A flush of US liquidity and record-low yields are prompting more Asian corporations to target American investors for their dollar-bond deals in addition to the usual Asian and European audience, even if that requires them to pay more and wait longer.
PTT Pubic Company is the latest Asian issuer to launch a US$1.1 billion dollar-bond deal through a 144A format, which includes documentation that complies with US Securities and Exchange Commission regulations and allows American investors to buy the bonds. The deal nailed record-low coupons for the issuer in both the 10-year and 30-year tenors at 3.375% and 4.5% respectively as US accounts snatched up as much as a quarter of the books for both of the tranches an hour after the deal opened.
“If we didn’t have the additional 25% of the order book, we would be in a different position right now,” said a senior debt banker who worked on the deal. “While the domestic market [in Thailand] is able to plug the funding gap for them, the attractive cost of funding in the USD bond market as a result of QE3 presents a very attractive option.”
The Kingdom of Thailand will be able to reap the benefits of QE3, record-low yields and abundant liquidity when it launches its sovereign bond to US investors as early as the beginning of next year, the banker added. The US Federal Reserve said September 14 that it will keep rates near zero at least through mid 2015 to boost the domestic jobs market.
Indonesia’s state-owned electricity utility Perusahaan Listrik Negara also priced a US$1 billion dollar deal on October 16 that received a 31% reception from US accounts. South Korea’s telecom operator SK Telecom held roadshows in the US last week to market its US dollar bond and is planning to price it as early as October 22, said a senior banker on the deal.
“That’s what the Federal Reserve did to the market. They injected a lot of money so investors still enjoy hefty cash available on the table to put to work,” said the banker.
Asian issuers sold US$121.7 billion in dollar-denominated deals so far this year, of which 54% is comprised of RegS only deals while the rest consists of deal formats with both RegS and 144A, according to Dealogic. Issues with both RegS and 144A formats sold a total US$52.2 billion year to date, doubling from US$29.7 billion during the same period in 2011.
RegS deals allow companies to sell their bonds to non-US investors such as those in Asia and Europe.
Japan’s Nippon Life Insurance debuted in the US-dollar bond market with a US$2 billion hybrid that attracted 45% of the book from US investors, who helped drive oversubscription rates over 12 times. The decision to open the books to the US was based on the fact that they provide the largest amount of liquidity in the capital markets, and that will prompt more Japanese companies with overseas operations or issuers who need to fund M&A and stock repurchases to tap American investors.
“QE3 is a significant reason for the reception,” said Masaki Inoue, head of DCM Japan at J.P. Morgan in Tokyo. “It gave the market that significant comfort that the Fed will continue to stand by and support liquidity, and investors are very relieved of the announcement of QE3.”
Inoue added that the bullish market sentiment will not be disrupted by the upcoming US elections and the fiscal cliff, adding that the threat of the European debt crisis has also subsided.
‘Buy and hold’
A majority of US investors in the debt capital markets comprise of insurance and pension funds, which tend to buy and hold these bonds longer than private banks seeking more yield. Although it takes two to three weeks longer to structure the deal with a 144A format and will cost issuers more on transaction fees, companies are more interested in targeting the ‘buy and hold’ investors as that lowers volatility in the secondary markets and keeps yields tight.
“If you’re selling to accounts you know will not sell it, the remaining accounts in the book realise that much of this has been placed with those who will not sell it, and that in itself prompts a reaction whereby you see bonds almost technically rally,” said a Singapore-based senior banker. “So by placing them in strong hands you see a favourable secondary performance.”
“A lot of these issuers actually want to achieve as low as possible costs to raise their funds, so their preference is to have long-only accounts to hold their papers so that over time the paper doesn’t fluctuate as much,” said another banker with knowledge of the PTT deal. “Whereas the private banking accounts, even the high-quality hedge funds in Asia, have a tendency to flip the paper because in the low interest environment everyone wants a yield pickup.”
Asian issuers are expected to issue more dollar-denominated bond deals in the 144A format as more companies take advantage of benign interest rates by pre-funding for the next year and issuing longer-dated tenors, giving US pension and insurance funds relief as many are facing difficulties searching for yield onshore because of low interest rates.
“The 144A market provides access to the long end of the curve so especially for 30-year bonds, given the rate environment, it is extremely attractive for them to spread out their maturity to the end of the curve and that’s exactly the extra advantage the 144A market gives. It’s so much deeper and liquid and more often than not, the liquidity for 30-year deals in Asia come a lot of from the US,” said another Singapore-based debt syndicate banker.
“In terms of the 144A market, US investors are looking into higher yielding paper that still have solid credit matrixes and strong fundamentals versus just having a strong brand profile and extra yield pickup which private bank investors tend to gravitate towards in the RegS market.”