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Are Dim Sum Bonds The Next Chinese Reverse Merger Fraud?
While Draghi somewhat shut the door on the ECB being the lender of last resort today, there appears to be a sucker-of-last-resort where Dim Sum bonds (offshore/HK Yuan-denominated bonds) have seen issuance almost triple in the first 11 months of the year. The WSJ is reporting that 76 entities issued CNY99.1bn YTD, according to the Hong Kong Monetary Authority. Interestingly, the biggest growth in the second half of the year has been from European firms who are unable to raise funds economically due to the crisis of confidence at home. Bloomberg notes BMW and Lloyds as two recent issuers with the latter managing to price CNY-denominated 3Y debt at 3.6% yield against comparable EUR-denominated debt at 5.3% - quite a saving if you're willing to take the currency risk (or looking for non-Euro, non-USD diversification) as a corporate Treasurer (or desperate for the money). But for the bulk of Chinese issuers it would seem evident that the Dim Sum investors are perhaps a little too eager to be lending their Yuan, and therefore not being appropriately compensated for credit risk concerns (even with the implicit FX revaluation bet).
This fear is even more prescient when, according to Bloomberg, one considers that 60% of Asia's fastest growing bond market lack any of the standard leverage covenant restrictions (protection) that Western bondholders are used to. And just to add some more fuel to the rising yield fire of these bonds, Bloomberg just reported that eager bondholders are more than willing (and blind to the risks) to accept one-off payments from issuers in order to accept significant covenant concessions (completely disregarding the credit risks through time). Our Dim Sum index has seen average yields jump a significant 70bps to 3.31% since mid-September leading us to raise concerns that this market, on which ETFs are now being created, is worryingly exposed to both a systemic Chinese credit crunch and idiosyncratic releveraging even if managers view Dim Sum as more of a currency play.
Dim Sum Investors Lack Protection on 60% of Bonds: China Credit
Asia’s fastest-growing bond market lacks restrictions that stop companies from borrowing to the brink of default. These debt-to-equity limits are typically required for junk bonds.
“We want comparable protection to what we get in other markets, regardless of the currency, and to date we’re not always seeing that,” said Bryan Collins, a fixed income portfolio manager at FIL Ltd., known as Fidelity Worldwide Investment. “We’re making it very clear that’s what we expect on new issues,” Collins said during an interview at his offices in Hong Kong. Fidelity manages $207.9 billion of assets globally.
Speculation the yuan will strengthen has fueled demand for the Chinese-currency assets in Hong Kong, where international bondholders can buy and sell debt.
Fees Blind Investors to Returns on Bond Changes, Fidelity Says
Bondholders are rushing to accept one-off fees from Asian companies asking to amend their notes rather than considering total returns, according to FIL Ltd.
“It’s the medium-term approach to total return when looking at covenant changes that sometimes gets missed,” said Bryan Collins, a fixed income portfolio manager, at FIL Ltd., known as Fidelity Worldwide Investment. If companies take on more debt, “that’s going to deteriorate their credit profile which is going to see their bond price potentially fall,” he said during a media briefing yesterday.
Asian companies are more likely than European or U.S. borrowers to alter terms on their debt to increase the amount they can borrow as these amendments are often cheaper than buying the bond back and reissuing the bond, Collins said. Issuers typically offer bondholders a fee to accept changes, which have to be approved by a specified percentage of investors, usually a simple majority, he said.
Dollar bonds typically restrict debt incurrence when sold, but Hong Kong sales of yuan bonds do not, according to Sabita Prakash, head of Asian fixed income at Fidelity. “Covenants need to be strong and need to be made stronger and I would say that even more emphatically, even more strongly, and even more assertively for the offshore renminbi or Dim Sum bonds,” she said at the briefing.
Sixty percent of non-financial corporate securities listed on HSBC Holding Plc’s Offshore Renminbi Bond Index contain no leverage limits, according to marketing materials.
PowerShares has a Chinese Yuan Dim Sum Bond Fund ETF (active since late September), which while not super liquid, trades at a modest 1.08% premium to NAV (vs average 1.2%). We have not checked borrow, but we note it has been lagging since mid November.
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The world is completely full of retards who will buy just about anything except for the one thing that will save them from this madness .... Gold.
China's rate of inflation has fallen in November to its slowest pace in 14-months.
Consumer prices rose at 4.2% compared with the same month last year, the National Bureau of Statistics said on Friday.
Inflation was at 5.5% in October, after hitting a three-year high in July of 6.5%
Analysts said this creates more room for authorities to ease monetary policy and encourage economic growth.
"The numbers confirmed that inflation is easing quickly in China," said Hua Zhongwei from Huachuang Securities in Beijing,
"As such, China's policies have to shift to the pro-growth side in a stronger and quicker way."
Seems like BMW will be the next automaker to be owned by the chinese.
