“This is the day we’ve been waiting for,” says Emil Nguy, managing partner at Hong Kong-based Asia bond house Income Partners. “The offshore RMB market is the first market with the potential to be big enough to rival the US.”
That matters to a firm like Income Partners, which Nguy helped to establish 17 years ago as a pioneer Asian fixed-income investor, both long-only and hedge. The firm’s size has always been restricted by the limited capacity in regional bond markets, both local- and foreign-currency. This is why it has never grown beyond $1 billion (it stands at about $800 million in assets under management at present), and why it felt the need to add non-fixed income strategies.
The problem for all the players that have launched RMB bond funds so far (with Haitong Securities first out of the gates) is that while there is plenty of demand, where’s the supply? Aside from a few high-profile deals from the likes of McDonald’s Corporation and the Asian Development Bank, there isn’t an offshore RMB bond market.
This is partly because the market is new, but also because, at present, issuers can’t readily re-invest their RMB proceeds into return-generating projects in China because of Beijing’s concerns over capital inflows.
Since July, when Beijing and Hong Kong authorities announced new rules allowing the free trading, clearance and settlement of RMB products offshore, Nguy realised he would need a different strategy. As a leading independent Asia bond house, he was able to approach multiple investment banks to pitch his idea: target those issuers among the banks’ client list to build a tailored portfolio of issuance, designed to create a diversified investment portfolio.
Now working with Bank of China International, Deutsche Bank, RBS and Standard Chartered, Income Partners is pursuing reverse-enquiry deals among each bank’s coterie of top clients with existing medium-term note programmes.
“I feel like I’m more of a DCM guy these days than a fund manager, originating deals,” Nguy says.
Furthermore, Income Partners has just hired Raymond Gui as executive director responsible for origination and investments of a new credit fund it is now launching. Gui was previously treasurer at China Construction Bank International, and before that ran portfolios at the State Administration of Foreign Exchange in Beijing.
Jaline Han, financial institutions sales director at RBS in Hong Kong, says the reverse-enquiry model is standard in the Hong Kong dollar bond market and that many banks’ existing clients are familiar with the process.
But for the offshore RMB world, the deal RBS and others have with Income Partners is unique. It’s not something that could be easily struck with a bank-affiliated fund manager, and there are few Asian fixed-income specialists.
The arrangement is not exclusive; Nguy says two more investment banks are likely to join in the next few weeks, while RBS and other banks will freely work with other asset managers.
The arrangement leapfrogs the current phase of the offshore RMB market by creating the diversification and supply that an investor needs. “We kill two birds with one stone,” Nguy says.
Nguy says he’d welcome the fact of other funds piling in on the deals he helps to originate. “The market needs more players,” he says.
Although Nguy declined to quantify the initial expected size, he says the offshore RMB market has the potential to support big funds, and hopes Income Partners’ AUM can get to the $5-10 billion range within the next three years.
Nguy estimates that his investment bank partners can generate up to 30-40 offshore RMB issues over the next six months. Potential issuers include multinational corporations and financial institutions, Asia regional companies and banks, and mainland-affiliated companies listed in Hong Kong.
Han points out that issuers are not technically barred from reinvesting proceeds in the mainland, but that, for now, any repatriation must be approved on a case-by-case basis by the People’s Bank of China. Once the authorities become more comfortable with the process, it will become formalised.
And the Income Partners RMB credit fund, which has yet to win approval from Hong Kong’s Securities and Futures Commission, will be a Hong Kong-regulated entity that is not reliant on the whims of mainland ministries with regard to QFII flows.
The initial bond deals being lined up are meant to be vanilla, investment-grade cash deals. The resultant portfolio is meant to have a variety of bonds, notes, CDs and other basic instruments, with tenors out to five years, with no derivative exposures or other exotica.
Income Partners would like to launch a long-only high-yield fund in the near future as well, but a long/short strategy is unlikely to emerge until the renminbi appreciates sufficiently to prompt more two-way bets in the market.
The fund will be open-ended and offer weekly liquidity, and will be built gradually in line with supply. It will pay semi-annual distributions with the goal of paying a minimum 2% dividend in its first year.
Wells Fargo Securities Asia is serving as adviser and global coordinator for the fund’s launch.
RBS is serving as the fund’s sole placing agent and lead originating dealer.
The fund has two share classes, one for institutional investors with a 0.75% management fee and up to a 3% placement fee; and one for high-net-worth individuals, accessed via private banks, with a 1% management fee and up to a 5% placement fee. Citi is the custodian and trustee, PricewaterhouseCoopers the auditor and Deacons the legal counsel.