Russia’s VTB Bank will be the first issuer of offshore renminbi (RMB) debt to swap the proceeds out of the Chinese currency. The VTB swap illustrates the potential of the so-called ‘dim sum’ market as a venue for international borrowers to access a previously untapped investor base -- without being restricted to spending the raised funds in Hong Kong or mainland China.
The RMB 1bn three-year bond, which printed last week, attracted plenty of attention as the first renminbi bond from a non-Asian emerging markets issuer and the first from an international financial credit.
However, what is much more worthy of attention is what VTB plans do with the money.
Unlike forerunners in offshore renminbi issuance, maker of earthmoving equipment Caterpillar and fast-food chain McDonald’s (the only other international companies to have issued in the dim sum market), VTB will not keep the proceeds in renminbi.
Instead, the bank will swap the entire amount into US dollars, a move it says will bring pricing advantages.
Alexander Smolin, head of debt finance at VTB Bank, told FT Tilt that on an after-swap basis the bank would achieve a cheaper cost of funding than would be possible in the US dollar market.
However, due to the infancy of the dim sum market (only since February this year has it been possible for foreign borrowers to raise funds in renminbi), there is no established RMB/US dollar basis swap market.
Fortunately for Standard Chartered and Goldman Sachs, lead managers for Caterpillar and McDonald’s, the two borrowers used the renminbi proceeds to finance their operations in Hong Kong and mainland China.
But for VTB Capital and HSBC, bookrunners for VTB Bank, “it has been the most challenging part” of the deal, according to a source close to the trade who said the joint leads were required to tailor make a swap for the Russian issuer.
Nonetheless, technical difficulties and feats of financial engineering aside, by swapping the proceeds, VTB has shown that with the right lead managers (only a few houses are able to provide such swap transactions), and as the swap market develops, international borrowers can access renminbi buyers in the same way they would any other group of regional investors.
This is good news for the investors: - VTB’s bond saw robust demand from hedge funds and private banks in Hong Kong and Singapore, the majority of which had no exposure to the bank, looking for portfolio diversification.
“A number of factors contributed to the deal: Russia is a country with strong fundamentals, VTB has a strong quasi sovereign credit rating and, as a frequent issuer, VTB has a well-established US dollar yield curve in the market and people know the name. In addition, yield is very low on local paper in Asia, so wherever there is any pickup with a strong credit story then it definitely attracts attention,” Andrey Solovyev, global head of debt capital markets at VTB Capital, told us.
This is also good news for issuers: as a result of the strong demand, the bond was “substantially” oversubscribed, allowing VTB to print significantly below initial price guidance at a coupon of 2.95% instead of 3.125%.
“We like the fact that we have reached a brand new investor base and are meeting the interest of people who didn’t look at our foreign currency bonds in the past, but the purpose of this locally based issue is not just about hitting this investor base, but also getting some discount to the secondary yield curve of our USD-denominated bonds,” Mr Smolin told FT Tilt.
VTB Bank, which also issued its first ever bond in Singapore dollars this year (a deal which was also swapped back into dollars), does not rule out a return to renminbi issuance at a later date.
Other Russian borrowers, such as aluminium giant Rusal, are also believed to be looking at the dim sum market.
“I think some other Russian companies, especially with strong credit ratings, will be interested in exploring this market opportunity,” says Mr Solovyev.