Southeast Asia debt capital market (DCM) revenues are down 18% year-on-year despite corporate investment grade and high yield bond issuance up 3.4% and 10.6%, respectively, highlighting the impact that increased competition has had on the bond market.
DCM bankers have disclosed revenue of US$89 million in 2013 to date, down from US$108 million in 2012 during the same period, according to data provider Dealogic. DCM has also contributed a smaller portion of banks’ revenue pie, as well. In 2012, DCM accounted for 46.7% of investment banking revenue; that figure is now 32.3%.
This comes as 85 investment grade corporate bonds – in US dollars and local currencies - have been issued in Southeast Asia to raise US$11.16 billion, more than any year on Dealogic’s record. High yield volume is also up, at US$4.81 billion across 14 deals.
Comparatively, 56 investment grade corporate bonds raised US$10.79 billion during the same period in 2012, and 15 high yield deals raised US$3.83 billion.
Bankers say the disparity between corporate bond issuance and revenue has become most pronounced in 2013 due to increasing competition between banks. In previous years, regional and global banks such as Deutsche Bank, DBS and HSBC have been key arrangers of Southeast Asian debt deals, but increasingly banks from geographies such as China and the Middle East are looking to get a piece of the pie as Southeast Asia’s influence grows and its markets develop.
“The competition intensifies every year. It never abates; every year, there are new banks coming in to do transactions,” said Kit Ho Ng, head of Malaysia DCM at RBS. “We have seen more foreign banks as well as Asian banks that are trying to become more regional, participating in DCM deals and competing with banks, such as RBS, that have been in Malaysia and working with clients for a long time. At the end, it's about having the right DCM platform with the global connectivity and network that will allow us to stay in the game.”
Additionally, issuers have had been inviting more arrangers to participate on their deals. This means that the revenue that banks collect decreases as the pie is split between more players.
“Volumes are fairly robust but we are seeing a lot more banks on a single deal, and that’s putting pressure on revenue for the banks,” said one Singapore-based debt syndicate source. “Before 2009 you would typically see one or two banks on a deal and now it’s fairly common to see four, five, six banks on the same deal, which means revenue is split up. And there’s more competition in the region, and issuers are taking advantage of that.”
He points to Indonesia’s Tower Bersama Infrastructure’s upcoming deal as an example, which has four banks mandated as bookrunners. “There are several banks on that deal, and that’s a ‘BB’-rated name,” said the syndicate banker. “An issuer like that would typically be a strong name to drive revenue because banks charge more to arrange a high yield bond. But now that’s being split.”
Dealogic shows that four of the 14 high yield deals completed in 2013 have four or more bookrunners, compared to one in 2012. Six deals had two or fewer bookrunners in 2013, compared to nine in 2012.
While this has been a recognised trend for while in other Asian markets, bankers say it is a newer phenomenon in Southeast Asia, and one that will continue as the region’s debt market develops.
“Korean banks were the first to see the number of bookrunners grow, first from three to four banks on deals and to five, size or seven banks,” said the syndicate source. “Chinese high yield issuers have three or four banks as opposed to one or two. India and Southeast Asia deals have typically had a fewer banks on their trades, but that’s changing for these markets.”
This happens as issuers look to maintain relationships with banks who work on other areas of their businesses. “They’re looking to give relationship banks a fair chance to be on bond deals, so we’re seeing a lot more banks who are doing mainstream services for them like Standard Chartered, HSBC, ANZ, DBS and Bank of China and getting on a lot more deals,” said one debt banker at a Singaporean bank. “Obviously the issuers are squeezing fees.”
He explains that sovereigns typically pay a fee of five to 10 basis points (bp) for their deals, while investment grade corporates pay 10bp-50bp. High yield issuers in Southeast Asia pay roughly 200bp-300bp more.
Yet, despite the growing competition in Southeast Asia and more banks participating on deals, some DCM executives believe that the region’s fee system will become more balanced in the coming years.
“It’s a common concern that fees are being compressed but to some extent it’s not a sustainable trend that banks will continue to take less,” said one senior DCM origination banker. “There’s been a lot of activity from banks focusing on debt in recent years but there are some banks that have almost been forced to exit the sector. You need a variety of revenue streams, so the system is working itself out.”
He adds that many banks have been keen to participate in lower-paying deals to elevate their status on league tables, but at some point that too will end if DCM managers find that the trade off isn’t worthwhile.
“In some areas and industries you have issuers who are extremely low payers...That’s not a viable strategy. Clients will begin to understand that it just doesn’t make sense overall to keep squeezing banks – particularly if you’re a corporate when there’s a quid pro quo when it comes to your relationships,” said the origination banker. “But this is a real concern for banks, and obviously it’s something that we’re trying to halt.”