Dim sum finance: tasty morsels for law firms
7 November 2011
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With turmoil continuing to surround the eurozone, raising cash in China has never been so attractive. By Yun Kriegler
France’s President Sarkovy may have been given short shrift by China when he went knocking with the eurozone begging bowl, but that has not stopped European companies such as Tesco, BP Capital and L’Air Liquide benefiting from money raised in that part of the world.
The two issues are obviously separate, but both stem from the rising importance of the Asian powerhouse and its intention to internationalise its currency, the renminbi (Rmb). Meanwhile, the rise of Rmb-denominated bonds, also known as ’dim sum bonds’, is only adding to China’s attraction.
People who have travelled to Hong Kong will be familiar with dim sum, a variety of tasty, bite-sized snacks that form the city’s most famous gastronomic experience. The term, which means ’touch the heart’ in Cantonese, has taken on a whole new connotation, referring to a new financial instrument denominated in Rmb and issued in Hong Kong - the premier offshore Rmb centre in the making.
Since August 2010, when McDonald’s became the first multinational corporation to issue such a bond, the term has gained traction in the global debt market. This has created new opportunities for international law firms with a strong Hong Kong base.
According to data provider Dealogic, a total of 69 dim sum bonds, worth a combined Rmb75.6bn (£7.5bn), have been issued so far this year. This compares with 17 deals valued at Rmb33.7bn for the whole of 2010.
“The government has implemented policies to push the development of the Rmb as an international currency, [meaning it is] not yet fully convertible but is popularly used outside China,” explains Linklaters Hong Kong partner Hwang Hwa Sim. “The process is gradual but progressive. Dim sum bond issuances have been a driving force of this development since the beginning, but the variety of offshore Rmb investment products has started expanding.”
Linklaters has been an active adviser for offshore Rmb financing transactions since their inception. It has acted for the banks on a number of dim sum bond issuances, such as those from Hopewell Highway Infrastructure, Tesco and L’Air Liquide. Allen & Overy advised Tesco, Latham & Watkins acted for L’Air Liquide and offshore firm Maples and Calder acted for Hopewell. In August Linklaters also helped China’s Ministry of Finance on the sale of sovereign bonds in Hong Kong with
a total value of Rmb20bn.
“Offshore Rmb financing transactions have become an important source of revenue,” says Sim. “The market’s new and young, but the important thing is that it’s still growing. If you look at the bigger picture, international firms are facilitating and riding the wave of China’s internationalising currency.”
From local to global
“In the past year a day hasn’t gone by without the international press discussing China’s latest policy moves and examining the future for the Rmb,” says Sau-Wing Mak, who recently left Simmons & Simmons for partnership at Mallesons Stephen Jaques in Hong Kong and is experienced in the offshore Rmb market. “The journey of Rmb’s internationalisation actually began seven years ago. But it was only after the McDonald’s RMB bond issuance in 2010 that companies around the world started taking serious notice of this financial instrument.”
Mak and her colleague, partner Kevin Tung, who also joined Mallesons from Simmons, have worked on a considerable number of dim sum bonds, including the Rmb200m McDonald’s issue, when they advised the arranging banks. US firm Cleary Gottlied Steen & Hamilton advised the company. The deal is widely understood to have brought dim sum bonds to a global audience and has also given the abbreviation Rmb a new interpretation: the Ronald McDonald Bond.
The journey of offshore Rmb liberalisation started in 2004, when Hong Kong banks were permitted to provide Rmb deposits, exchange, remittances and credit card services to personal customers.
However, the biggest developments came in 2010 as a series of regulations and policies were drawn up to open the offshore Rmb market and enable an expanded list of Rmb products in Hong Kong. In that year, a string of high-profile dim sum bond issues took place.
So far this year the central government’s commitment to fully support Hong Kong’s development into an offshore Rmb centre and the further relaxation of policies on Rmb foreign direct investment have fuelled the growth of the market.
Hong Kong rules
At the same time, the scale and size of the Rmb liquidity pool in Hong Kong has expanded phenomenally. At the end of September 2011, the savings denominated in Rmb in Hong Kong reached Rmb622.2bn, representing a 10-fold increase in two years, according to statistics from DBS Bank (Hong Kong). The significant liquidity available in the market has, in turn, hastened the innovation and creation of a number of investment channels.
“Clients around the world are wanting to jump on the Rmb bandwagon,” says Mak. “We’ve witnessed the shift in terms of the amount of enquiries we’ve received. The current situation in the western economies and the weakness of the greenback [US dollar], combined with China’s strong economy and determination to take Rmb international, are some of the fundamentals fuelling the market. The regulations are facilitating the development.”
Although many would consider the measures and developments so far as baby steps, lawyers such as Mak believe they will lead to big results.
“As finance lawyers we move with client demands and follow market trends,” she says. “The Rmb is the darling of the financial market at the moment and this is where a major part of our work is generated. Where there’s a will there’s a way. In the years to come, I believe that the Rmb will become a credible alternative to the greenback.”
