenor of new issues tends to be short – a large majority of new issues have been 2-3yrs in duration (see Chart 4 above). In October 2010, ADB was the first issuer to issue a 10yr bond with the Ministry of Finance following up with another 10yr bond in December. The only companies who have raised 5yr bonds are China Resources, China Power and the Ministry of Finance. In 2011 the majority of issuers have raised 2-3yr bonds (IFC is the exception with a 5yr bond). While Asian investors generally tend to prefer short-dated bonds, the average duration in the CNH market is shorter than other local currency markets as well as the Asian USD bond market, where most bonds issued average 5yrs. We believe the focus on short duration by the market is due to a combination of factors which include: „ Banks, which have been the historical buyers and still account for about 35% of the buyer base, will prefer shorter durations to better match assets and liabilities „ There is not yet a critical mass of insurance investors who tend to prefer long-dated issuance to better match their liabilities. „ There is little ability to hedge interest rates in the CNH market and investors would run basis risk hedging interest rate risk with CNY. In general, the average deal size is quite small at about RMB1.0-1.5bn (~US$150-250mn). As a consequence of the relatively small average deal size in conjunction with short tenors, fewer trading-type accounts and more demand than supply, trading liquidity is relatively weak with less than RMB200mn in daily Chart 3: Investor base breakdown for recent deals Funds 44% Banks 36% Retail 16% Other 4% Source: BofA Merrill Lynch Global Research Chart 4: Bond tenor breakdown for deals issued 1y r 2% 2y r 53% 10y r 3% 5y r 6% 3y r 36% Source: BofA Merrill Lynch Global Research Cred i t p r imer : Of f -shore RMB market 07 February 2011 4 turnover. Over time as the market grows, the supply/demand situation begins to balance out, the number of trading accounts increase, deal sizes increase and tenors lengthen, trading liquidity will increase commensurately. Mostly investment grade issuers, some high yield element In Asia, it is usually only high grade issuers which have access to domestic bond markets3 (including Australia and Japan) as domestic investors have little appetite for high yield bonds. For the most part, high yield issuers wanting to raise funding from public bond markets have really only been able to do this in USD (although we have seen a number of RMB synthetic deals issued in the last month which we discuss later) given a larger and more diverse investor base. However, we have seen a few high yield issuers tap the CNH market. We think that to some degree this is driven by the lack of supply and yield in the CNH market. Over time, we expect the supply/demand imbalance to normalize and we think it will be interesting to see whether a true, liquid, high yield market develops in RMB. For now, investors are starved for paper and reaching for yield. (For a full list of dim-sum bonds issued to date, please see Appendix 1.) Pricing driven by supply and demand Trades at a premium to CNY market In general, CNH bonds have been offered and trade at tighter yields than comparable on-shore CNY bonds. This premium is a reflection of the strong demand for CNH assets which has driven down pricing for issuers as bonds provide a better yield than bank deposits. In December, the MoF priced a 2yr retail tranche which was 2.37x oversubscribed while selling 3yr, 5yr and 10yr bonds to institutional investors. (BofA Merrill Lynch was chosen by China’s Ministry of Finance as one of three market makers.) The differential between paper on-shore and off-shore is quite stark if we look at pricing yields for MoF bonds in CNY and CNH. (See Chart 5) Trades at a discount to USD market for investment grade issuers While there remains strong appetite for RMB denominated assets, it is generally more expensive funding for investment grade issuers compared to the USD bond market. For example, China Resources (RESOUR) issued a $500mn 5yr USD bond in August 2010 with a coupon of 3.75%. In early November, the company raised RMB1bn (~US$150mn) in 5yr CNH bonds with the same coupon. At the time of issue the USD bonds were trading at about L+200. Incorporating the CNH CCS (which we note is not liquid so there is some flex in the adjustment) the CNH bonds were offered at about L+300, a 100bps discount to the USD bonds. The same holds true for other issuers such as Caterpillar and McDonalds. However, issuers wanting to raise RMB to bring on-shore, pricing is more attractive than if they raised it in the on-shore CNY market (as discussed above). Arbitrage between CNH and USD markets for Galaxy However, the CNH market has provided an attractive alternative for high yield issuers such as Galaxy who was able to take advantage of very strong appetite for higher coupon bonds. (It is our understanding that the company did not bring the RMB on-shore but swapped the bond proceeds to repay off-shore debt.) In December, Galaxy raised RMB1.38bn in 3yr paper with a coupon of 4.625%. Incorporating RMB appreciation based on the CNH CCS curve, these bonds 3 In some markets like Malaysia and Thailand, companies which would be rated BB or below by international rating