Banking & Finance

A large serving of dim sum

Baosteel becomes the first Chinese company to issue in Hong Kong

A large serving of dim sum

Xu Lejiang, president of Baosteel

When foreign companies started issuing renminbi-denominated debt in Hong Kong last year, the comparison with the Cantonese dim sum meal seemed appropriate one. After all, the first dim sum bond issued by a foreign firm raised just $30 million (for McDonald’s), reflecting the bite-sized nature of the Chinese meal.

But as the deals increase in size, the moniker is being stretched to new limits, with Baosteel Group’s recent sale of Rmb3.6 billion ($564 million) of debt in Hong Kong.

The deal – managed by HSBC – also stands out because Baosteel is the first mainland company to issue a dim sum bond directly from China. Previously Chinese companies issued the bonds either via a Hong Kong subsidiary or through an offshore holding company.

That changed in October when the state planning agency, the NDRC, granted Baosteel approval to tap the Hong Kong market. Mainland companies and financial institutions have a Rmb50 billion quota to issue dim sum bonds this year.

By raising capital in Hong Kong, Baosteel was able to cut its borrowing costs by nearly 1.5% compared with yields in Shanghai, reports Bloomberg.

The debt was split into two, three and five year tranches (the five-years pay the highest rate of interest, at 4.375%). They also proved particularly popular among insurance companies, with 59% of the notes going to insurers, an investor class that typically holds bonds until maturity, reports FinanceAsia.

Around half of the two and three-year notes were taken by banks.

Still, Baosteel had to pay coupons higher than it would have needed to a few months ago, when other Chinese firms were issuing debt in less anxious economic times.

“This is a milestone deal for the dim sum market,” Gina Tang, HSBC’s head of debt capital markets for Hong Kong and China, told Bloomberg. “The transaction has attracted massive levels of investor interest despite the uncertainty that rocked markets.”

Sales of dim sum bonds in 2011 now stand at Rmb144.1 billion, more than quadruple the amount in 2010, according to Bloomberg data. And yields are expected to remain relatively low, as there is a huge surplus of renminbi deposits in Hong Kong (about Rmb620 billion), much of it looking to be invested.

A horde of Chinese companies would like more access to some of that offshore capital. But the problem for aspiring issuers is that regulators will only allow the largest state-owned companies to issue dim sum debt, according to one dealmaker speaking to the Financial Times. Privately-owned companies will have to wait even longer.

It is also worth noting that Baosteel will keep the raised capital offshore. Another source speaking to the FT said that the company will use the money to pay for acquisitions abroad.

© ChinTell Ltd. All rights reserved.

Sponsored by HSBC.

The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.