While Asia’s loan markets may have changed only superficially, its bond markets bear almost no resemblance to how they looked 30 years ago. The emergence of China on to the world stage and into the international capital markets has changed the business beyond recognition.
“Greater China accounts for around 70% of issuance in the G3 Asia ex-Japan bond markets, from virtually zero even 20 years ago, when volume in was dominated by Korean issuers,” says Derek Armstrong, head of Asia Pacific debt capital markets (DCM) at Credit Suisse in Hong Kong.
Dollar bond issuance has grown exponentially — from around $15bn in 2000 to $200bn last year, according to Credit Suisse — and there has been a noticeable shift away from 144A format to Reg S.
“Today the US dollar Reg S market is capable of supporting large, multi-tranche deals across the maturity curve,” says Neil Arrowsmith, head of Asia Pacific syndicate at MUFG in Hong Kong.
This year, Deutsche Bank reckons 70% of Asian issuance will be Reg S only. Five to 10 years ago it was 50%.
“Asia has a much more active regional investor base, which is driving demand — more business is being executed in Reg S only — with volumes more than doubling over the last five years alone,” says Jake Gearhart, Deutsche Bank’s head of debt syndication and origination, Asia Pacific.
A decade ago, a roadshow would involve a day in Hong Kong, a day in London and a day in New York. These days, bankers often spend a day in Singapore and a day in Hong Kong. It is now the norm to have bond issues with no investors outside the region.
The Asian dollar market is receptive to a diverse range of issuers and provides for debt structures ranging from vanilla to subordinated, perpetual and hybrid structures in various forms and aimed at specific investor groups.
Among sovereigns, even Mongolia has been able to tap the markets twice in the past year, although its $500m issue in March 2016 had the dubious honour of the highest coupon on a sovereign bond since 2011.
Lots of the activity is driven by Chinese issuers, as their regulatory environment has become more conducive to funding through bonds, and issuers have more need for dollars to fund overseas expansion.
“We’re also seeing much more activity in the corporate high yield market in the region, again most significantly from Chinese issuers and in the real estate sector,” says Arrowsmith.
Since 2000, high yield issuance from Asia has risen from around $2bn to more than $20bn last year, according to Deutsche Bank.
THE RISE OF LOCAL CURRENCIES
But Asian bond markets have changed in other ways too. Most significant is the development of domestic currency bond markets.
These emerged in the wake of the currency crisis that was triggered in May 1997 by the Thai baht devaluation. The common habit before then of using short term dollar debt to fund long term investments whose returns were tied to the value of domestic currencies was an accident waiting to happen. A period of painful soul-searching and reform followed.
Local bond markets grew up and stopped being glorified syndicated loan markets. They have now become enormous.
“One of the most exciting things is the evolution of the China domestic bond market, the third largest in the world, and its gradual opening up to foreign participation for both issuers and investors,” says Ashish Malhotra, global head of bond syndicate at Standard Chartered in Hong Kong.
At roughly Rmb48tr ($7.4tr), the Chinese bond market is nipping at the heels of the $11tr Japanese market, though it remains far behind the US’s $35tr.
Growth in Asian bond markets has been driven by what bankers call the region’s “notoriously diverse investor base”. This is populated by local banks, private banks, life insurance companies and pension funds as well as local and international funds, and it is these that have wanted longer maturities.
“The need for income, in an environment where you have a lot of fixed income instruments in negative territory, is what is leading to the flows,” says the head of Asian credit at one asset manager.
This is unlikely to change soon. “China will continue to dominate the market, though hopefully balanced out more by the emergence of certain southeast Asian and Indian markets that have room to grow,” says Arrowsmith. “Bank liquidity has always been strong in Asia and certain local bond markets have also developed to provide a competitive local funding option.”
RISKS AND RATE HIKES
But there is one dark cloud on the horizon: US interest rates, which tend to govern the level of dollar bond issuance in Asia. With one rate hike under the Federal Reserve’s belt so far this year and a second likely soon, bankers are starting to worry about outflows.
Most believe, however, that any slowdown will be gradual. There is little sign of banks trimming their DCM teams. Rates are likely to remain below historical medians, while strong issuer balance sheets and regional economies should sustain an active debt capital market in Asia. Most importantly, the large issuance volumes in recent years will all need to be refinanced.
“We expect the markets to remain calm in the run-up to a potential US interest rate hike in June and see a healthy pipeline,” says Armstrong. “A number of issuers are positioning themselves to access the market as part of liability management exercises before two more potential US rate hikes this year, and also many of the previous 2012 and 2013 deals are coming up for refinancing.”
There are, as always, doom-mongers who argue that the tightening of US monetary policy, the increasingly domestic focus of US president Donald Trump and rising inflation could call a halt to the market’s 30 year bull run. But not even those who predict a widening of Asian credit spreads or a disorderly sell-off of emerging market credits reckon that will be anything other than a bump in the road.
“These are good times to be a DCM banker in Asia!” says Malhotra.