The Offshore RMB bond market is expected to continue on the fast lane to growth, as bond issuers and investors seek to leverage on RMB appreciation potential according to Daniel Wan, CFO of Shui On Land. "Everybody believes the RMB will appreciate at least 5% every year, and that's the driving force behind growth in the offshore RMB market," Wan says in a recent interview with Finance IQ.
Shanghai-headquartered Shui On Land made headlines in late 2010 as the first property company to issue an offshore renminbi-denominated bond priced at RMB3 billion (US$450 million). The oversubscribed deal raised an impressive RMB $4.8 billion, from private banks, fund managers, insurers and banks in Asia and Europe.
While there are plenty of comparables for Shui On Land in the dollar bond market, including Chinese real estate companies such as Yanlord, Agile Property and Shimao Property, at the time, there were none in the offshore renminbi market. According to Wan, Shui On Land chose the offshore RMB market because they needed to inject RMB funding into mainland China for land payment and location expenses because we are a property developer. The convertible RMB bond was the best choice under the circumstances, but it was challenging to make this decision.
"We did not know how deep the market will be, or if our investors will accept a RMB bond at the time of our launch," says Wan, who adds, "But we went ahead and launched, because the benefits outweighed the risks. As the issuer, we believed that we will be able to command a lower coupon rate and a higher premium, and our investors will also be able to take advantage of the RMB appreciation potential."
Although Shui On's bonds are settled in US dollars, investors are receptive to exposure to RMB. If the Chinese currency appreciates against the US dollar over time -- as Wan and his team expects it will -- investors will be able to capture that upside through investing in this bond.
"We issued a convertible bond because we wanted to provide our investors with the opportunity to convert the bond into equity to further benefit from the exposure to the appreciating RMB," Wan says.
The main reason why Shui On Land's bonds are settled in US dollars was due to unclear regulations on remitting the RMB funds raised according to Daniel. "Government regulation is the major obstacle, as the rules and regulations aren't that clear. For example, if we had launched a Dim Sum bond, we were not clear if we could inject the money raised into mainland China for land payment. On the other hand, we are unable to just borrow RMB from mainland China for the land payment, and we're stuck in the middle," he comments.
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