By Nethelie Wong and Kit Yin Boey

Thailand's Ananda Development emerged this week as a surprise candidate for the maiden issue of hybrid notes in the offshore renminbi market.

Bankers had been toying with the idea of offering an offshore renminbi perpetual bond for over a year, as a natural next step for a market that has welcomed higher coupons and longer tenors over the past year.

The most likely candidate for a Dim Sum hybrid, however, would have been a highly rated name or a Chinese state-owned enterprise. As such, market players were very surprised to see a mid-cap Thai developer being the first to step forward.

Ananda is betting that a very high yield of around 9.5 percent will lure investors to the unrated Reg S deal. It has also structured the bond with only three years to the first call date, as well as a rate reset and a record 600bp step-up on the coupon, if the notes are not called at that time.

While that will help offset investor concerns over duration and interest rate risk, the deal still comes as a test of risk appetite in the offshore renminbi market, where investors have preferred higher-rated credits and shorter tenors. Books were still open late this Friday and it was unclear if the issuer would be successful.

Still, a corporate perpetual would pave the way for other companies to issue hybrid capital through the Dim Sum market at a time when Chinese banks are expected to embark on a round of additional Tier 1 capital raisings next year.

Higher yeilds

A perpetual for Ananda would also confirm the offshore renminbi market's ability to deliver competitive funding for lower-rated companies after a record number of high-yield issues over the last year. Chinese developer Golden Wheel Tiandi set the high watermark for coupons in April with an 11.25 percent 2016 note.

Appetite for duration in the Dim Sum market has also improved from the early days, when tenors rarely exceeded three years. The Chinese Government issued a 30-year offshore renminbi bond in June.

"I am not comfortable with long-tenor paper beyond five years in CNH [as ofshore renminbi is called], mostly because of liquidity issues, but the step-up makes this deal quite interesting," said one investor.

While the investor base has deepened, however, bankers say finding a first issuer has been complicated. The swap market remains illiquid at longer tenors, they say, explaining why the first hybrid is more likely to come from a company with renminbi funding needs.

The lack of a clear benchmark in the offshore renminbi market has also been a hurdle to the rate reset structure that is popular with investors in U.S. dollar perps.

Leads Barclays, CLSA/Citic Securities and CIMB resolved the swap issue by offering Ananda the option to swap the interest rate as if it were a three-year bond, something that the high step-up might have made easier to justify. The proceeds will be converted to Thai baht.

Low stock price

If successful, the issue will allow Ananda to increase its equity in the balance sheet without diluting shareholders. The issuer is not short of money, but the company told its shareholders it would maintain a debt-to-equity ratio of below 1.1x.

Ananda completed its Bt5.6bn ($161 million) IPO at Bt4.20 a piece in December 2012, but its shares have since fallen to Bt2.56, explaining its reluctance to sell new shares.

Before opting for the offshore renminbi market, the issuer was looking to launch a perp offering in several other places, including the domestic Thai baht, the Singapore dollar and the U.S. dollar markets.

Those avenues were not as welcoming as the Dim Sum market, though.

High-yield bonds are rare in Thailand, and the only perp so far came from PTTEP, one of the country's top issuers.

Singapore's private-bank investor base was hungry for perps last year, but has become far more selective and more demanding in yields recently.

Pricing of 5.5%-6.0% was heard for a potential Ananda perp in Singapore dollars, but investors saw that as too low for an unknown foreign mid-cap borrower.

In comparison, Heeton Holdings, also a property developer with a market cap of S$175 million ($141 million), sold a two-year bond last week at 5.60 percent, suggesting that Ananda, with a market cap of around $275 million, would have to pay far more for a perp.

Eventually, Ananda decided that tapping the offshore renminbi market would be the most economical. It may also create a new landmark.

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