Despite the region’s high savings rates – and the traditional reluctance of its governments to borrow abroad – Asia is becoming a more important universe for emerging market sovereign credit.
“There is continuing strong interest from global investors in the emerging markets of Asia and a renewed investor confidence in the Asian story. This is driven in part by positive ratings momentum, improving credit fundamentals, improving underlying economics and general political stability,” says Cynthia Whelan, head of debt capital markets at Barclays Capital in Hong Kong.
Whelan says that there is also a rebalancing of global emerging market portfolios taking place. “Many Latin American issuers are flush with cash due in part to strong commodity prices, and many are undertaking debt buy-backs. With this shrinking supply, investors are reweighting their portfolios towards markets in Asia,” she says.
“The rally in emerging markets really reflects the improvement we’ve seen in economic fundamentals,” says Edwin Gutierrez, portfolio manager at Aberdeen Asset Management. “It’s difficult for me to be bearish in this asset class.”
Not so long ago, there was only the Philippines – always broke and borrowing, and always reassuring international investors that it could still service more debt by the simple but unholy fall-back plan of forcing more of its educated workforce to go abroad and remit their (vastly improved) earnings back to the country. As a result over the years, the Republic of the Philippines became one of the three core emerging market sovereign papers, along with Brazil and Turkey.
Thailand and Malaysia have always been more circumspect with their occasional forays into the international capital market – usually to establish benchmarks for their corporates. Indonesia was long absent, before its return in late 2004 for the first time since the Asian crisis. But, having raised over $8 billion since then, it has joined the Philippines as a key emerging market.
“Asian sovereign debt issuance is likely to continue to be heavy, although the composition is likely to change,” says Whelan. She continues: “Stronger credits, who have traditionally been active issuers, are likely to decrease their use of international capital markets as FX reserves grow. Instead we are likely to see less frequent borrowers come to the fore.”
Vietnam’s return
Perhaps the most exciting event of new membership to the club came last October, when the Socialist Republic of Vietnam pulled off a stunning return to the international capital markets with a $750 million, 10-year transaction, despite volatile conditions in emerging market bonds at the time.
“This was a very well received deal from an issuer who benefited from rarity value. The transaction had been anticipated for some time, and with a compelling credit story and positive growth prospects in Vietnam, investors embraced the deal. The success of this offering bodes well for future transactions from Vietnam, expected later this year,” says Whelan.
Communist Vietnam had been mulling a deal for a year – going back even to before the Asian crisis. Credit Suisse First Boston was sole lead manager for the deal, having already marketed a potential Vietnam fundraising in 2001.
Vietnam had some $300 million of Brady bonds outstanding, but investors had never been able to buy a straight benchmark size deal from the country before. As a result, its $500 million bond attracted $4.5 billion of orders and was increased to $750 million. It was priced to yield 7.125% – placing Ba3/BB-rated Vietnam well inside the secondary market levels of Indonesia and the Philippines.
The deal gave capital markets bankers hope that the country was using the bond as a signal that it wanted to encourage more cross-border transactions, whether in debt, mergers and acquisitions or equity. It also gave those in the debt capital market renewed faith that other countries would also dip their toes in the water of international finance.
Barclays Capital’s Whelan adds a note of caution. “Emerging credits such as Indonesia, Vietnam and Pakistan, who are the next wave of frequent borrowers, will need to continue to be prudent in their approach to markets to attract investors and increase the number of accounts interested in emerging Asia,” she says.
There has already been some action on the sidelines. Sri Lanka has mandated Citigroup for a bond issue, and Mongolia is rumoured to be in the market too, again via Citigroup. Bangladesh is also looking at a possible sukuk financing and has asked Citigroup and HSBC to advise on the rating process.
That last financing should be able to leverage off another of last year’s most successful emerging market sovereign deals – the Islamic Republic of Pakistan’s $600 million, five-year sukuk in January 2005. The sovereign came back to the market in March this year with even more vigour when it launched two landmark bonds at competitive prices: its largest ever, a $500 million, 10-year bond; and its longest-dated, a $300 million, 30-year bond.
