Asian Bond Markets: An Overview
02-16-2007 | Source: Institutional Investor Sponsored Report
Asian corporate issuers find themselves in an enviable position. Where once only the most highly rated could access global capital, today lower-rated issuers can take advantage of a growing high-yield market, liquid local currency bond markets, vast global liquidity and a warm reception among institutional investors. In a generally quiet year for the big-name, highly rated issuers, the big story of 2006 was what happened in high yield. It’s also likely to be a key theme for the year ahead.
It’s not just that the size of the issues was large, although several high-yield deals last year were eye-catching: $650million from Korean cable TV operator C&M, $1 billion from the Indonesian state-owned (but not guaranteed) electricity generator Perusahaan Listrik Negara, and a host of $400 million-plus Chinese property deals.
What also caught the eye was how the market reacted to a crisis. At the end of December 2005, a Chinese aluminum extruder called Ocean Grand Holdings tapped the market for $125 million with a five-year bond through ABN AMRO, taking a further $35 million in March 2006. Then, in July, the company discovered fraud at one of its mainland subsidiaries. It would go on to default.
Coming at the same time as a series of downgrades, including Chinese issuers Hopson Development and Panva Gas and Thailand’s GSteel, the bad news hit the market. Bonds performed badly and the market closed to new issuers. But it didn’t stay that way, and that’s what’s interesting.Investors recognized that the fraud was company-specific and were able to differentiate between that situation and the broader market – in a way that many feel they previously would not have done. All high-yield bonds, and particularly those in China, went down,but were then bid up again by opportunistic value investors, an investment class new to the region that provides a useful backstop to sliding sentiment.
Within months, the market was buoy-ant again – so much so that Ranhill, a B-minus-rated Malaysian construction group with high leverage and an order book dominated by a housing project for the Libyan government, was able to raise $220 million through a five-year bond in October. This was led by ABN AMRO, the same bookrunner that handled the China Ocean Grand deal. Other big issues showed that investors were willing to price risk, including $250 million for Pakistan Mobile (known within Pakistan as Mobilink), plus three deals for Chinese property developers: $400 million for Agile Property, $400 million for Greentown China and $600 million for Shimao Property Holdings.
The pipeline looks strong, too. “The broader high-yield markets – which encompass public bonds, private financings and leveraged loans – had the best year ever in 2006, and I expect 2007 to exceed this, driven by many of the same factors plus the catalyst of LBO and M&A activity,” says Mark Leahy, head of Asian debt syndicate at Deutsche Bank. He expects these markets to see issuance of $25 billion to $30 billion this year.
Asian High-Grade Credits This is a welcome development for book runners, because although there have been some big issues from more highly rated names in 2007 – in particular, a remarkable $2 billion deal for Indian bank ICICI and a $1 billion issue by the Republic of the Philippines –Asian high-grade credits have not jumped into the market in the same way as elsewhere in the world. “In Europe,you’ve seen savvy borrowers pick up on the success of other people’s deals and issue on the back of them,”says Fergus Edwards, director of Asian fixed-income syndicate at UBS in Hong Kong. “Investors have got cash and are look-ing for deals. That’s allowing issuers to improve their maturity profile or go down the credit curve.” But with some exceptions, Asian investors have not taken advantage of that liquidity. “They don’t see this market as being one that’s going to move significantly away from them” in terms of funding cost, says Edwards, “and a lot of issuers were already adequately financed going in to2007. You’re left with the guys who plan to come to market every year.
Those who do issue will find a willing audience. “Another big theme for 2007is the return of global investors to Asian credit,” says Leahy. The ICICI deal, he points out, “was greater than the total senior and upper tier II issued from all of India in 2006. While some of this is a function of demand for high-quality Indian paper, and for ICICI in particular, it is clear that global investors are in the process of reweighting Asian credit.”
One other development in Asia over the last year – and something that stops the high-yield market from becoming livelier still – is the growing use of private markets. Many issuers, such as those that don’t have a rating (or can’t get one), or for some reason don’t want to broadcast their financials to the world, consider the private finance market a more-convenient, if expensive, alternative to public market issuance. This market is growing partly because of the increased interest of hedge funds in the Asian marketplace, coming in with cash and a high-risk appetite, including an appetite for companies that don’t generally have access to the capital markets.
Private Markets“Frequently, it is the most motivated borrowers, requiring high execution certainty while anticipating a meaningful risk of deal failure, that seek access via the private markets,”says Vinay Jayaram, executive director and head of debt syndicate for Asia Pacific at Morgan Stanley. “Investors eagerly seek out such situations, as it alters the investor-issuer balance in their favor. They have a better ability to dictate terms and can avoid volatile marks to market.”
Asian borrowers have a considerable advantage over their counterparts 10 years ago in that, instead of being entirely at the mercy of dollar investors, they can now borrow in euros or yen, and perhaps more importantly, in Asian local currencies. Malaysia is in the process of joining the MSCI World Government Bond Index and should formally join in July. Malaysia will become the 23rd country in an index followed by about a trillion dollars of capital, a huge step and a strong endorsement of that market’s sophistication. Not every Asian market has done very well, but with every year, liquidity in these markets grows and tenors available to borrowers increase. This is one of the reasons that high-grade issuance in G3 markets has been quiet. They have cheaper alternatives, at low interest rates, at home.
But, while low rates and high liquidity boosted local issuance in 2004 and 2005, rates hardening last year made these markets less accessible, with some exceptions (notably the Hong Kong and Singapore dollar). “Asian local currency markets continue to offer their strategic promise, though in practice, they have yet to live up to expectations,”says Leahy. Asia still has to develop mezzanine and subordinated-debt markets. One would think, with private equity driving larger numbers of buyouts in Asia as elsewhere in the world, that these markets would develop to support the buyouts, but that has yet to happen – chiefly because there hasn’t been a need.
Mezzanine FundingFor one thing, most buyouts in Asia have not been large enough to need mezzanine funding. Even the bigger ones, like MBK’s $1.6 billion bid for China Network Systems in Taiwan, did not require a mezzanine or subordinated tranche.
But the big reason is that local banks are willing to lend large amounts of senior debt. Many banks have a great deal of liquidity but not too many places to put it, especially when it comes to generating yield. Consequently, senior debt tranches in Asia are stretched much more than elsewhere in the world.
Many bankers do speak of mandates for deals with subordinated tranches, so perhaps things are changing, but even then, the form isn’t quite the same as in the U.S.or Europe. “Mezzanine deals normally exist as the piece between the debt and the equity side of the balance sheet,” says Edwards. “But what’s happening in Asia is they’re not really fulfilling that role. Instead, they are providing pre-IPO capital, or debt capital for people who are highly leveraged.”
Nevertheless, if leveraged finance is to grow in Asia, as it surely will, then it stands to reason that subordinated-debt markets should follow in time. Here, too, much is happening below the radar on the private finance side, and there are mezzanine funds appearing in Asia, such as the CLSA Mezzanine Fund, with $200 million to invest.
Generally, it’s a winning position for the Asian issuer: choice of markets, choice of structure, choice of investors.
This Sponsored Report was prepared by the Special Projects Department of Institutional Investor and written by Chris Wright, a journalist based in Singapore.