Dim sum bonds fail to catch CFO fancy

Reliance Power is also raising part of its foreign debt for its Sasan Power Project.

The worlds largest lender Industrial and Commercial Bank of China ICBC may have set up shop and the Reserve Bank of India RBI may have given companies the go-ahead to shop in the yuan market,but its going to be a while before dim sum bonds bond denominated in Chinese yuan and issued in Hong Kong become more popular in India.

Given their unfamiliarity with the yuan market,corporates are cagey entering that market. Even ILamp;FS,which plans to borrow the equivalent of 150 million in yuan,and is hoping to close the book by November,is just testing the waters. A senior ILamp;FS executive said: We plan to swap the yuan exposure into euro and hope that after taking into account the swap cost,it would be cheaper by about 100-150 basis points. The infrastructure financing company wants to explore newer markets like Hong Kong which,it believes,will become increasingly important over the years. Among other firms,Reliance Power is also raising part of its foreign debt for its Sasan Power Project in yuan.

But others are still not ready to borrow in yuan,given the market volatility. CNH Chinese offshore yuan funding is comparable to USD US dollar funding as a general ballpark number,but currently,borrowing costs are volatile and change on a daily basis. I would not be surprised if the cost of CNH funding goes up by about 100 bps more over the next few days, observes Harinder Singh,MD,global markets co-head of wholesale banking at Standard Chartered Bank. Indeed,companies are concerned they could end up paying a whole lot more. Says R Shankar Raman,CFO,Larsen and Toubro: While its still early days,our understanding is that right now,the cost of raising money through yuan bonds will be more than US dollar bonds. Adds Prabal Banerjee,CFO at Adani Power: We believe that yuan will appreciate in future; so,we wouldnt like to take on a yuan liability just yet. There is also the issue of hedging the exposure and we feel it would be cheaper and easier to manage a dollar exposure.

Syed Zafar,head of financing and rates,Deutsche Bank,explains that typically,a company which is able to borrow at,say,libor plus 275 basis points in the dollar market would pay an equivalent of libor plus 300 basis points in yuan market. Chinese banks charge a slightly higher rate for Indian credit. Moreover,there would be additional cost of swapping the yuan liability into a dollar liability, Zafar points out.

Its not surprising therefore,that firms are cagey. Says Seshagiri Rao,director,JSW Steel: We do not have a natural hedge,in terms of exports; moreover,the Chinese currency is expected to appreciate in future. So,as of now,we prefer to have an exposure to the dollar rather than yuan. Rao believes that although its true that his company can hedge the exposure,it may not be financially attractive to do so. While swapping yuan liability is easier for shorter tenures,as Zafar points out,the five-year market in dollar-yuan swaps is not as liquid as the one-three year duration. FE