Smaller currency issuers keep finding new niches
From high volume markets such as Australian and Hong Kong dollars, to exotic and frontier currencies such as Dominican pesos, Mongolian tughriks and West African francs, niche currency bonds have carved out an important role in capital markets, writes Silas Brown.
Now, as in the past, the non-core dollar bloc lies at the heart of the niche currency bond markets — where international issuers issue debt in currencies other than the big five of dollars, euros, yen, Swiss francs and sterling.
Foreign issuance in Canadian dollars may have declined, but the Australian and Hong Kong dollar markets still pull in regular cross-border issuance.
Few institutional investors outside Hong Kong seek exposure to the US dollar-pegged currency, but the territory’s deep pool of local liquidity attracts a consistent flow of international issuers.
Companies such as BASF, Caterpillar, Total and Victoria Power Networks and public sector issuers including Cagamas, Corporación Andina de Fomento, KfW, Korea Development Bank, the Province of Manitoba and the World Bank have raised HK$1bn and more from jumbo deals in recent years, as has the UK mutual Nationwide Building Society.
In contrast, the Australian dollar commands a diverse international investor base. Besides its traditional European retail buyers, Asian and Japanese investors are also moving in. “Long end buying from Japan has become a huge part of the Kangaroo market,” says Sameer Rehman, head of local currency bonds at TD Securities in London. “It’s seldom two or three days go by without the long end re-opening, driven by Japanese investors.”
Japanese life insurers have become prolific buyers of Kangaroo bonds with 9.5 year maturities or longer, as longer tenors work well for their asset-liability matching. Kangaroos offer them higher yields than Japanese government bonds.
Domestic investors are also served by Kangaroo issues. While this product has been dominated by supranationals and agencies, corporate Kangaroos have picked up momentum. US blue chips have spearheaded this rise, with Apple, Coca-Cola, Ford and Intel all appearing.
The New Zealand and Singapore dollars also provide some large volumes, though this is more sporadic. Among foreign names only the World Bank has issued more than one big deal in either currency in the past five years.
The Canadian dollar market has faded for international issuers since US rate hikes made yield differentials less compelling for international borrowers.
“SSAs issued three, four or five times a year in Canadian dollars — with the five year maturity being the sweet spot crossover for price and demand,” says Chris Jones, global head of local currency bond syndicate at HSBC in London. “But more recently, cross-currency basis swap levels have made arbitrage plays less viable for multinationals.”
One of the most notable developments in niche currencies has been the broadening of Japan’s substantial retail market. Starved of yield in yen, Uridashi bond buyers are increasingly receptive to debt in a range of emerging market currencies.
While an estimated 45% of vanilla Uridashi volume remains in the traditional Australian, New Zealand and US dollar plays, this has declined from 85% before the global financial crisis.
Replacing that flow, $30bn has also been sold to Japanese retail buyers in higher yielding currencies in recent years — sometimes with coupons of 10% or more.
These flows centre on a trio of emerging market currencies: Brazilian reais, South African rand and Turkish liras. Real and lira sales together account for as much as 60% of this activity, but banks have also sourced substantial pockets of demand for Indian rupee, Indonesian rupiah, Mexican peso and Russian rouble Uridashis — and even a few Hungarian forint deals.
Supranationals, sovereigns and agencies account for at least two thirds of this volume, with the World Bank and Asian Development Bank prominent. Toyota, the leading issuer of dollar bloc Uridashis, is absent from the EM currency product.
The Norwegian krone and Swedish krona also rank among the top niche markets. (The Danish krone is largely inactive as an international funding currency as its behaviour is so similar to the euro’s.)
The two other markets contrast strongly, however. Most big foreign issues in Swedish kronor come from Nordic firms wanting to access the largest insurers and pension funds in the region, with occasional offerings from key SSAs like the European Investment Bank, FMS Wertmanagement, KfW and the World Bank.
“Swedish negative interest rate policies have taken the shine off Stokkie [Swedish krona] issuance,” says Rehman. “Investors — understandably — are cautious of buying negative yielding paper.”
Norwegian kroner have accommodated a greater diversity of international borrowers. These include: BMW, BP, Daimler, General Electric, Linde, Melbourne Airport, National Grid and Nestlé. Auckland City Council, Caisse d’Amortissement de la Dette Sociale and MetLife have also sourced funding in the currency.
But issuance shrank when the krone fell 30% against the dollar, after oil, which drives Norway’s economy, fell from $115 a barrel in June 2014 to $28 in January 2016. “Once oil prices stabilised to between $45 and $55 a barrel — and currency and FX swap levels recovered — foreign issuance has returned to the Nokkie [Norwegian krone] market,” says Rehman.
BMW re-entered the Nokkie market after two years with a Nkr900m ($106m) three year bond last October. International accounts such as Belgian, Dutch and Swiss asset managers, banks and private banks bought most of the bonds.
International bond activity in exotic and frontier market currencies has stepped up in recent years. “Some rare issuers are funding in the local currency, so they have specific needs and can then offer unique exposure to investors, especially when swap markets are inexistent in this currency,” says Amaury Gossé, head of MTNs at Citigroup in London. “Large parts of offshore trades are underwritten — the leads will provide investors with a secondary market, as it’s important investors can sell to crystallise gains or cut losses.”
A small group of banks led by Citigroup and ING has opened a host of new currencies in Africa, Latin America and Asia — typically through euro or dollar-settled synthetic notes that get around the technical challenges of clearing and settling illiquid local currencies.
“The euro and dollar-settled synthetic EMTN is an effective way for foreign investors to gain access to local currency markets without the need for local currency bank accounts or the requirement for local custodians,” says Richard Proudlove, head of MTNs and private placements at ING in London. “Multinational development banks are looking to lend in local currencies — the dealer’s role is old school capital markets: pairing investors with issuers.”
Central Asian and Caucasian currencies stand out among these. Offshore investors have gained exposure to the Armenian dram, Azerbaijani manat, Georgian lari, Kazakh tenge, Kyrgyzstani som, Mongolian tughrik and Tajikistani somoni through synthetic bonds. Such deals meet a need for local organisations to borrow in their own currencies.
“There is a desire for some emerging markets to de-dollarise because, if your currency devalues, any hard currency liabilities are more expensive to service,” says Proudlove.
At the same time, Latin America’s pension funds have diversified away from home government bonds by buying supranational and foreign agency offerings.
Besides the more established Brazilian real and Mexican peso markets, activity in Chilean, Colombian and Uruguayan pesos and Peruvian soles has been notable.
Most promising is the Argentine peso, as investors seem prepared for the country’s credit risk again. The government issued foreign currency bonds for the first time for 15 years late last year. It raised $19.25bn, €5bn and Sfr400m.
“Argentina has seen significant deals — including the Province of Buenos Aires — with very attractive yields, that drew in international demand,” says Jones.