Brazilian pulp producer Suzano became the first Latin American company to tap China’s onshore Panda bond market, as Brazil and China celebrated the 50th anniversary of the establishment of diplomatic relations.
The Rmb1.2bn (US$167m) 2.8% three-year green Panda bond that priced last month was a small deal for the company to test the water.
The deal came in the same month as the G20 summit held in Rio de Janeiro and China President Xi Jinping's visit to Brazil. Panda bonds are sometimes used for their strategic political importance, although Suzano did not say that was a reason for its debut trade.
Suzano said it tapped the market to diversify its funding sources. The company's funding needs are mainly in US dollars and so the majority of its bond issuance is in that currency, but it is open to fundraising in other currencies, as long as the cost is attractive after swapping back to US dollars. The eucalyptus pulp exporter has plants in Brazil, the US and Finland, and has operations in 11 overseas countries including China.
Apart from Brazilian real, renminbi is the first local currency that Suzano has issued in. Marcos Assumpcao, treasury and investor relations director at the company, said it had also looked into issuing in a Middle Eastern local currency, but the research had not gone very far.
He said Suzano started to work on the Panda bond deal in the middle of the year, with the main goal of finding an alternative source of funding. The Panda offered a very “competitive” funding option, and it achieved a 50bp cost saving after swaps compared to the company's US dollar bonds, Assumpcao said.
Despite its modest size, the transaction gave market participants hope that more companies will follow.
“There’s no better substitute than there being somebody trailblazing and completing the transaction,” said Timothy Yip, head of DCM at HSBC China, one of the joint lead underwriters on the deal. “It’s like a validation and demonstration that yes, this can be done.
“Since the successful pricing of this transaction, we have been inundated with enquiries as well as requests for information sharing sessions with potential issuers from the LatAm region.”
HSBC's Yip expects the closer cooperation and economic ties between China and Latin America and the Middle East will bring more supply to the Panda market.
“We hope this will lead to more interest from issuers in those jurisdictions,” he said.
However, the Panda market needs to deepen to be more attractive to issuers. Suzano’s deal is smaller and shorter in tenor than its dollar trades, most of which raised at least US$500m and had tenors of longer than seven years.
“But we understand this is the way the market is structured today, and we believe the market will continue to grow, evolving to longer tenors and larger tickets. That’s why we saw a very interesting opportunity at this point,” said Assumpcao.
The situation could be improved if Chinese regulators send a clear message that insurance companies are allowed to buy Panda bonds. Insurers favour long tenors and want to lock in current yields before onshore rates go lower, but are reluctant to invest in relatively new products unless there is a clear message that they can do so. State-owned banks, which prefer short-dated notes, are usually the anchor investors in the Panda market.
“Currently, there is ambiguity around whether insurers are able to buy Panda bonds … Perhaps there would be further clarity down the line,” said Yip.
Mutual benefit
While Suzano has a Rmb20bn two-year Panda issuance quota that expires in 2026, it does not have a concrete plan to return to the market anytime soon, nor does it have any other fundraising plans for next year.
Suzano will focus on reducing its leverage as its new pulp production mill project in Brazil has entered the final stage. The Cerrado project, which the company called one of the "largest and boldest projects in Suzano's history" with a total investment of R$22.2bn (US$4.3bn), started operations in July. It will have an annual production capacity of 2.55m tonnes of eucalyptus pulp, and will increase Suzano’s production capacity by 20%.
The company's capital expenditure will be lower going forward, while cash generation will be higher in the coming years.
“If we don’t have any specific needs for additional money in the coming years, we’ll be very selective in our issuances,” said Assumpcao. The company is targeting a leverage ratio of two to three times, down from the current 3.1 times.
Assumpcao viewed the Panda deal as an “interesting process” to learn about China’s “investment ecosystem” and to better understand what investors there think about Panda bonds. It was also an opportunity for the world’s largest pulp manufacturer to market its growth prospects and ESG strategy to Chinese investors.
“It was good for both ways, for us to understand better how the debt market works in China, and also for Chinese investors to learn a little bit more of the company, including the growth prospective and our new Cerrado project,” said Assumpcao.