Certainly those Asian emerging market sovereigns that had deals at the ready in January and February scored stunning successes in the international bond markets.
Philippine successes
For the Philippines, it was a breakthrough year despite the political pressure on Gloria Arroyo’s government. It managed to sell a blowout $1.5 billion, 25-year deal, then returned in early May with a reopening of its 2015 and 2030 bonds. It completed its financing for the year with a $1 billion, 11-year transaction in September. It then refused to pre-fund its 2006 budget – which in the past it would have jumped at. This new-found transparency, say bankers, allowed the republic to demonstrate its credibility, and it has now established itself as the region’s most transparent sovereign issue (see Funding Official of the Year, p.25).
Indonesian promise
If 2005 was the year when the Philippines raised $2.5 billion – vastly experienced in the debt capital markets because of its permanent deficit, it must be said – could this be the year when the Republic of Indonesia establishes its credentials as a sound executioner of bond issues and a transparent communicator with the market?
At the beginning of March the Republic of Indonesia achieved a spectacular turnaround in its fortunes in the international bond market with a stunning $2 billion, 11-year and 29-year issue. Led by Barclays Capital, JP Morgan and UBS, the deal raised over $8 billion of orders and captured the imagination of the world’s emerging markets investors.
Barclays Capital’s Whelan says: “Indonesia established itself as a benchmark borrower with this blowout transaction that attracted over $8 billion in firm orders. The borrower was able to aggressively price $1 billion of a new 11-year, and add a much-needed $1 billion of liquidity to last year’s 30-year. This repriced the entire Indonesian credit curve, a shift that has held up in the secondary market.”
The borrower – led on the roadshow by the new finance minister, Sri Mulyani Indrawati – took a leaf out of the book of Omar Cruz, the Philippines’ national treasurer: it told the market it needed $2 billion of funding through offshore bonds in 2006. It then proceeded to market a two-tranche deal, giving many investors the impression that this could be their only opportunity to buy a new issue this year from Indonesia.
At a time when emerging markets sovereign spreads were tightening, and countries such as Colombia and Venezuela were buying back foreign currency bonds, the prospect of two benchmark-size global issues from B2/B+ rated Indonesia was too much to resist, and investors scrambled to place orders. Both Standard & Poor’s and Moody’s revised their outlook to positive a few days before the deal, with both agencies citing increasingly responsible fiscal management, particularly the falling budget deficit.
That allowed Indonesia to price the $1 billion, 11-year bond, which matures in 2017 at 7%, just 5bp outside its 2016s and well through its curve, while the reopening of last year’s 2035s was priced at 7.375% – also a slim premium to existing trading levels, which had been 7.32% just before the tap.
But the republic has brought tight deals before that have slumped in the secondary market. That was when they forced ahead with deals whose pricing had been decided a long time before market events intervened. A $1 billion, 10-year deal last April came at an appalling time: treasury yields were rising, and investors were panicking about downgrades to US auto-makers GM and Ford. Led by Citigroup, Deutsche Bank and UBS, the bonds lost more than 2% in the first day of trading. Indonesia tried in October with a $1.5 billion, 10- and 30-year deal. Lead managed by Citigroup, Credit Suisse First Boston and Merrill Lynch, it too looked ill-starred – coming just after the second Bali bombing, as well as fears of further US rate rises.
In a bid to smooth the path for future borrowing, Indonesia is in the throes of an investor charm offensive. “Indonesia carefully managed their relationship with investors in the international capital markets and continues to seek to develop their investor base,” says Whelan.
This includes holding a forum for over 130 investors in New York following
the spring IMF meeting. “This type of proactive investor relations effort will help to develop their partnership with investors and increase their access to funds so that they will be able to make quick and frequent access to international funding sources in the future, as required,” says Whelan.
It remains to be seen whether Indonesia follows the Philippines’ path in the world as a permanent but transparent borrower, and whether other Asian nations will enter the sovereign bond issuing firmament. Anyone for a Myanmar bond?