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.
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