By Sarka Halas
Russian banks are increasingly selling bonds in the offshore
renminbi market as growing investor demand allows them to borrow at
cheaper rates and a chance to diversify their funding base.
Investors say they are keen to buy the bonds because they are
often issued by state-backed, high profile Russian banks and offer
an attractive yield and exposure to the Chinese currency.
Russian banks-including JSC VTB Bank, Russian Agricultural Bank
OAO and Russian Standard Bank ZA--have already sold the equivalent
of $480 million of the bonds this year, compared with just $309
million in the previous three years. Gazprombank OAO, the financing
arm of energy giant Gazprom, also issued yuan debt.
The trend illustrates the growing prominence of the offshore
renminbi market, which Standard Chartered expects to be worth
between 320 to 350 billion yuan ($50.8 to $55.6 billion) in
issuance this year, up from last year's record issuance of 267
billion yuan. The bank expects yuan issuance to rise in 2013 on
further regulatory liberalization and a more constructive outlook
for the currency.
"What's driving this largely is yield, some expectation of
currency appreciation and the need for investors to put their
renminbi somewhere while they wait," said Edmund Harriss, director
at Guinness Asset Management.
Mr. Harriss' Renminbi Yuan Chinese Currency Fund bought VTB's
yuan bonds, which offered a coupon of 3.8%, in January. The
Guinness Atkinson Renminbi Yuan & Bond Fund has $92 million of
assets under management.
As well as yield, investors have been drawn to the Russian debt
sales because they feel more comfortable giving them their money
than some of the more local issuers.
"A large percentage of bond issuance in the offshore renminbi
market are from either China or Hong Kong, and for European-based
investors who might not be familiar with these companies, the risk
profile of these issuers may be deemed to be on the high side,"
said Liang Choon Koh, Nikko Asset Management's Head of Asia Fixed
Income. "They [investors] are more comfortable with issuers that
have recognizable brand names and those that are investment-grade
rated."
Mr. Koh said he looked at all three investment grade-rated
issuers from Russia, but declined to say which ones were picked up
by the fund. Nikko Asset Management has a total of $154 billion
assets under management.
VTB, Gazprombank, and Russian Agricultural bank are all
investment-grade rated, quasi-sovereign borrowers, with vast
experience issuing in the dollar and euro markets. Russian Standard
Bank has a high-yield rating, but is the country's biggest lender
to consumers and one of the largest privately-owned banks in the
country.
Such demand is allowing the banks to borrow at cheaper rates
than they would do in the dollar or euro markets.
For example, Russian Agricultural Bank sold a three-year one
billion yuan ($160.78 million) bond with a yield of 3.6%. It pays
5.3% to investors in the dollar market for debt of a slightly
longer maturity of five years.
Alan Roch, head of bond syndicate Asia Pacific region at the
Royal Bank of Scotland, one of the banks that placed the Russian
Agricultural Bank bond, said he was very confident of selling the
Russian bank's debt at a discount to the dollar market before his
team even visited prospective investors to pitch the sale.
The Singapore-based banker said RBS was seeing growing interest
from foreign issuers and Russian names in particular because of an
increased need to fund in offshore renminbi, increase depth of
demand and investor diversification, and arbitrage opportunities
(ability to issue in renminbi and swap back into main currency).
"European issuers have been quicker in identifying this and the
more that come and issue in renminbi, the more will want to follow,
as their comfort on the execution of these deals improves," said
Mr. Roch.
Artyom Lebedev, a spokesperson for Russian Standard Bank, said
the attractive cost of funding in yuan and the diversification
opportunity for the bank's debt portfolio, meant the bank would be
keen to sell more debt in the offshore renminbi market.
Since being sold, the Russian yuan bonds have performed well on
the secondary market. Yields are lower than what was offered when
the bonds were sold as the price of the bonds have risen due to
secondary market demand.
However, Russian bonds aren't without risk as investors
highlight economic and political risk in Russia and stagnant growth
in Europe as factors. Mr. Harriss looked at Russian Standard Bank
which is not listed, but decided against buying the bank's debt,
because the credit risk was too high with weaker profitability and
capital ratios combined with an increasing push into consumer
lending in Russia.
Nevertheless market participants expect more yuan debt sales
from Russia.
"If you are an investment-grade rated borrower, you will have no
problems because investors are looking for savvier issuers," said
Augusto King, who is head of debt capital markets Asia at RBS and
based in Hong Kong. "Russian names offer higher yield and investors
buying this debt like the outlook of the long-term appreciation of
the renminbi and they like the growth outlook for China," said Mr.
Koh. Mr. Harriss agrees that better pick up in yield and quasi
government status are strong selling points for the bonds, and in
the case of VTB - its diversified operations.
Mr. King added that a large amount of yuan bonds were due to be
paid back this year, meaning investors would have to find a new
home for their money at a time when debt sales from Chinese banks
in the offshore market has been low. The yuan market has so far
been largely dominated by state-owned Chinese companies and Chinese
government entities looking for foreign investors--something they
can't do at home because the Chinese bond market is closed to
outsiders.
"The pickup in issuance is largely demand-driven, because Asian
investors have increased allocations to emerging market debt," said
Mikhail Nikitin, Credit Analyst at VTB Capital. He also noted that
for Russian banks, selling debt in yuan not only diversified their
funding but helped them avoid potential over-supply to Europe and
U.S.
Among foreign borrowers, the big global companies such as
McDonald's Corp., (MCD), Volkswagen AG (VOW.XE), and Caterpillar
Inc. (CAT) have all tapped the market in an effort to grow their
businesses in China.
Write to Sarka Halas at sarka.halasova@dowjones.com