Asian bond taps could give investors the whip hand

Asian corporations are returning to the market for bond taps rapidly after launching their original deals. That certainly makes sense for those companies, but it could damage the chances of others by making investors a lot more aggressive the first time a deal hits the market.

  • 21 Feb 2012
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China Overseas Land & Investment (COLI) is the latest Asian issuer to return to the dollar bond market for a tap soon after issuing the original deal, selling a $250m bond at the end of last week. That was only 10 days after the company first sold its $500m five year bond. Sun Hung Kai Properties has now announced that it wants to raise $500m from a tap, doubling the size of a 10 year bond it sold on February 6.

The property companies are following a stream of taps from Hong Kong corporations: Henderson Land, Hutchison Whampoa, Nan Fung International and Wharf Holdings have all issued and tapped bonds in quick succession since the start of the year, adding $1.85bn to the $2.85bn they have raised from their original deals.

Few could fault the logic being applied by funding officials at these companies. They achieved overwhelming demand from their original visits to the market, were shown clearly that there was excess demand for their deals, and are being told by any banker they talk to that the rest of year is uncertain.

Against that backdrop, any company with heavy funding needs would be foolish to pass up the chance to launch a quick tap at a decent price. But there is a flipside: taps limit the chances for bonds to tighten in the secondary market.

Unsurprisingly, taps usually need to be marketed at a discount to secondary bond prices: no investor would want to go into an order book for a deal that they could get cheaper in the secondary market (assuming there is enough secondary liquidity).

But that means that when taps are being marketed, secondary tightening is essentially put on hold, since the reverse is also true: buyers would typically not be willing to buy a bond in the secondary market if they thought they might be able to go into a primary book and get a better price.

This is arguably only a short-term problem, but this spate of taps can make things tougher in the long run as well, by making investors wary about future supply — and making them much more aggressive in primary execution.

This is already worrying some bankers on syndicate desks in Hong Kong and Singapore. They are right to fret, but they could make things smoother for issuers launching their first deals, and minimise the impact of taps on the secondary market.

For one thing, bankers should make sure that they launch taps only for those companies that are getting strong reverse enquiry demand, perhaps from those accounts who were under-allocated in the initial book.

Some bankers rightly embrace the challenge of building a book without clear demand, but if you have closed a deal for a company only a few weeks before, you should know where the demand for a tap is coming from. If you don’t know, don’t bother.

Bankers and issuers also need to make sure that their size of their taps does not overwhelm the market, depressing secondary prices, derailing deals from other companies in the near-term, and damaging the issuer’s reputation with investors in the long-term.

Those companies that have tapped the market so far have been of a high enough quality to ensure demand, and they appear to have taken a mature approach to the market. But the regularity of these taps will be ringing alarm bells in investors’ offices. Bankers should take note — and make sure issuers know this could push up their funding costs in the future.

  • 21 Feb 2012

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