McDonald’s Yuan Bonds Set Benchmark for China: Credit Markets
By Patricia Kuo and Shelley Smith
Aug. 20 (Bloomberg) -- McDonald’s Corp.’s yuan bond sale, the first by a foreign company in Hong Kong, may pave the way for a new global debt market as China seeks to capitalize on its status as the engine of the world’s economic recovery.
McDonald’s, which opened its first 1,000 restaurants in China faster than any other country outside the U.S., sold 200 million yuan ($29 million) of 3 percent notes due in September 2013. Wal-Mart Stores Inc., the world’s largest retailer, has said it’s considering issuing such notes.
China, the fastest-growing major economy, changed rules in February to let foreign companies issue yuan-denominated bonds through Hong Kong to strengthen the former British colony’s position as a financial center and promote the yuan for global commerce. Yuan bonds issued by Chinese companies have returned 6 percent this year, their best performance since 2005, according to a Bank of America Merrill Lynch index tracking 1.38 trillion yuan of debt.
“This is going to become a popular trend,” said Donald Straszheim, a Los Angeles-based senior managing director and head of China research at International Strategy & Investment Group. “There are hundreds of global companies wanting to do more business in China and they will want to be involved in the country’s evolving credit market.”
Oak Brook, Illinois-based McDonald’s issue, the first by a non-financial company from outside China and Hong Kong, follows a 1.38 billion-yuan deal by Gordon Wu’s Hopewell Highway Infrastructure Ltd. Bank of East Asia Ltd. and HSBC Holdings Plc’s China unit became the first non-Chinese banks to sell yuan bonds in 2009, Bloomberg data show. Bank of Tokyo-Mitsubishi UFJ (China) Ltd. sold 1 billion yuan of notes in China in May.
Wal-Mart, based in Bentonville, Arkansas, said in March it was considering selling bonds in yuan.
‘Big Bang’
China is on the cusp of a “big bang” of reforms that will give foreign investors greater access to China’s capital markets, Nomura Holdings Inc. analysts led by Hong Kong-based Sean Darby wrote in a report on Aug. 18.
McDonald’s yuan bonds are its smallest debt issue since 2004, when it raised $25 million from 5.375 percent notes due 2016, which were bought back, according to data compiled by Bloomberg. McDonald’s $500 million of 4.3 percent 2013 notes were last quoted at 108.34 cents on the dollar to yield 0.942 percent, according to bond-price reporting system Trace.
“There are a lot of companies expressing interest in issuing yuan bonds,” said Per Nordstrom, head of EMTNs Asia at Standard Chartered Plc, who worked on the sale. “I’m expecting the renminbi offshore market to be very popular.”
Subordinated Bonds
Elsewhere in credit markets, the cost of insuring European banks’ riskiest debt rose.
Credit-default swaps tied to the subordinated bonds of Spanish lender Banco de Sabadell SA climbed 30 basis points to 386 and contracts on Banco Popular Espanol SA, the nation’s third-biggest commercial bank, increased 27 basis points to 393, according to data provider CMA.
Swaps on subordinated bonds issued by Allianz SE, Europe’s biggest insurer, rose 5 basis points to 87. The Markit iTraxx Financial Index of default swaps on bank and insurance-company subordinated debt climbed 5.5 basis points to a week-high of 202.5 as of 10:30 a.m. in London, JPMorgan Chase & Co. prices show.
Junk Ratings
The Markit iTraxx Crossover Index of debt swaps on 50 mostly junk-rated European companies climbed 9.7 basis points to 504.1, paring the gauge’s decline in the past week to 6 basis points, according to Markit Group Ltd.
Credit-default swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt, and typically rise as investor confidence deterioriates. A basis point equals $1,000 annually on a contract protecting $10 million of debt.
The Basel Committee on Banking Supervision proposed yesterday that debt counted as bank capital should be converted to stock or written off in a financial crisis. The committee is seeking to force bond investors to bear some costs in future bailouts rather than have taxpayers take all the strain.
Banks’ cost of capital may rise as investors demand compensation for the increased risk that they won’t be repaid.
“It looks like the banks are going to be paying more for regulatory capital,” said John Raymond, an analyst at credit research firm CreditSights Inc. in London. “They’ll also have to look for a different investor base.”
