A unit of Indian lender Infrastructure Leasing & Financial Services Ltd (IL&FS) has mandated banks for raising funds in offshore yuan, banking sources told Reuters on Tuesday, probably the first Indian company to raise funds in the hot market.
IL&FS adds to the growing roster of foreign companies like Fonterra Co-Operative Group, New Zealand’s biggest company and McDonald’s Corp who are raising funds in the growing offshore yuan market.
Even though the purpose for raising funds in offshore yuan was not known, market players said the proposed offer represents another example of clever Indian companies tapping overseas local debt markets to achieve cost savings.
But given the lack of depth in the swap markets for exchanging offshore yuan back to U.S. dollars and the presence of a hefty withholding tax for Indian firms raising foreign funds, it was not immediately clear how significant the cost savings would be.
“The rationale would be to get your name out there in a hot new market and establish brand recognition among yuan investors,” said Vijay Chander, head of credit strategy at Standard Chartered Bank in Hong Kong.
China’s ambitions to boost the use of renminbi in international trade has led to the creation of Hong Kong as an offshore yuan hub, an experimental capital market that has seen explosive growth over the past year.
Yuan deposits in Hong Kong have grown nearly six-fold in the past year to 511 billion yuan ($79 billion) at the end of April and trade settled in yuan has swelled to an impressive 8 per cent of total Chinese trade in the first quarter of 2011 from barely nothing a year ago.
As yuan deposits swelled in the former British colony, many Chinese names have tapped into the growing offshore yuan market as they faced no difficulty in selling bonds at more than two percentage points below comparable government bonds to hungry investors betting on further yuan appreciation.
Widely recognised borrowers, including the World Bank, Volkswagen and Caterpillar, have also sold yuan-denominated bonds or “dim sums” as they are more colorfully known after a local delicacy.
Outstanding bonds in dim sums have swelled to more than 130 billion yuan so far, and many expect volume to exceed 200 billion by the end of the year.
Even though offshore bond sales have surged recently with both April and May witnessing record supplies, June has proved to be a torrid time for issuers as appetite for Chinese credits have cooled noticeably after short-seller Muddy Waters accused Toronto-listed Sino-Forest of exaggerating the size of its forestry assets.
An index of offshore bonds has dropped by more than one point in the past three weeks or so and only a handful of issues has crossed the line since the start of the month.
Morgan Stanley and Deutsche Bank are the bankers to the deal.
The size and maturity of the offering is yet to be decided, said the sources who declined to identify the IL&FS unit.