Reuters: US Dollar Report: CNH Tracker-Credit ratings elbowed aside in hunger for yield

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CNH Tracker-Credit ratings elbowed aside in hunger for yield May 9th 2013, 04:18 Thu May 9, 2013 12:18am EDT By Saikat Chatterjee HONG KONG, May 9 (Reuters) - When Sven Lautenschlager, international funding officer at Germany's L-Bank, was talking to potential investors on selling shorter-dated bonds in the offshore yuan market, he was surprised to find they were asking him to pay at least similar yields offered by bank paper. Even though the state bank of Baden-Wuerttemberg has sold four yuan bonds amounting to nearly 700 billion yuan ($114 billion) in the last two years, he was unwilling to do so because he said it didn't reflect the difference in credit ratings between an AAA-rated lender such as L-Bank and some of the lower-rated bank paper floating in the secondary market. "From an issuer's perspective we are not willing to pay that yield as that gives a wrong impression to our investors on how we see our credit rating in the market and this lack of differentiating between credits remains one of the key challenges for this market going forward," Lautenschlager said at a euromoney conference this week. Calls for credit ratings to more adequately reflect the underlying risks in the three-year old "dim sum" market have been drowned out by bulging order books from Asian private banks and funds who have displayed their better knowledge of these issuers as an offset to credit ratings. When the market began in late 2010, investors were drawn to the prospects of investing in an asset class denominated in a currency that was expected to strengthen at such a healthy rate that investors began to reach for funky products like synthetic products in no time. When those bets were upended in a market selloff in late 2011, investors began to pay more attention to credit risk in these bonds and the demand for ratings grew, but those calls remained far more prevalent among overseas issuers than from mainland Chinese names who tapped into strong demand for yuan assets from Asian banks and funds. Indeed, Gary Lau, managing director of corporate finance at Moody's Investor Services in Hong Kong, estimates that only a third of the outstanding bonds in the CNH markets are currently rated compared to an overwhelming majority of bonds sold in U.S. dollars. That proportion in favour of unrated bonds grows more when it comes to the Chinese sector. Investor demand for yuan bonds remains robust especially because the bulk of the demand for these bonds emerge from investors in Hong Kong and Singapore which makes this market, "unique and technically strong," according to Jon Pratt, the head of Asia debt capital syndicate at Barclays Capital. Indeed, the first quarter of 2013 saw the second biggest issuance of yuan bonds on record, according to Thomson Reuters data. The total volume of issuance this year may be a record even though large institutional investors like central banks and global pension funds are noticeable in their absence. The growing demand for CNH bonds also emerges from the strengthening yuan, the launch of more yuan funds and regulatory changes such as establishing a benchmark for issuers and the likelihood for more capital market reforms. The yuan has been setting near-daily record highs in recent sessions. So while L-Bank may understandably feel miffed about the absence of a credit rating differential in the dim sum market, it may have to wait for a while before investors start looking at that barometer while buying bonds. WEEK IN REVIEW: * Eddie Ye, deputy chief executive at the Hong Kong Monetary Authority, said this week that increased cooperation between different offshore yuan markets is conducive to the growth of the CNH markets. To that end, Hong Kong has lengthened the operating hours of the RMB Real Time Gross Settlement systems to facilitate trade settlement. * On the heels of Hong Kong regulators establishing a benchmark reference rate in the CNH markets, HSBC recently executed its first CNH HIBOR interest rate swap for a notional value of 100 million yuan for a one year tenor and a forward start in July. A fixed rate of 2.64 percent was swamped against 3-month CNH Hibor which will be launched in June. * Chinese property firm Greentown raised a 2.5 billion yuan, 3-year bond at 5.63 percent, the lower end of price guidance. One of the biggest bond offerings in the CNH market, it achieved significant cost savings compared to the U.S. bond markets. The final order book of the offering was in excess of 16 billion yuan, with 126 investors participating. * A weekend SAFE regulation asking onshore banks to adhere to new foreign currency loan to deposit ratios have sent offshore yuan markets in a tizzy as banks were forced to unwind previous long yuan positions. While the sharp market moves earlier this week have subsided for now, traders say the yuan may be a lot more volatile in the short term. CHART OF THE WEEK: Deposits in Hong Kong banks:Yuan deposits have begun to rise again. Deposits in Hong Kong banks grew to RMB 670 billion in the latest data ending March Cross-border trade settlement in yuan registered an even more impressive jump (54 percent on a month-on-month) basis to 341 billion yuan. RECENT STORIES: CNH Tracker-A booster shot for the Hong Kong market China targets hot money inflows with new forex rules More stories about the CNH market Daily onshore yuan reports Daily China money market reports Offshore yuan rate Onshore yuan rate Offshore yuan dealt Onshore yuan on CFETS THOMSON REUTERS SPEED GUIDES Link this Share this Digg this Email Reprints

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