BAA Loan
BAA Ltd., the owner of London’s Heathrow and Stansted airports that averted a strike by workers this week, said it borrowed 625 million pounds ($973 million) to reduce costly acquisition debt.
The company’s four-year loan was increased from 500 million pounds and pays interest at 3.25 percentage points more than the benchmark lending rate for the first three years, rising to 3.75 percentage points in the final year, according to a statement today.
Spanish builder Ferrovial SA loaded BAA with debt in 2006 when it acquired the London-based company. Credit-default swaps on the airport operator fell 26.5 basis points to 179, the lowest level since May 19, CMA prices show.
Corporate bond sales worldwide declined 40 percent this week to $31.4 billion, from $52.6 billion in the four days ended Aug. 12, according to Bloomberg data. For the year, issuance fell 28.5 percent to $1.91 trillion, from $2.67 trillion.
The extra yield investors demand to own company bonds instead of government debt was unchanged at 177 basis points, according to the Merrill Global Broad Market Corporate Index. In emerging markets, debt spreads rose 3 basis points to 271, JPMorgan Chase & Co.’s Emerging Market Bond index shows.
McDonald’s Sale
McDonald’s sold its bonds in a private placement to Hong Kong institutional and professional investors, it said in a statement yesterday. Standard Chartered Plc managed the sale.
“This gives us access to new funding to support growth in China,” said Lisa Howard, a spokeswoman for the restaurant chain. “We are very confident in the Chinese market and have a strong plan to grow our business in China.” Fitch Ratings graded the 200 million yuan debt at A, its sixth-highest investment grade.
Money raised will provide working capital for expansion in China, where the company will open as many as 175 restaurants this year, according to the statement.
“Consumer demand is strong in that part of the world, and there’s opportunity to open up more stores in some of the more inland-type cities. It seems like a good move on McDonald’s part,” said Nicholas Reitenbach, New York-based senior international portfolio manager at Wilkinson O’Grady & Co. Inc., which has about $1.8 billion in assets.
Currency Speculation
A market in yuan-denominated debt issued by foreign companies would give investors the chance to speculate on China’s currency, which is forecast by economists to strengthen, said Georg Grodzki, head of credit research at Legal & General Investment Management.
“For many investors this type of product would be more appealing and suitable than Chinese corporate credit risk and almost allows a pure currency play with the benefit of some extra yield,” said London-based Grodzki, who helps oversee 300 billion pounds ($468 billion) of investments. “Liquidity in corporate yuan debt remains to be tested and currency convertibility may cause issues. Investors should be mindful of such risks and prepare a plan B.”
Currency of Commerce
China is seeking to broaden use of the yuan, also known as the renminbi, after first approving the currency to settle cross-border trade with Hong Kong in June 2009.
China’s and Hong Kong’s central banks signed agreements on July 19 to ease restrictions on yuan transfers between banks and companies in the city, and also agreed the ex-colony would have no restrictions on yuan deposit holders transferring cash to buy wealth-management products.
The People’s Bank of China in Beijing said Aug. 17 it will let overseas financial institutions invest yuan holdings in the onshore interbank bond market, while keeping limits on the conversion of foreign currency for such investments.
China overtook Japan in the second quarter to become the world’s second-biggest economy, growing 10.3 percent.
The central bank set the yuan’s reference rate at 6.7884 per dollar today. The yuan has risen 0.5 percent against the dollar since China ended a two-year peg versus the U.S. currency on June 19.
Trading Rises
Trading in yuan-denominated corporate bonds issued by Chinese companies rose to $613.77 billion in the second quarter, a 43 percent increase from the previous three-month period, according to the Asian Development Bank in Manila. Chinese companies had $492 billion of yuan debt outstanding at the end of the first quarter, up 67.5 percent from a year earlier, ADB data show.
Yuan bonds have lagged behind global corporate debt, which returned 8.4 percent this year, according to Bank of America index data. Japanese corporate debt handed investors 2.5 percent, the figures show.
Foreign companies selling bonds in yuan “is a potential growth area,” said Alex Garrard, a partner at BTG Asset Management U.K. LLP in London. “We’ve become aware of some interest among international issuers in other BRIC currencies,” he said, referring to the emerging-market nations of Brazil, Russia, India and China.
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