Private bonds fill the high yield hole

  • 28 Jan 2008
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When global credit markets seized up last year, one sector of the Asian bond business continued to thrive. Asia’s private bond market is transforming itself from a murky world of high risk deals into a genuine public market alternative, a trend that will continue into 2008, says Steve Garton.

Privately placed BONDS worth $15bn were sealed in Asia, excluding Japan and Australia, in 2007. Not only is that a sharp increase from around $8bn in 2006 and $2bn in 2005, but it also comes at a time when public bond issuance out of the region has fallen disappointingly flat.

Private placements are becoming a much more important part of the Asian market, for arranging banks, investors and issuers alike. Banks have set up dedicated private placement teams, in some cases dividing syndicate desks to specialise in this market. Investors who had never previously considered private deals are being tempted to participate, while Asian issuers are finding a private bond can offer essential funding when other markets remain firmly closed.

It is easy to see why interest is growing. New bonds worth just over $40bn were issued in dollars, euros and yen in Asia in 2007, according to data company Dealogic — that market has remained almost flat since 2004.

Net issuance has been declining since 2004, notes Edwin Chan, a credit analyst at UBS in Hong Kong. Subtracting redemptions and coupon payments from the volume of new Asian G3 issuance gives a net figure of $17bn in 2004, $12bn in 2005 and just $2bn to December 6, 2007. Big scheduled redemptions in 2008 could even lead to negative net issuance for the year.

The private market can offer compelling fees for arrangers and returns for investors, as the few disclosed transactions demonstrate.

Merrill Lynch arranged a $75m three year placement in April 2007 for Henan Xinyuan Real Estate, a Chinese developer, which was priced at a coupon of 680bp over Libor and offered fees of 3.5%, according to Dealogic. Fees on public high yield bonds rarely reach above 2.5%.

After the subprime turmoil hit last summer, investors were being approached with private high yield deals with returns in some cases of close to 30% — usually including the added juice of warrants to bump up total yields.

High yield’s loss is private’s gain

While some investment grade names regularly tap the private placement market as part of their funding programme, such as Korea Development Bank, the main driver of the private market’s growth is the slow development of an alternative high yield industry.

"The private market is growing as a response to a failure in the public markets," says Fergus Edwards, head of Asia debt syndicate at UBS in Singapore. "The reality is that Asia is made up of non-homogeneous legal systems and public markets. This means there is no true single publicly tradable high yield market as different deals are not true substitutes for each other. The lack of liquidity that results means that many investors feel they are better off buying private placements."

With no public data to go on details are sketchy, but participants will testify that private deals continued to close during some of the most challenging periods in the credit market recently, illustrating the degree of demand for private bonds.

Notable examples included a $300m pre-IPO financing in August for Hengda Real Estate, the Chinese property company, arranged by Credit Suisse. With only two public new issues worth $188m launched in the entire month of August, the Hengda transaction demonstrated that the private market could offer issuers a sizeable amount of funding in extremely difficult conditions.

"The private market has been repriced, just as the public one has, but issuers that are prepared to pay can still access this form of liquidity," another syndicate banker in Singapore said in December.

Hengda is understood to have paid 500bp over Libor for the floating rate loan, which was sold with warrants to give investors a theoretical internal rate of return of around 18%.

7 Days Group Holdings, a Chinese budget hotel operator, sold $80m of three year bonds in the middle of August in a deal arranged by Merrill Lynch. The notes carried a coupon of 550bp over Libor.

Hong Long Holdings, another Chinese developer, turned to the private placement market in September after struggling to raise funds through a public bond, completing a $90m five year deal via sole lead manager Citigroup, paying a 12.5% coupon.

Private high yield bonds continued to close even in November and December, well after the public new issue market had shut up shop for the year.

Lee & Man, the Chinese paper company, sold a $100m seven and 10 year private deal on November 23 via lead manager Deutsche Bank, placing the debt with four US accounts at a coupon of 250bp to 265bp over Libor.

Bankers believe the sector will continue to thrive in 2008.

  • 28 Jan 2008

Bookrunners of International Emerging Market DCM

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • 24 Oct 2016
1 Citi 41,733.81 194 9.42%
2 HSBC 40,945.92 235 9.24%
3 JPMorgan 37,214.87 151 8.40%
4 Bank of America Merrill Lynch 29,284.07 123 6.61%
5 Deutsche Bank 20,416.10 78 4.61%

Bookrunners of LatAm Emerging Market DCM

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • 25 Oct 2016
1 JPMorgan 13,485.80 35 12.64%
2 Citi 11,728.10 31 10.99%
3 Bank of America Merrill Lynch 11,727.25 30 10.99%
4 HSBC 10,091.34 29 9.46%
5 Santander 9,784.51 27 9.17%

Bookrunners of CEEMEA International Bonds

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • 25 Oct 2016
1 Citi 15,985.59 61 11.10%
2 JPMorgan 14,992.78 59 10.41%
3 HSBC 11,482.63 54 7.98%
4 Barclays 8,704.42 31 6.05%
5 BNP Paribas 7,314.81 22 5.08%

EMEA M&A Revenue

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • 02 May 2016
1 JPMorgan 195.08 50 10.55%
2 Goldman Sachs 162.26 37 8.77%
3 Morgan Stanley 141.22 46 7.64%
4 Bank of America Merrill Lynch 114.20 33 6.18%
5 Citi 95.36 35 5.16%

Bookrunners of Central and Eastern Europe: Loans

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • 25 Oct 2016
1 UniCredit 3,966.12 27 13.01%
2 SG Corporate & Investment Banking 2,805.90 16 9.20%
3 ING 2,549.27 20 8.36%
4 Citi 2,526.98 15 8.29%
5 HSBC 1,663.71 16 5.46%

Bookrunners of India DCM

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • 26 Oct 2016
1 AXIS Bank 6,343.17 130 18.89%
2 HDFC Bank 3,833.38 102 11.41%
3 Trust Investment Advisors 3,461.85 150 10.31%
4 Standard Chartered Bank 2,372.20 33 7.06%
5 ICICI Bank 1,992.51 54 5.93%