Debt bankers at global institutions say that the conundrum of luring European bond issuers to Asia and convincing regional investors to buy into these international credits will be one of the biggest challenges to take on in 2013 - yet will be a necessary step for the development of Asia’s debt capital market.
“Easily one of the biggest challenges that we continue to face is getting European names to issue in Asia,” said one head of debt capital markets (DCM) at a global bank. “Investment grade names from Europe can issue bonds because there is an appetite for these credits. But marginal investment grade names and unrated bonds continue to have difficulty. It’s surprising to see this even with well-known brands.”
Debt origination and syndicate sources say regional investors favour Asian investment grade and global investment grade bonds above all. If they do chose to go down the credit rating spectrum, then the preference is for Asian high yield bonds. Asian investors have limited appetite for unrated and marginal investment grade European credits.
“They prefer high yield Chinese property names to marginal investment grade European bonds, despite the performance of the onshore property market,” commented the DCM head, expressing exasperation. “They’ll go for property names yielding double digits instead.”
Bankers note that the trend particularly applies to European corporate credits, given the ongoing economic volatility in the eurozone affecting risk appetite.
The banker recalls a situation earlier this year when a well-known, unrated European brand sought to issue a bond in Asia. Though the unnamed company was within a struggling industry, the deal advisers were confident that its familiar name would energise investors.
Yet meetings with potential buyers ended with lukewarm interest. While the issuer’s brand name piqued curiosity, it was clear the deal could get off the ground.
“One deal failed and it was a very well-known brand,” recalled the DCM head. “The issuer is still optimistic that it can come back later, but we had to shelve the deal for the time being.”
According to one debt syndicate source, Asian investors’ hunt for yield is at the heart of the issue. He notes that investment grade deals “can always get done” but the middling yield offered by lower-IG issuers cannot compete with the strength of its higher-rated peers or the yields offered by its lower-rated ones.
“Asian institutional investors want yield, and that’s why Asian high yield names will be popular and lower-investment grade credits will have difficulty competing,” he said. “It’s an interesting question, how to get these investors interested … there’s a huge delta around ‘BBB’-rated credits.”
He notes that in Asia ‘B’-rated credits tend to yield between 10%-12% while ‘BB’-rated issuers offer 7.5%-9%. IG issuers yield between 2%-5%, with ‘BBB’ credits at the higher end of that range.
“Institutional investors still want yield – why get 4%-5% when you can access 9% from a big name in China?” asked the syndicate source.
Bankers suggest the best way for these European marginal IG names to gain access to the market will be to issue hybrid bonds because regional investors have special interest in the subordinated debt and the higher yields these bonds offer.
This model has already been used by German electricity producer RWE (‘BBB’ Standard & Poor’s, ‘Baa2’ Moody’s). On March 29, the company sold a US$500 million hybrid bond maturing in 2072 with a 7% coupon, primarily targeting Asian investors in Hong Kong and Singapore. Self-described as the “first hybrid bond from a European utility in the Asian capital market” by the company, the deal was more than four times oversubscribed.
Likewise unrated French commodities firm Louis Dreyfus sold a US$350 million perpetual hybrid on September 5. Bankers on the deal attributed the success of the bond – unique because it was unrated and not a utilities firm - to Asian private banks’ demand. It achieved a US$1 billion book and a coupon of 8.25%.
Bankers agree that private banks will likely be the prime investor to open the market for this segment of issuer, particularly keen for yield as they are forced to offer increasing lower interest rates on loans.
Yet the onus is not entirely on Asian investors – European companies themselves must recognise that, if they are not a brand-name issuer, they will likely have to pay a premium to attract Asian interest.
“There are European companies that don’t have the best credentials saying ‘we hear Asians will buy anything’,” concluded the syndicate source. “Those are not the issuers we are trying to lure to Asia … If they’re a good name and able to offer subordinated debt they’ll be appealing to private banks, which are becoming more flexible towards these investments in the region.”