Chinese companies seek cheaper offshore debt after rule change
China’s foreign exchange regulator in January let domestic companies bring home cash raised through offshore bonds secured by onshore guarantees, in a potential game-changer for domestic borrowers.
The change, which lowers the cost of funding, has sparked more interest in offshore borrowings, bankers and lawyers told Reuters. Chinese firms prefer to raise debt offshore where the market is much deeper and more liquid, allowing them to sign larger and longer-term deals.
However, those wanting to raise money offshore for the purpose of bringing it back to China could previously only do so using relatively weak legal agreements that made it expensive to borrow.
The State Administration of Foreign Exchange (SAFE) now allows companies to offer a guarantee attached to their onshore entity, giving investors more assurance they can get their money back.
Market watchers said the move was designed to help support the yuan by making it easier to raise foreign currency for the purpose of bringing it back home.
China’s foreign exchange reserves fell below the closely-watched US$3 trillion level in January for the first time in nearly six years. The renminbi slumped around 6.6 per cent last year, its biggest annual loss since 1994.
The move is good news for domestic corporates which could see borrowing costs fall by up to 50 basis points as foreigners are effectively put on an equal footing with domestic creditors.
“We view favourably any changes to Chinese regulations which place offshore bondholders on a more equal footing with onshore creditors,” said Aberdeen Asset Management’s head of emerging market credit research Paul Lukaszewski. “Allowing Chinese borrowers to provide offshore bondholders with guarantees from important onshore entities would accomplish just that.”
More corporates are switching to the new funding structure. “There will be more issuers using the guarantee structure. In a few deals that we have kicked off after the Chinese New Year, issuers have switched to guaranteed structures,” said William Liu, partner at law firm Linklaters.
One banker said he had seen a lot of new activity in the debt issuance pipeline as a result of the rules.
Chinese borrowers accounted for more than 40 per cent of hard currency bonds from Asia ex-Japan last year when issuance rose to a record US$217.3 billion, and the supply flow from the world’s second-largest economy is expected to continue this year.
Previously, Chinese firms could only offer foreign investors security through letters of credit and so-called “keep well” agreements. “Keep well” agreements are deeds borrowers can use to enhance their credit worthiness but unlike guarantees they are not legally binding and have not been tested in Chinese courts.
Fears over the creditworthiness of Chinese borrowers have grown amid a broader economic slowdown that has seen a flurry of debt defaults in recent months.
Fredric Teng, head of high yield product group at Standard Chartered Bank, said direct guarantees would help assuage fears and make borrowing between 25-50 basis points cheaper than deals that use “keep well” agreements.
“We were always cautious on those ‘keep well’ agreements but if going forward bonds are issued with guarantees, it will make us look again,” said Sanjiv Shah, CIO at Sun Global Investments, a London-based emerging markets wealth management firm.