I have a very serious question.
Do countries with massive amounts of sovereign debt ever plan on paying that money back? I mean ever?
I can't see, say the USA, ever paying that kind of money back to the investors because of the ever increasing enormity of the amount we owe.
I can only conclude, sovereign countries with massive amounts of debt will never be able to pay back their creditors the principal they owe them, ever!
So why do people keep funding sovereign debt? Are they brain damaged?
It is all about the Collateral.
Of course they won't get their worthless money back.
They will receive hard assets in return, at fire sale prices.
Bubba gave the national parks as collateral, and they are now owned by the UN.
Yes, they will inflate or die. Printing money has never worked in the history of the world, but they don't care as they continue to show episode after episode here in this global kick the can charade. Since the US happens to be the reserve currency and is tied to global crude outlays, Hyper-Inflation will be the only outcome from any of this. ZIRP till 2013 and beyond guarentees a global currency crisis within the next year or two.
Eurozone will break down admist the chaos, sovereign nations will be divided once again just as they have multiple times the past century alone, new monetary systems will be devised (just as every fiat system throught history has failed no more than a half-century after its inception)... Much like the Law of Physcis these academic geniuses that call themselves our 'leaders', belive they can manipulate the world both economically and geopolitically via imperial hegemony to produce favorable outcomes to the NWO's liking.
This will all end in tears and if the Govt survives in it's current state U-6 unemployment will reported over 50% (in real terms). In any case, Like Faber, Rogers, Schiff, Rosenberg, Ron Paul and others warned... the WORST IS YET TO COME. The real crisis is in front of us, not behind us.
Jim Rogers on CNBC (11/6/11): Situation worse than ever due to U.S. debt levels at highest percent in history.
http://www.youtube.com/watch?v=-g195PL7Ad0
I have very dark visions of how bad it will get.
I think that's what it will take to get the sheeple to point at the rulers and oligarchs of the planet and say to them; we know who you are, we want you out of our lives.
Epic!
Gerald Celente: John Corzine Pleads The 5th Before Congress! 1/3
http://www.youtube.com/watch?v=s9fQKjyxmY0&feature=player_embedded
Unless the dumb fucking Germans agree to bend over, take it up the ass, and become debt slaves for the rest of their lives just like the rest of the Eurozone, there's going to be complete and total world wide economic collapse.
I hope Germany wins this war, for once.
The CEO of Lloydes of London is on leave for stress related illness. Can you imagine?
Perhaps he read my previous post?
Thanks for posting video.
Any Ph.D from Harvard will tell you that debt levels do not really matter as long as you can pay interest on it.
Also the very same Ph.D are convinced that you can solve debt problems with more debt.
SINKHOLE BONDS for FUCKTARDS.
Yo tyler
Why did you pull the piece
On
Mf global english black hole erupting ?
Did you get a jingle from bin gle been jewed?
The big question.
Are we all fucked?
The answer.
Yes, we are.
But it's only life.
The only Emporer is the Emporer of Ice-Cream.
http://fucklloydblankfein.blogspot.com
Dim Sum bonds are for dim wits. PMs are for the well informed.
dimwits are not the only ones with dim sum bonds appatite. I'd like to add fuckwits and nitfucks to the list.
Dim Mak bonds.
Mac-N-Cheese Bonds
While the bonds can be shitty credit, I would doubt that a KFC Yuan piece is either a bad credit or bad currency. The problem is that for the sake of currency, the foreign idiots-look-good-in-an-expensive-suit-money-manager will ignore credit issue. But for the currency, are we facing a currency crisis in China, while the total credit to GDP is high, one has to remember that the central government has probably a net asset position in the State Owned Enterprise, meaning that the transfer of debt from teh local gov will increase the central government debt to GDP, but the State Owned Entreprise it is a bit of a different story, because if the central government sell the State Owned Enterprise, it can probably generate a net asset position or at least mitigage the increase in Government debt to GDP. Finally the consumer sector has little debt, which is in the end is very important. If the central is indebted and the population is also indebted this is trouble.... that is the US. So the case on currency debasement is really not there, as far as the case for credit yes, point taken.
That does not mean that we are not going to see a banking crisis nor that base metals in general are going to get further creamed...
I agree. I found out that there is a lack of legal infrastructure that secures SOE debt capital structure. People presume basic creditor seniority protections that isn't there.
Another thing is that there is no meaningful secondary market for issuance.
Arab spring,Chinese fall, Euro winter,American ice age
Don't under estimate the level of ponzification, just sayin'
Well the wages move faster than inflation in China, as long as this is the case, do not bet on widespread riots.
"Arab spring,Chinese fall, Euro winter,American ice age"
Be nice to see Texas secession in there somewhere. ;-)
David Koresh tried that and look what the hillbilies from Arkansas did to him.
