Denominated in Chinese yuan but issued in Hong Kong, dim sum bonds allow companies to raise cheaper funds in yuan, as the credit condition in China is still tight because of inflationary pressures. Moreover, raising funds in the offshore yuan market also helps mitigate risks associated with foreign exchange.
Growing in the Middle Kingdom
Ford is setting up more production facilities and aggressively expanding its dealership network in the country. It's planning to introduce 15 vehicles and double its dealership outlets by 2015. Last month, Ford opened its fourth assembly plant in China, making it the biggest global production location for the company after Michigan. Ford's capacity in China has now risen to 600,000 vehicles a year. Its sales from China in 2011 were about 7% higher from 2010 levels, and Ford would like that figure to rise.
Similarly, a major part of Caterpillar's international growth plans is focused on China. Revenue from the Asia-Pacific region surged a staggering 45% in 2011 from a year ago, and China accounted for almost a quarter of the region's revenue. But Cat wants to get bigger in the Middle Kingdom and is eyeing greater market share. Apart from setting up several new manufacturing facilities and expanding research and development, Cat is also trying to acquire China-based mining company ERA Mining Machinery.
Obviously, such big plans require huge investments in local currency. That's where the dim sum bonds come into the picture.
Biting into dim sums
For Ford, this will be its first such experience. It has raised roughly $158 million (1 billion RMB) through the sale proceeds that will be used for "corporate purposes" in its Chinese operations. As for Caterpillar, this is its third yuan-denominated bond issue. It has raised around $199 million (1.26 billion RMB).
The Foolish bottom line
Focusing on high-growth regions like China makes sense for both the companies, and they seem to be doing the right thing by raising capital through dim sum bonds. Keep tracking Ford and Caterpillar as they expand and grow bigger by adding them to your stock Watchlist, our free and personalized stock-tracking service.
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