From left to right: Linklaters' William Liu, Andrew Malcolm and David Tsai
The Linklaters-advised Hopewell Highway Infrastructure Eurobond has broken open the market for Chinese corporates issuing in renminbi outside China, paving the way for a full interbank market in renminbi in Hong Kong.
It was a thoroughly unremarkable bond issue in every way but one - which made it electric. Hopewell Highway Infrastructure's Rmb1.38bn ($203m) two-year transaction was the first renminbi-denominated foreign corporate bond ever to be issued outside of China. As the first renminbi 'Eurobond', it was a milestone in China's plans to internationalise the currency and bolster Hong Kong's role as a global financial centre. And it could prove as significant for that role as the former UK colony's handover in 1997, according to Linklaters, the deal's primary legal adviser.
Linklaters has about 150 lawyers based in Hong Kong, where it has been active since 1978, and one third of them work in the capital markets team. Their skills have enabled Linklaters to take pole position as adviser to most of the small but growing number of renminbi bond issues out of Hong Kong.
There is nothing especially new about renminbi bonds in general. A huge domestic market for corporate and convertible paper exists on the Chinese mainland, where issuance totalled nearly $100bn equivalent in the first half of 2010 alone. Locally incorporated subsidiaries of foreign banks are now being allowed to tap this market, though the proceeds must be for domestic use.
Rise of the renminbi
Since 2005, there have been three Panda bonds - the Chinese equivalent of a Samurai or Yankee bond, issued in renminbi by a foreign entity, except that Chinese government approval is required and the proceeds must again be kept onshore. That has restricted the growth of this particular market, where the only issuers have been the International Finance Corporation and the Asian Development Bank.
In 2007, the government began permitting Chinese banks to issue in renminbi, under annual quota restrictions, in Hong Kong. This too requires official approval, with proceeds remitted to the Chinese mainland. Such issues have been targeted at retail investors, usually with an institutional tranche. More recently, the rules have been relaxed to allow locally incorporated subsidiaries of Hong Kong banks to do the same.
In a final pre-Hopewell twist, since 2007 mainland corporates have been allowed to issue renminbi-denominated bonds and convertibles internationally. The bonds are payable on subscription and redemption in US or Hong Kong dollars, so they do not actually raise renminbi capital but rather serve as a useful accounting aid.
The policy backdrop to this is the Chinese government's determination to secure a more dominant role for renminbi in international trade and finance. It is in no great hurry to achieve this but, as the world's second largest trading nation, it has implicitly criticised the hegemony of the US dollar as the single global reserve currency of choice. A controlled currency such as the renminbi is a non-starter as a global unit of exchange, so these capital market reforms are part of a gradual programme of relaxation.
The latest chapter in these reforms began this February when the Hong Kong Monetary Authority issued what it called a clarification of the existing rules to all Hong Kong banks. As long as the proceeds were not transferred to mainland China, it said, any company, anywhere, was free to issue in renminbi in Hong Kong without Chinese government approval.
"Not a lot happened after that, because people were puzzled," explains William Liu, Linklaters capital markets partner and the lead partner on the Hopewell deal. "The clarification raised two important questions. If a company raised renminbi, what would it do with the funds? And how would it service the interest and principal repayments?"
It took another regulatory change, announced in June, to provide one of the answers. Since July 2009, a pilot scheme has allowed participating banks in Hong Kong, Macau and Association of South-East Asian Nations countries to engage in the settlement of renminbi transactions involving businesses in Shanghai and four other Chinese cities, without government approval. The June 2010 promulgation extended that scheme to cover 20 provinces in China, and banks in all countries worldwide. Just as importantly, it extended the scheme's scope, which originally only allowed renminbi settlement of cross-border transactions in goods, to include services and all current account items.
"For the Hopewell deal, the significance was in the opening up to include current account items, which means that it can freely remit dividends and interest payments from its onshore projects," says Mr Liu. Listed on the Hong Kong stock exchange since 2003, and domiciled in the Cayman Islands, Hopewell is controlled by Hong Kong tycoon Gordon Wu. It builds and operates expressways in Guangdong province. The promulgation explained how it could service its debt. But how could it use the proceeds onshore, as it wished to, for a project in the busy Pearl River Delta region?
"If you raise renminbi outside China, you can use them for any lawful purpose outside China without approval," Mr Liu points out. "Hopewell managed to obtain Chinese government approval to use the proceeds as a capital contribution to one of its projects in China. Before Hopewell, any foreign investment into China, if it was a capital transaction, had to use foreign currency."
As Mr Liu notes, the important point is that approval was required only for the remittance leg of the financing, not the issue itself. Once this was clear, Hopewell wasted no time in preparing the transaction, with Bank of China as sole bookrunner and lead manager, advised by Linklaters. Linklaters had worked on 12 out of 14 of the post-2007 renminbi issues for banks out of Hong Kong and, with its strong debt capital markets team, was the obvious choice for a deal in which speed was now of the essence.
"It [the speed] was partly politically driven," says Mr Liu. "The government said it would like to see a deal happen before July 1 - Reunification Day." That left less than three weeks to put together an unprecedented deal structure. "It meant that quite a few people didn't get too much sleep - with the huge expense of missing a few football games at the World Cup," Mr Liu quips.
Opening up
The issuer had never tapped the international debt market before, so the need to educate added to the time pressures. There were particular anxieties around the process of remitting funds to China on capital account, which had never been done before - but which turned out to operate very smoothly.
The unrated two-year issue priced inside initial price guidance, with a coupon of 2.98%, a cheapness driven by extreme scarcity of supply. The original deal size was Rmb1bn, but since it was more than twice oversubscribed, this was increased to Rmb1.38bn. Investors were mainly banks with renminbi, with some Chinese institutions, corporate investors and private banking clients.
"We are all very excited about it," says Andrew Malcolm, Linklaters partner and head of Asian capital markets. "It tells us that it is now possible to raise renminbi without approval and keep it offshore. And it demonstrates that there is a viable financial market for renminbi outside the mainland."
Mr Liu draws a parallel with the early days of the Eurobond market in London, describing some of the transactions that now become possible. Clearly, it opens the way for foreign companies to fund their Chinese operations through offshore renminbi bonds, like Hopewell. But there are other permutations.
"In principle, an Indian company could settle its import of a gas turbine manufactured in China - as a current account item - with renminbi funds raised through a Eurobond issue," says Mr Liu. "A renminbi Eurobond can also function like a Samurai bond, allowing the issuer to raise funding in one currency and swap the proceeds into another."
Mr Malcolm continues the list of possibilities. "We have now seen a Rmb/US dollar currency swap settled physically in currency, something which in the past was only possible on a non-deliverable basis," he says. "All the pieces are now available to build a full interbank market in renminbi in Hong Kong, and for renminbi currency and interest rate derivatives to start developing. Things are moving very quickly. Watch this space."