Euro winter... hmmm reminded me of turnip winter. This could get ugly. History rhymes.
The thing about investing in Dim Sum Bonds is, an hour later you're broke again.
i thought dim sum bonds was barry's kid.
the stupid chinese sells wonton soup with no wonton.
If we build, da well cum
December 2011
House Prices Plunge in Chinese Ghost Town
Will not matter anyway. China is about to roast Uncle Sams nuts because Obumfart got us invloved in one too many MENA conflicts. Just a race to see what happens first, complete global economic meltdown or WW III. Either way, the world is burning and the Vampire Squid and it's minions fiddle.
Ancient Chinese secret huh?
Dim Sum...and Sum Dim...
What are Yu...?
yu yung fu
"Asia's fastest growing bond market lack any of the standard leverage covenant restrictions (protection) that Western bondholders are used to"
LOL ... we can't have investors taking risks with their investments!!! We must have a raft of government regulations and oversight bodies doing fuck-all to protect investors instead!
It would appear that the WSJ has absolutely no concept of capitalism and free markets - where failure to do due dilligence (through a variety of credible free market rating and insurance vehicles) leads to investors going bust when seeking higher yields.
The crimes begin & end at K-Street and Washington DC. You will learn shortly.
It's not a crime to raise funds by issuing bonds to speculators with no protection.
It is a crime to issue bonds with the pretense of protection, then to pass laws virtually forcing pension funds and private retirement accounts into those bonds.
Chinese investors and speculators expect to take a hit if their investments don't pan out. Overly pampered Western investors expect government to both guarantee and monitor their investments for them ... and then to steal from other taxpayers to bail them out when the rules, regulations and oversight [inevitably] fail.
The cancer will be removed from the host. They feel the heat from a large magnifying glass. Don't fall for the smiles and optimistic rhetoric, many are shitting their pants.
Are you on drugs?! Your replies bear no relationship to my points ... at all.
Keep sleeping snoopy, your unaware of your surroundings.
"Leverage Restriction?"
Sounds like an oxymoron.
the widows and orphans are in good shape either way, b/c if the company's debt falls in value/price, the company can take that as income, which is very reassuring, as we see from the financials floridly flourishing under their zombie TBTF fake&bake bullshit accounting scams
When I saw "fake&bake" at first glance I thought you wrote bukkakie. Oh wait it is the same thing. The bankers are doing that to us.
CNY100 billion verses a USD100 trillion in notional derivatives.
Obviously the Chinese are not even trying.
The West breaks their own arms patting themselves on the back for inventing "corporate governance."
And then there's Greenberg, Fuld, Madoff, Corzine and about a 1000 other prime assholes making the argument for how much better 'We' are verses 'Them.'
Please.
Frankly, the Chinese could vacuum up every dollar in circulation overnight by making China a foreign tax haven with passport for accounts over $1MM.
Too bad its all just paper.
707,568,901,000,000 total notional
100 billion ain't shit
If I were looking to borrow money, the last currency that I would want to borrow in would be the yuan. The yuan keeps getting stronger, so the interest rate savings could be partially or entirely eaten up by changes in the exchange rate. And if I am a European company and the euro collapses, I could lose big time.
Whereas if I borrow in euros and the ECB finally decides to print, I could end up repaying my loan in much cheaper euros.
And suppose that I run a company that is practically worthless. What is to stop me from borrowing in yuan at 3.6% and converting to euros, loaning them at 5.3% and pocketing the difference for as long as I can. Eventually the yuan would appreciate and my company would go bankrupt. But until then, I could collect nice earnings.
What is that that they say about a fool and his money?
mmmmmm, dim sum
There are so many unknowns in this, any possibility could open events that would run their course. The red flag at the top of my list would be the possibility of these bonds being leveraged into oblivion in subsequent trading. China would not appreciate an MF Global crisis dropped in their laps. Wars have started for less than that. Pearl Harbor would look like a local turkey shoot. Everything will be decided when China decides to get on the brakes. Perhaps they will see room to squeeze out a better deal. From the European point of view, the Yuan might be their best chance for a step sideways that limits their losses. I see this as a no confidence vote against the USD.
http://georgesblogforum.wordpress.com/2011/11/02/the-daily-climb-2/
Adding my 2 cents:
Friend I know who trades the foreign exchange desk for a US bank with Asian connections says it's CHINA who is on the bid for the Euro and the reason it has not fallen farther than 1.34 so far.
CHINA wants to protect it's investment in the 2 major fiats....until they don't.
according to lindsey williams, the globalists are buying up all the debt they could, no matter the cost, to eventually call on the debt, which of course cannot be paid. so, instead they seize all properties, infrastructures, and especially slaves. why do you all think, the bondholders can't take losses?
"Dim Sum Bonds"... with two you get egg roll.