Fitch InterView: Chinese Corporates to Still Favor Onshore Bonds in 2016
In the Q&A below, Fitch's Shanghai-based analysts, Shuncheng Zhang and Ying Wang, discuss factors that drove the rapid increase in onshore bond issuance by Chinese corporates in 2015 and their outlook for 2016.
Q: What drove the boom of Chinese corporates' onshore issuance in 2015?
A: Offshore bond issuance by Chinese corporates decreased 6% yoy to USD49bn in 9M15, while onshore issuance stayed roughly flat at CNY3,894bn (USD628bn) . A record CNY442bn, representing 10% of total onshore corporate bond issuance, was raised from the exchange market in 9M15, more than triple the CNY129bn in the full year 2014.
Lower regulatory entry barriers were a key driver behind the boom in the issuance of exchange corporate bonds. In January 2015, the China Securities Regulatory Commission (CSRC) expanded the pool of eligible exchange corporate bond issuers to all onshore-registered corporates from A-share listed corporates only. Issuance from non-listed corporates formed 59% of the total exchange corporate bond issuance in 9M15.
The regulator also reduced the administrative burden for exchange corporate bond issuance. For instance, CSRC has introduced a registration scheme for public bond issuance and reduced the time for application processing to three months. The administrative procedure for private placements is quicker and simpler as it only requires filing with the Securities Association of China within five business days after issuance.
The strong increase in supply has been absorbed by robust demand. Abundant idle liquidity amid a benign monetary and fiscal policy environment as well as capital exiting the stock market since June 2015 have fuelled strong investor appetite for fixed-income products. As a result, onshore bond yields, especially exchange corporate bonds, fell sharply and this enticed more corporates to tap this market.
Q: Will the strong momentum of onshore issuance continue in 2016, while offshore issuance shrinks further?
A: We believe onshore issuance will further expand in 2016, fuelled by continued regulatory easing and refinancing of higher-cost debt. The National Development and Reform Commission (NDRC) has recently followed CSRC's suit by loosening regulatory and administrative requirements on enterprise bond issuance. Fitch expects the share of onshore bonds issued by Chinese corporates with offshore bonds outstanding to increase in 2016 - in 9M15, the share was 17%.
New supply pressure and potential outflow of capital to other asset classes, for example if the Chinese equity market recovers in 2016, could cause onshore yields to rise, while reduced supply of offshore paper and growing demand for US dollar-denominated assets could drive offshore yields down, which will narrow the gap with onshore yields. However, the onshore market's lower funding cost should still remain attractive for lower-rated corporates.
The offshore market is likely to see very low issuance from high-yield Chinese corporates in 2016; this is already evident in the volume shrinking to USD7bn in 9M15 from USD12bn in 2014. Some investment-grade issuers may continue to tap the offshore market, but the proceeds are likely to be used for their offshore projects.
In addition, the NDRC recently changed its policy to require all Chinese corporates, including the offshore-incorporated entities, to be registered before they can issue debt offshore within a certain quota. The new requirement may put a temporary halt to offshore issuance until more clarity and supportive policies are rolled out at the implementation level.
Q: How does the funding cost of onshore issuance compare with that offshore?
A: At the end of 9M15, five-year corporate bonds with domestic ratings of 'AAA', 'AA+', 'AA', and 'A+' yielded 4.04%, 4.59%, 5.05%, and 8.33% respectively, in the interbank market. The yields were lower in the exchange market at 3.37%, 3.56%, 3.76%, and 6.50% respectively.
In contrast, offshore yields are generally wider across the curve - the lower the ratings of the offshore bonds, the wider the gap between their yields and the onshore yields. The onshore issuers with offshore bonds outstanding are all rated at or above 'AA' by domestic rating agencies as of end-9M15, while their international ratings range from 'A+' to 'B-'.
For example, Yingde Gases Group Company Limited's (BB/Negative) onshore bonds are rated 'AA' domestically and were quoted at 5.5% with 4.9 years till maturity - 740bp below its offshore bonds with a shorter maturity. In the property sector, Oceanwide Holdings Co. Ltd.'s (B/Stable) onshore bonds, also rated 'AA' domestically, yielded 6.5% with a six-year maturity, 400bp lower than its offshore bonds with a four-year maturity.
Q: Which sectors are most active in tapping the onshore corporate bond market?
A: The onshore corporate bond market is dominated by capital-intensive sectors. Capital goods, utilities, materials, energy and transportation are the top five sectors, accounting for 75% of total issuance in 9M15.
The property sector has a strong presence in the exchange market with an issuance share of 46% in 9M15. Offshore Chinese property bond issuers' onshore issuance surged to CNY115bn in 9M15 from CNY11bn for the full year 2014. In contrast, their offshore issuance fell to USD9bn in 9M15 from USD24bn in 2014.
Q: Does the onshore bond market favour SOEs over non-SOEs?
A: We believe SOEs will continue to dominate onshore corporate bond issuance, but non-SOEs' issuance will increase rapidly as a result of lower regulatory entry barriers. The share of SOE issuance declined to 85% of all onshore corporate bonds in 9M15 from 89% in 2014. The decline is partially due to strong issuance from non-SOEs in the exchange market, which accounted for 30% of total exchange issuance in 9M15.
The pricing differential between SOEs and non-SOEs is more significant down the credit curve. For example, five-year exchange corporate bonds with domestic ratings of 'AAA' issued by SOEs trade at similar yields to those by non-SOEs, while 'AA'-rated bonds issued by non-SOEs yielded 60bp more on average than those by SOEs. The pricing differential is greater in the interbank market, where five-year 'AA'-rated MTNs issued by non-SOEs yielded 100bp more than those by SOEs.
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