Floating rate notes shone in Asia last week after Kookmin Bank’s $500m three year floater not only received solid demand in the region for what was perceived as a US-centric bid, but was also able to get away with eye-popping savings compared to the borrower’s five year fixed rate pricing levels.
Now that a commercial bank in Asia ex-Japan has proved that other lenders could save as much as 23bp versus their five year fixed curve, it makes perfect sense for others to call their capital markets advisers and ask how they would benefit. Banks typically swap their fixed rate funding for floating. This way they won’t have to, adding another advantage.
It’s a timely structure. For investors, the most obvious advantage is that shorter tenors and floating rates insulate them from getting burnt by a rate increase. Even though quantitative easing tapering has been postponed, it’s only a matter of time before the US Federal Reserve starts to put out details on how much it will start cutting bond purchases, nudging rates higher.
And the format is gaining more support in Asia. The key investor base for Asian floaters has traditionally been US buyers, but the US government shutdown prompted many of them to stay out of Kookmin’s deal. Despite a weaker turnout from the US, however, Asian investors surprised bankers by taking up 59%.
Asian bank treasurers, who took a whopping 41% of Kookmin’s bonds, sought the A1/A rated floaters as a way to match their liabilities. Asian appetite was further bolstered by the fact that that Kexim’s 2016 floaters have tightened around 10bp since they were issued in September.
Strings attached
Kookmin’s deal has definitely revved up momentum for FRNs for now, but an improvement in risk sentiment and an increase in underlying rates that turned out to be slow and measured could also pour cold water on the FRN sizzle. A lack of comps could also dampen appetite, for now.
The biggest concern is that an issuer won’t be able to save much — if anything — over a longer fixed rate tenor if the deal is launched on a bad day, even though FRNs are considered a defensive play. In fickle markets, this can’t be ruled out.
It’s worth bearing in mind that a three year fixed is only about 2bp-3bp wider than an FRN of the same tenor at the moment, and could very well become flat amid more supply. Kookmin Bank’s three year fixed January 2016s have tightened by about 5bp-10bp in the past two weeks.
All of which is a reminder to issuers that fickle markets can quickly render the apparent advantages of nascent structures less appealing. Yes, FRNs might in the short term look like a good bet given the backdrop. But they will not be a magic solution for all.