In volatile markets, the unanimous advice for issuers and investors alike is to be flexible. Stable market windows can be few and far between, leaving little opportunity for borrowers to raise debt at attractive levels. Creating additional hurdles for Chinese issuers is the requirement to get approval from the National Development and Reform Commission (NDRC), the regulator that oversees international debt issuance, to sell bonds with tenors of 365 days or longer. While the NDRC seems more willing to hand out issuance quotas this year, the process and timing for getting rubber-stamped are still unpredictable.
Enter bonds with maturities of less than one year, which allow Mainland borrowers to speed to the market as opportunities arise without getting the nod in advance from the NDRC — giving them a nimble way to access capital markets before issuance windows close.
The approach is not new, of course, and not without some controversy.
When issuers first started using short-dated bonds in the summer of 2017, it was as a way to tap markets without NDRC approval — something that was coming at a glacial pace at the time. So borrowers desperate for funds used the loophole to woo investors.
Market watchers were rightly concerned about the refinancing risk of these notes, given that some of the issuers seemed unlikely to get regulatory approval at all. This meant the companies could end up stuck in a cycle of refinancing short-dated bonds with more short-dated bonds.
Fortunately, issuers are now moving beyond this thinking. With the NDRC apparently handing out approvals readily and being sensitive to the refinancing risks facing Chinese companies, borrowers should have little need to use 363 or 364 day bonds as last-ditch efforts. But four companies have still printed short notes since the start of the new year.
Their strategy is worth noting: getting a quick deal at a decent price to ward off any imminent refinancing pressure.
It also certainly helps that short tenors have been popular with skittish investors in recent months. Two and three year notes from Asian borrowers have also become common, making even a five year maturity look long. It should be no surprise then that a sub-one year tenor would be eaten up by investors afraid of rising rates and market swings.
Because of this, issuers can sell short-dated notes at a much more attractive price.
Zhenro Properties Group, for instance, sold an unrated $200m 8.6% 363-day bond last week at a yield of 10.75%. Bankers on the trade pointed out that had the real estate company opted for a two year tenor, it would have had to pay above 12 %, or 13% for a three year transaction.
If issuers believe, and hope, that market conditions could be more favourable for a longer-dated tenor in a few months, then it makes sense for them to secure funds to tide them over now, and print more traditional tenors later when pricing is in their favour.
This approach is not for all, of course, but Chinese issuers that can use short-term notes can wield them as a tool in difficult markets. While deal sizes will be modest, they can stem the refinancing pressures issuers are facing.
What is clear is that short-tenor bonds are no longer just a bandage for companies under financial strain. Instead, they are being used by issuers to combat volatility, keep funding costs under control, and raise funds for any imminent needs. That savvy approach is notable.