Victoria Young reviews how global firms are positioning themselves to cash in on a market on the cusp
As the internationalisation of China’s currency continues, global firms are making much of the pioneering Yankee bond-style deals in the Chinese market, eyeing opportunities in the orient and beyond.
China’s capital markets liberation has increasingly become the object of international investors’ interest within a short period of time. The market for renminbi-denominated bonds from foreign issuers sold locally – ‘panda bonds’ in securities slang – initially opened in October 2005 but has arguably only gained momentum in the past 18 months thanks to fresh regulatory prodding.
Global law firms, which have spent the best part of a decade working out how to wrestle the greased dragon that is China’s legal market, are jostling to position themselves at the forefront of market developments.
Connie Heng, Asia capital markets head for Clifford Chance (CC), which acted on the first panda bond – for International Finance Corporation, a unit of the World Bank – says: ‘It gained traction again last year when the regulators made a real push. Panda bonds are very important for us – we’ve been in the greater China region for over 30 years and we continue to be involved in innovative products which achieve regulatory breakthroughs.’
For some, the galvanising transaction came in 2014 when Daimler sold a RMB500m ($81.5m) bond to Chinese investors, marking the first foreign corporate bond outside the finance sector in China.
Since then global advisers securing mandates include Allen & Overy (A&O), which in September last year acted on the first batch of panda bonds under new regulations for HSBC.
King & Wood Mallesons (KWM) acted on the first sovereign issuances offered by the Republic of Korea and British Columbia, while A&O guided Poland through its first issuance, perhaps surprisingly Europe’s first sovereign panda bond deal.
According to EY data, at the end of February 2016, 15 offerings had been made totalling RMB20.5bn (£2.3bn). Indeed Yan Yan, chair of China Chengxin International Credit Ratings Company, forecast earlier this year the total could reach over RMB300bn (£34.1bn) by 2020, as the ratings agency has more than 100 panda bonds waiting to be assessed.
While early deals have led to much speculation over whether the potentially vast market will supersede the Hong Kong-based market for ‘dim sum bonds’ (renminbi bonds issued outside mainland China), partners still have reservations due to strict Chinese regulations, in particular the need for corporates to make their books comply with PRC accounting standards.
Aside from unwieldy regulation, cynics see the market as low value given the relatively straightforward structure of the bonds and the small amounts of debt currently being raised.
Heng says: ‘There are still hurdles – that’s why you don’t see more of them. It is hard when big multinationals have to change their accounting standards just to do a bond issue. However, we believe these hurdles will resolve over time.’
A&O partner John Lee agrees: ‘We are getting questions and requests from government agencies, banks and companies in Europe, South-East Asia and Australia, so there are a lot of potential issuers.’
‘It is not a hugely profitable market, but that’s better for us because it is just opening. After we have done a few bonds it should get easier.’
Andrew Malcolm, Linklaters
Linklaters Asia head of capital markets Andrew Malcolm notes: ‘It is not a hugely profitable market, but that’s better for us in a way because it is just opening, and after all they are very vanilla bonds, and terms are quite straightforward, so after we have done a few it should get easier.’
He added: ‘We are always competing and trying to be competitive on price, but for us we always try and look ahead and look at what the next big product is going to be and panda is an example of that.’
Positioning for panda
Firms looking to win market share are using early bond issuances to build their reputation, and cite their relationships with industry groups and regulators as points of difference. For example, A&O was the only international firm asked by Chinese watchdogs to review and advise on regulations prior to the pilot issuances. A&O PRC regulatory group head Jane Jiang is widely recommended for her pioneering work on panda bonds. Meanwhile, CC’s Tiecheng Yang sits on the legal committee of the National Association of Financial Market Institutional Investors (NAFMII), which the firm says has a huge impact on regulators.
Linklaters’ Malcolm says: ‘In the panda bond market KWM is very active and it has a good share. The other firms we see most, in the panda bond but also other offshore transactions, are CC and A&O.’
Other firms to have handled such securities deals include Mayer Brown JSM and Hong Kong firm Deacons, while KWM has the advantage of having Chinese-qualified lawyers. At the moment, Magic Circle firms have to team up with local law firms to act on these transactions, so usually hold the role of international counsel.
KWM partner Richard Mazzochi says: ‘None of the Magic Circle firms have the same coverage, it’s different having [Chinese] partners who have lived their lives here.’
Minny Siu, KWM capital markets partner, adds: ‘We don’t have to bother with separate fee arrangements and it’s a more flexible arrangement with us rather than an international counsel having to work with a PRC counsel.’
Given the Chinese government’s commitment to the internationalisation of the renminbi, many advisers believe such deals are worth the hassle of navigating obstructive Bar rules and local regulation. Softly, softly catches panda apparently.
victoria.young@legalease.co.uk