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(Nathan Denette/CP/Nathan Denette/CP)
(Nathan Denette/CP/Nathan Denette/CP)

With eyes on China, Caterpillar sells second yuan bond Add to ...

Caterpillar Inc. sold $355-million U.S. of yuan-denominated bonds on Wednesday in the biggest deal by a foreign multinational company in the offshore renminbi market, a sign that Western companies are gaining confidence about China’s currency experiment.

Caterpillar, a component of the Dow Jones Industrial Average, is the second company to return to the so-called “dim sum” bond market after Hopewell Highway Infrastructure Ltd. raised offshore yuan funds in May and came ahead of McDonald’s Corp , which is also planning to tap the yuan bond market a second time.

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China’s ambition to spread the use of its currency abroad, also known as the renminbi, in international trade has led Hong Kong to become an offshore yuan hub, an experimental capital market that has seen explosive growth over the past year.

Caterpillar’s two-year bonds are priced at 1.35 per cent, well below Caterpillar’s two-year dim sum bond last November, when the heavy equipment manufacturer issued a yuan-denominated bond at a coupon of 2 per cent.

The latest bond yield was also in the middle of early price indications of 1 to 1.5 per cent, suggesting investors were willing to shrug off concerns about European sovereign debt and an economic slowdown in China when it came to high-grade credit.

“As concerns over Greece and corporate scandal issues in China recede, the market is slowly opening up for high-grade names,” said Tim Jagger, head of credit strategy at Royal Bank of Scotland in Singapore.

“Cost savings are very attractive in the offshore market, especially if it is high-grade paper like Caterpillar.”

Caterpillar has been beefing up its presence in China over the past year. A top executive said in January the firm planned to spend more than $1-billion over the next few years to increase its manufacturing capacity there. In April, it announced a joint venture in China to produce drive train systems and other components for its heavy machinery.

The growing pipeline of so-called “dim sum” bond offerings seized up briefly in June after Hong Kong-based short-seller Muddy Waters accused Toronto-listed Sino-Forest of exaggerating the size of its forestry assets, adding to concerns about China’s corporate governance standards.

Investment grade deals appear to be flowing in the market.

With borrowing costs in mainland China still relatively high and trade settlement in yuan proceeding at a rapid pace, more borrowers are expected to tap the offshore yuan market.

HSBC , the biggest deal syndicate bank in the dim sum bond market, raised its forecast for the volume of dim sum bonds that will be issued in 2011, to as much as 230-billion yuan from 100-billion yuan previously.

About 70-billion yuan has already been issued in the first half of the year, according to Thomson Reuters data.

Yuan deposits in Hong Kong have grown nearly six-fold in the past year to 548-billion yuan at the end of May, and trade settled in yuan swelled to an impressive 8 per cent of total Chinese trade in the first quarter of 2011 from almost nothing a year earlier.

Widely recognized borrowers, including the World Bank, have jostled with first-time Chinese issuers to sell yuan-denominated bonds to investors hungry for exposure to yuan assets.

The sharp growth of the offshore yuan bond market has encouraged foreign companies to consider the market as a fundraising tool for their mainland business plans rather than just a cheap financing option.

Standard Chartered Plc. was the sole book runner for the Caterpillar offering, with Citigroup Inc as joint lead manager and Goldman Sachs Group Inc as co-manager.

Asian investors dominated the latest trade, with Hong Kong accounting for 62 per cent and Singapore 18 per cent, while Europe made up the remainder, IFR, a Thomson Reuters publication, reported.

Funds took 54 per cent, banks 24 per cent, insurers 9 per cent and private banks and others took the remaining 13 per cent. About 80 investors participated in the offering.

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