When Kaisa Group Holdings raised $400m from a return to the bond market last week, it took an unusual approach for a high yield Chinese property company, adding 144A documentation to the deal to get full access to the US investor base. It served as a reminder of how few of its peers have taken a similar approach.
Deals with a 144A portion made up more than half of Asian dollar bonds issued 10 years ago, but that number has dropped to under 20% so far this year, according to Dealogic. This is starting to change. There has been a 40% rise in number of deals sold in the format this year, Dealogic data shows. But bouts of Asian 144A issuance tend to prove temporary.
The 144A element has become something that is nice to have but not a must-have for offshore transactions in Asia. Even when leaving aside the tougher disclosure and documentation requirements in the 144A market, many bankers and issuers now argue that the Reg S market has more than enough depth, pointing to multi-billion transactions executed in the market.
It is certainly easier to stick to the Reg S format. Asian borrowers have already established themselves in the market, meaning that Reg S bonds can often be done rapidly, without lengthy roadshows that might cause them to miss ideal issuance windows. The fact that US investors are more followers than price drivers in Asian trades also means there are less economic incentives for issuers to go that extra mile.
But the market today is in a different credit cycle compared to even a couple of years ago. As the global economic downturn looms, the credit markets are rife with uncertainty. Although the Asian market is developing at an impressive clip, there is no guarantee that the Chinese bid driving the execution of many of Asia’s Reg S deals can be relied on in future.
Who could doubt that rainy days lie ahead? There are sources of uncertainty wherever you look: the trade war, the rise of populism, Brexit, the Hong Kong protests, climate change. Bond investors have a proven ability to ignore geopolitical issues when it suits them, but the sheer number of risk factors facing the markets at the moment means issuers need to be cautious.
That means widespread, diverse and differentiated syndication. It means appealing to new investors whenever possible, building relationships in the good times that can be tapped in the bad times. It means, for a lot of Asian issuers, 144A bonds.