Dim sum market wakes up borrowers U.S.

A Caterpillar tractor throws a piece of equipment of construction in Somerville, Massachusetts on January 27, 2010.

Credit: Reuters/Brian SnyderBy Andrea Johnson

Thursday, July 7, 2011 4 pm EDT

by Andrea Johnson

BRADENTON / NEW YORK, July 7 (IFR) - one of the Favorites of the market high-U.S., Financial Services Caterpillar, is becoming quite the regular issuer on the market at the offshore of denominated in yuan, also called dim sum or the CNH bond market.

Wednesday CAT (CAT.)(N) at a price a bond of 2.3 billion yuan ($355 million), its second trade in a market that is looking more and more interesting to us companies doing business in China.

So far, only five foreign multinationals have exploited market dim sum, McDonald (MCD.)(N), Caterpillar, Unilever (UNc.AS), Volkswagen (VOWG_p.DE) and Fonterra. But the market is on average a good deals with five to ten per week, and outstanding bonds have increased by more than 130 billion yuan so far. Many expect this volume exceeds 200 billion yuan by the end of the year.

In addition, a greater proportion of this volume is likely to come from American companies that produce revenues in China. The market of the dim sum is more user-friendly and US firms invest more in China.

"For us, it is part of normal strategy financial Caterpillar that we expect to fund the local market," said Jim Dugan, spokesperson for Caterpillar Inc., "in this" meaning there is great interest for the renminbi market but for us, it is part of our broader strategy.

Borrowers who need funding renminbi are generally two options for raising capital directly in the currency. They can access the market of bank loans - mainland China when the rates are regulated by Banque populaire of China (PBOC) or, as Caterpillar and McDonald before she did so, they can issue on the bond market of renminbi to the coast, where rates are based on the market and return the product to China.

YUAN CHEAP

In the the current economic climate, the offshore market is by far the cheapest alternative for borrowers.

"A bank loan of two years continental Caterpillar renminbi would have cost approximately 6.4% rate of 1.35% Caterpillar has managed to reach in the market bond CNH," said Caroline Owen, head of the North America of DCM for Standard Chartered, the only over-allotment on the transaction of yuan off the coast of Caterpillar.

The 6.4% loan rate is generally a strong transmitter like cat. It sets the base rate and Mainland banks charge borrowers as low as 90% of that rate for the borrower to higher quality. It is essentially a PBOC-gaming floor put in place so that banks do not try to obtain market by undermining and put in danger. However, banks can and do, well more than 100% support rate for riskier credits.

Only savings, the dim sum bond market is like the best alternative for companies in need of funding renminbi. But there is another major factor motivating borrowers prefer a link to a loan.

"Ultimately, the Central Bank control the tap on the continent of loan and can take measures to drain liquidity," said Owen. "However, funded by the bond CNH market, issuers have the security that they have access to funds when they need it.

All the obvious advantages of the dim sum market naturally attract much interest.

"Even if the market is still in its infancy, we have quickly seen the emergence of a variety of credits, ranging from names of high-performance high-quality household and non-assessed issuers," said Owen.

HURDLES STILL ABOUND

That said, the market of the dim sum can be difficult to swallow. The ability to CNH bond produced in China is strictly controlled by the Chinese regulators. In fact, the approval process to make a link to the coast of denominated in yuan is long enough.

"The full potential of growth of volumes of issuance, however, is limited by the amount of product issuers can return to the continent to finance their operations," said Owen.

Size of Deal is essentially capped at what the Chinese authorities allow issuers to the border - and is determined by what is known as the quota of foreign debt, the difference between the total investment and minimum capital.

Issuers seeking to deliver the product of liaison to the continent must seek approval by regulatory authorities indicating the amount they wish to develop in China. In General, issuers will wait for the required approvals given before bringing the case. Regulatory approval could come in weeks or months. Once the transmitters approval, they then hit the bond market and hope to get enough demand to achieve the approved amount.

Caterpillar, for its part, has obtained the green light for a non-negligible route. The agreement of 2.3 billion yuan was large compared to its predecessors. Only eight issuers never tried an agreement of 2 billion yuan or more, and five of those who were affiliated to Government. The other three, Guangzhou R & F, Melco Crown and Ping An (2318.HK), carried out in an environment of much better market and indeed much higher prices. Impressive CAT to prize size in the unstable market conditions.

The demand for bonds CNH is high partly because investors have no other options.

"Investors who have access to the renminbi are really very few investment opportunities." "They can place their cash in deposit accounts CNH paying on 50-60bp, not many, especially when take you into account inflation, or invest in the yuan to a relatively higher performance denominated obligations offshore, in", said Owen.

The request caused yields on bonds coming CNH considerably. When Caterpillar made his debut for dim sum in November 2010, she paid 2% for a 1 billion yuan binding two - year.

Most investors are so far in Asia. But on Wednesday trade actually saw the participation of 20% of European investors. It is the largest European participation in the bond CNH market this year.

Standard Chartered, Caterpillar lead arranger, is ranked number two behind HSBC in the table of League of yuan offshore bonds.

(Statement by the senior analyst IFR Andrea Johnson in Bradenton, Florida;) Other reports by journalists IFR Nethelie Wong in Hong Kong and Timothy Sifert in New York. (Editing by Timothy Sifert)