Dim sum all round
There are many reasons why dim sum bonds are the flavour of the month. For multinational companies such as McDonald’s, Tesco and Caterpillar that have significant operations in China, dim sum bonds offer an easy, fast and less expensive way to raise funds in Rmb and minimise currency fluctuation risk.
In addition, companies can use the currency to settle cross-border trades. This means that foreign companies, even those without a China presence, can raise Rmb for trade settlements with their Chinese exporters.
To investors, the expectation of further Rmb appreciation makes dim sum bonds an attractive investment.
These factors have contributed to the diversifying issuer base for dim sum bonds. In the past 15 months companies from Russia, the UK, France, India, Malaysia, Singapore, Japan, Korea and a number of other countries have tapped into the market.
“We’re acting for a variety of issuers in Asia and elsewhere,” says Clifford Chance Hong Kong partner Matthew Fairclough. “We expect the variety and diversity of the client base to continue to expand. The issuance of dim sum bonds is an international market issue and we remain confident that it will be a major part of our capital markets practice in Asia.”
“Companies in Europe and the US increasingly realise the attractiveness of raising offshore Rmb,” adds Sim. “The other important story lies in regional deals - the growing fundraising activity of Asia-based companies in Hong Kong.”
Japanese company Orix, Singapore’s Global Logistics Properties and Korea’s CJ CheilJedang are among a long list of Asia-based issuers Linklaters has advised.
The firm has around 30 associates and six partners in its Hong Kong capital markets team, many of whom have exposure to dim sum bond work.
“The number’s growing every day as more of our lawyers start to handle this type of deal. The Rmb’s going through an internationalisation process: so are we,” says Sim. “Besides our China offices our colleagues in Paris, London, Singapore and Tokyo are increasingly involved in this type of deal.”
Although the past two months have seen fewer new issuances, market participants believe the lull is temporary.
“The market’s growing fast but it’s also subject to uncertainty, particularly against the backdrop of Europe’s crisis,” says Sim. “It can’t defy the gravity of the global market. However, the market’s extremely resilient compared with other parts of the world. We have more than a dozen deals in the pipeline, some of which hopefully will be launched this year.”
Another set of statistics from Dealogic shows that in the third quarter of 2011, Rmb bond issues were more popular than euro products for the first time, with the value of Rmb-denominated corporate bond issues by non-financial companies remaining relatively steady at Rmb200bn, while euro-denominated issues more than halved.
Smoothing the path
One of the main concerns hindering the pace of dim sum bond issuances has been the restrictions and regulatory approval requirements on repatriating proceeds into mainland China.
If a company wants to remit Rmb proceeds raised in Hong Kong to the mainland for capital account purposes, it will first have to go through a case-by-case approval process with the Chinese regulators, which can add uncertainty, complexity and time to deals.
In mid-October the People’s Bank of China and the Ministry of Commerce promulgated new rules clarifying and simplifying the framework for Rmb-denominated foreign direct investment into China.
The Hong Kong Monetary Authority expects the new framework to greatly expand the use of Rmb funds in Hong Kong and promote the development of the dim sum bond market. Many market participants, including legal advisers, would cautiously agree.
“The market needs time to digest these rules and is waiting for further clarification and measures to come out,” says Mak. “But it’s the right move in the right direction as it aims to solve one of the issues that has hindered and restrained the market. The new measures will surely encourage more people to participate in the market.”
The new framework reduces the regulatory uncertainty associated with the repatriation of offshore Rmb financing proceeds. But when a company decides to remit bond proceeds into mainland China it will undoubtedly need Chinese legal advice, meaning the new regime is also good news for Chinese law firms.
“In the past Chinese legal advisers only had a minor role to play in the issuances of dim sum bonds, providing basic due diligence reports and legal opinions,” says King & Wood Shanghai partner Roy Zhang. “Under the new framework we expect there’ll be more demand for sophisticated Chinese legal advice, particularly at the repatriation and investment stages.
“When there’s a legitimate and open channel linking the mainland’s economy and industries with offshore proceedings it will open up a whole new dimension for international and Chinese firms to work together on offshore Rmb fundraisings and the investments into the mainland using the proceeds.”
In the near future, mainland companies outside of the financial sector will also be allowed to issue dim sum bonds, adding another array of potential clients to firms’ existing lists.
At the end of October Baosteel, the state-owned steelmaker headquartered in Shanghai, won approval to issue Rmb6.5bn worth of dim sum bonds.
Baosteel’s issuance is expected to set a roadmap for onshore dim sum bond issuers. So far, only Chinese banks, the offshore incorporated subsidiaries of Chinese companies and red-chip companies have done such deals.
“This is going to be another landmark deal, signalling widening access to the offshore Rmb bond market for different types of companies,” says Zhang. “In the issuances of China-based companies, local firms will have a bigger role to play,” The results of a recent survey conducted by Allen & Overy provide further evidence of the market’s strong growth potential. It reveals that 25 per cent of the 1,054 companies with international operations polled expect to tap the Rmb-denominated finance market in the next five years, while 17 per cent expect to use Rmb-denominated products such as bonds, loans and IPOs in the next year.