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The Globe and Mail

China’s big-cap bond issuers in driver’s seat

China's corporate bond issuers are in a sweet spot. They have sold $26-billion of U.S.-dollar-denominated bonds in 2012 to date, according to Barclays, compared with $18.5-billion for the whole of 2011, not including banks and financial services companies. For big caps looking to extend their tentacles overseas, now is a good time to enlist foreign investors' help.

Global funds have poured into Asian credit to get a better return on their money than they can find at home. Since March, the percentage return investors demand from Chinese companies above what they get from U.S. Treasuries has fallen 64 basis points, compared with a 56-point reduction for Asian corporate issuers overall.

China's economic performance adds confidence. Industrial profits in aggregate rose 20.5 per cent year on year in October. That makes investors more relaxed about the typical quirks of offshore bonds, like the lack of a concrete claim on the underlying assets. It helps that companies issuing dollar bonds tend to be more established. Some, like big oil companies Sinopec and CNOOC, come guaranteed by state-owned parents.

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Since investors are keen, issuers can be innovative. Shipping company Cosco issued a bond backed by Bank of China on Nov. 26, giving it to a lower yield than it would get on its own. It used not an explicit guarantee but a "letter of credit" – something usually used to finance trade, and untested as a backing for bonds. Investors nevertheless requested 11 times the amount for sale.

Raising funds abroad makes most sense for companies who can spend it there too. Issuers like Baidu, which sold $1.5-billion of dollar bonds on Nov. 20, can use the proceeds to buy foreign-listed rivals or pay back overseas debt. For others, the currency swap market isn't yet developed enough to make raising funds in cheap dollars and bringing them home in yuan an easy arbitrage.

There may be another reason offshore bonds are in vogue: silver-tongued advisers. Global underwriters, especially U.S. banks, are pushing hard to get more balance sheet exposure to China and cozy up to its ambitious big companies. When order books are filled up 11 times over, fees of around half a percentage point seem like easy pickings.

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