Companies looking to tap the offshore yuan bond market to refinance maturing debt this quarter will face a market increasingly wary of the Chinese currency, in the biggest test of investor appetite since issuance dropped off in 2015.

Bank of China International's (BOCI) data shows that 52.8 billion yuan ($8.1 billion) worth of offshore yuan bonds, known as dim sum bonds, will mature in the second quarter, 45 percent more than the same period last year and 55 percent higher than the first quarter.

A handful of property companies are starting to trickle back into the yuan bond market in Hong Kong.

But rising default risks mean investors will be smaller in number and will ask for higher premiums, keeping borrowing costs high for some time.

"Our dim sum pipeline is gradually building up and we have several deals from Chinese names that are expected to be completed this month via private placements," said a debt capital markets banker at a Chinese bank in Hong Kong.

Chinese issuers of both yuan- and dollar-denominated bonds offshore switched to raising funds onshore last year because of ample liquidity, a weaker yuan and government efforts to allow easier access to its $7 trillion onshore market.

At the same time, however, Beijing's tighter foreign exchange curbs to staunch a sell-off in yuan assets have hurt investor demand in the offshore market.

The exodus of firms to the onshore market last year led to a decline in annual primary dim sum bond issuance, the first since it was launched nearly a decade ago.

Tentatively dipping back, these yuan-shy investors now want better yields on their yuan bonds.

Meanwhile, Beijing's cross-border curbs make it harder for issuers to use funds raised onshore to refinance offshore debt.

"Companies will have to rely mainly on the offshore market to refinance their existing dim sum bonds, though funding costs are cheaper onshore as Beijing is controlling fund outflows," said Nathan Chow, an analyst at DBS in Hong Kong.

REFINANCINGS

In April, China property developer Fantasia Holdings Group Ltd sold a three-year 600 million yuan ($92.4 million) offshore bond at 9.5 percent - highest in the primary market since October 2014 - to refinance debt.

Fantasia, rated B+ by Standard & Poor's, sold a three-year offshore yuan bond with a coupon of 7.875 percent in 2013. The bond matures on May 27.

The company's onshore subsidiary paid 7.29 percent for five-year money earlier this year on the mainland.

Although Fantasia has raised some funds onshore, it could take months to move the money offshore and the cost would be high, said a debt capital market banker involved in the deal.

Property firms Yanlord Land Group Ltd and Powerlong Real Estate Holdings Ltd are among a clutch of others with offshore yuan bonds maturing this year.

Dim sum bonds could benefit from narrowing interest rates between offshore and onshore markets seen in recent months, BOCI analysts said in a report.

But for now, most dim sum issues are likely to be only small private placements with just one or two investors due to weak demand for yuan assets, bankers said.

Only Fantasia and the Republic of Hungary have publicly sold yuan bonds in Hong Kong this year.

Bankers said delays over reforms, including the release of new rules for "panda bonds" or yuan-denominated bonds sold by foreigners on the mainland, could help demand for offshore bonds.

Proceeds of most panda bonds sold so far are only used within China and it is difficult for an issuer to take proceeds out of the country, they said.