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Growth in offshore yuan notes will slow this year as investor concern over a “paucity” of protection measures outweighs potential gains from Chinese growth, according to Fitch Ratings Ltd.
So-called Dim Sum bonds, or yuan-denominated securities sold in Hong Kong, “lack many of the covenants investors expect to see in offshore high-yield bonds from the same issuers,” according to an e-mailed media release from the credit rating company today.
The covenants that are missing include cross-default clauses tying the issuing borrower back to the entity that generates the cash, negative pledges preventing the company from using any of its assets for other debt obligations, and restrictions on future borrowings, according to the release.
“Compared to U.S. dollar high-yield bond documents, offshore yuan bond documents have limited operational disclosure beyond the audited financial statements of the issuing entities,” Seoul-based Matt Jamieson, head of Asia-Pacific research at Fitch, said in the release. “Out of the 39 Chinese corporates which issued Dim Sum bonds in 2011, only seven had an international rating. Baosteel is the only Chinese corporate with an international rating to issue Dim Sum bonds this year.”
Another factor dissuading many international investors from buying Dim Sum bonds is the absence of maturities longer than three-years, Fitch said.
“More frequent issues of long-term debt by the Chinese government and its quasi-sovereign agencies would help establish a deeper yield curve that can be used as a benchmark to price other issues,” according to the release.
Dim Sum bond sales more than quadrupled to 151.4 billion yuan ($24 billion) last year from 35.7 billion yuan in 2010, according to data compiled by Bloomberg. Sales this year total 38.2 billion yuan, a 167 percent increase on the same period of 2011, the data show.
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