The transaction comes at a time when there has been a steady flow of Panda bonds, although primarily from Red chips - firms whose business is primarily in China but headquartered elsewhere. Veolia is in an entirely different category as one of only three foreign corporate issuers to tap the market following Germany’s Daimler and Singapore’s Global Logistic Properties.
The Paris-headquartered resource management multinational is no stranger to renminbi bond markets.
“In 2012 we issued a dim sum bond which will mature next year,” said Antoine Nguyen, head of corporate financing and market operations, Veolia, in a phone interview. “In the future, one of the options to refinance it will be a Panda bond.”
The firm, which operates in some 40 cities within China, had a number of reasons to look at the market, according to Claire Bechaux, group treasurer.
“We try to source our funding directly in the currency of the markets where we operate,” she said. “And China is one of the most important countries for us in terms of capital investment. We have also been following closely the internationalisation of the RMB.”
China’s emphasis on broader use of the RMB and its opening of the onshore bond market to both issuers and investors has paid off so far. Issuance in the Panda bond market has been strong, with a total of 26 deals in 2016 so far, compared with the seven deals priced between September 2015 – when the market was rebooted – and the end of the year, with a volume of Rmb59.3bn ($8.9bn).
Meanwhile, the dim sum market has gone missing in action, with just 14 deals and a meagre Rmb14.7bn in total volume in the year-to-date. Chinese issuers have been driven away by the lower onshore rates and many international names have been scared off by the devaluation of the RMB and the volatility of the market.
No walk in the park
“Price determination is quite a tricky exercise in the domestic bond market,” said Bechaux. “There is a lack of reference points and [relevant] yield curves. We approached it by first looking at the funding costs in absolute terms and then comparing those with the offshore RMB cost.”
Despite the still tiny list of even remotely comparable issuers in the Panda market, the firm was lucky to have the Republic of Poland tap the market just a week before its own deal. The sovereign priced a three year Rmb3bn trade with a coupon of 3.4%, making Veolia’s own pricing that much more impressive. The firm is rated Baa1/BBB/BBB internationally, while Poland is rated A2/A-/BBB+.Veolia priced its three year at 3.5%.
“We issued one week after Poland but that did not change the way we looked at the possible pricing,” said Bechaux. “We had more or less decided on a target, which we achieved. It was reassuring to be close to Poland, but mostly it just proved that we were in the right ball-park with our target.”
While the execution was smooth, that did not make the journey there an easy one, according to Nguyen.
“Panda issuance was something we had been watching for more than a year. We had a feeling that the domestic market would open to foreign issuers, following a general trend of the People’s Bank of China wanting to internationalise the currency.”
The firm started taking steps as a result, adding the RMB as a funding currency to its revolving credit facility in October 2015, as well as putting into pace a cross-border cash pooling structure as part of its China treasury that would allow funds to be more easily remitted out of the country.
The next step for Veolia’s treasury was to gain approval from the firm’s management, following which the firm reached out to the National Association of Financial Market Institutional Investors (Nafmii) – one of the bodies regulating the Panda market – in March 2016.
The right recipe
The first was accounting standards. China expects Panda issuers to translate their books into Chinese and have them locally certified, but the current rules also allow firms under European International Financial Reporting Standards (IFRS) to dodge the requirement, an exception not afforded to firms using US Generally Accepted Accounting Principles (GAAP).
The fact that the firm obtained a local rating of AAA by domestic rating agency China Chengxin International Credit Rating also satisfied another requirement of the authorities that not all firms are ready and willing to comply with.
But the real prize was the permission granted to Veolia to use the proceeds to meet debt payment obligations from its previous offshore RMB debt. With the regulators’ fright of capital flight and currency stability in the past year, Veolia has been among the few to be granted an exception.
“For the authorities, Panda bonds should fund the real economy in China” said Bechaux. “We explained to them our financing policy and how it was organised, and why we needed the proceeds of the Panda bond to be used to repay offshore debt. You have to prove the link between what you want to do and your investment in the country. We had several discussions on this, but mostly they want to avoid that the funds are used for arbitrage purposes.”
Despite the agreement, the treasurer explained that decisions are made on a case-by-case basis, and that the firm will have to seek permission again if it seeks to move proceeds of future issues. On top of that, the regulators have asked the firm to prove that the proceeds have been used as agreed.
Even with all its quirks, Bechaux noted that the China bond market will become an inescapable reality for many.
“We see the development of the China bond market as important in general,” she said. “After all, they are already the third bond market globally almost without any foreign issuer.”
For Nguyen, the market seemed ready to take off.
“I think in the future there might be just the Panda bond market for RMB bonds,” said Nguyen. “From the discussions we have had we think that there is obviously lots of issuers monitoring the market and waiting for approvals to tap this market. Hopefully there will be more liquidity and transparency in the market, so that at some point the market practice will be just like the one for Eurobonds.”