agencies do gain access to domestic markets with BBB ratings by domestic rating agencies but size and liquidity of BBB rated companies is quite limited. Blue chip companies in India and Indonesia which are non- investment grade will also have access to domestic bond markets. Chart 5: Yield differential at pricing for MoF bonds in CNH and CNY 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 3.5% 4.0% 4.5% 2y r 3y r 5y r 10y r CNH CNY Source: Bloomberg, BofA Merrill Lynch Global Research Cred i t p r imer : Of f -shore RMB market 07 February 2011 5 priced at about L+470bps. At the time, the Melco Crown (MPEL) 5yr CDS was trading at about L+520bps. As the curve between 3yr and 5yr was relatively flat, this suggests that Galaxy achieved relatively attractive pricing in the CNH market. Tenor would likely have been a consideration for Galaxy. Given a flat 3yr and 5yr curve in the USD market and 3yr paper being the preferred tenor for CNH investors, Galaxy was able to assess which market could provide the best pricing. In this case, the company was able to take advantage of the strong demand for CNH bonds and was able to fund at an attractive level in CNH. In addition, the company was also able to issue a bond with marginally weaker covenants than if they were to issue in the USD bond markets (see Table 1 below). Table 1: Comparison of covenants for CNH and USD bonds Galaxy USD 2012s Galaxy RMB 2015s Status Secured (project finance) Unsecured Additional debt tests: Incurrence tests Debt/ EBITDA < 2.75x for senior debt, 2x otherwise NA Incurrence test carve out US$120mn total NA Maintenance tests NA Consolidated net worth > HKD7bn Max Leverage ratio < 1.75x Restricted payments test Dividend, buybacks and optional redemption restricted to 50% of total net income plus equity infusion and sale of investments. Change of Control Put Yes @101% Yes @101% Interest Reserve Account Yes. 2 qtr interest pre-funded NA Asset Sale Restrictions Consideration needs to be in cash, use only for repaying senior indebtedness, buy new assets or repay notes NA Negative pledge on assets Yes Yes Restriction on affiliate transactions Yes No Source: Bond prospectus', BofA Merrill Lynch Global Research We think that Galaxy was able to achieve attractive pricing given its timing into the market when there was strong demand for high yielding assets and as it is a reasonably well known name in a high growth industry which most investors believe has robust fundamentals. We have since seen small deals from PCD Stores, a luxury department store operator in China and Yeun Foong Yu Paper, a Taiwanese paper manufacturer. In the case of PCD Stores, Chinese consumer demand plays are reasonably well supported although we are a little surprised at a small Taiwanese paper manufacturer managed to tap the market given the cyclicality of the industry. (See Appendix 3 for a cheat sheet on how to compare RMB and USD bonds.) Cred i t p r imer : Of f -shore RMB market 07 February 2011 6 Growing potential to invest CNH onshore may impact pricing versus CNY On 16 August 2010, the PBOC4 opened a new channel for off-shore RMB to come into the onshore interbank bond market. Foreign central banks, RMB clearing banks in HK and banks participating in cross-border RMB trade settlement can invest their RMB liquidity in the on-shore bond market. These investments will come under a quota and go through a separate account. This allows them the ability to hold higher-yielding RMB-denominated assets than the deposits they had previously been stuck in and can also diversify their range of counterparties. On 18 January 2011, the China Securities Regulatory Commission announced it would launch a trial program, also known as mini-QFII, to allow local brokerages and investment firms to raise money overseas and bring in this money to invest domestically. At least 80% of the money raised has to be invested in the bond market, with the rest in equity. The mini-QFII scheme will be subject to separate quotas, which was expected to be initially capped at RMB20bn by the market. Currently, local brokerages and investment firms are only allowed to raise money domestically and invest domestically. Mini-QFII takes after the 8-year-old QFII program (Qualified Foreign Institutional Investor program) which allows foreign fund managers to invest in Chinese stocks and bonds on behalf of foreign investors using money raised overseas. Up to June 2010, some 80 foreign firms were approved to invest in China under the QFII program, pumping in about $17.7bn. We believe a certain amount of RMB deposits held in Hong Kong will be directed onshore through the two channels discussed above. However, as the two programs are operated on a quota system and the initial quota (estimated by the market) seems to be relatively small compared to outstanding RMB deposits in Hong Kong, we believe the pricing impact on the CNH market should be limited for now. Growth and development It all began in 2007… The offshore RMB bond was first introduced in 2007 after the Regulation on RMB Bond Issuance of Domestic Financial Institutions in Hong Kong SAR was jointly promulgated by PBOC and NDRC on June 8, 2007. The regulation allows policy banks and commercial banks legally incorporated in Mainland China to issue offshore RMB bond i