Hybrids at the crossroads

Asia’s companies had strong enough support in the bond market last year that they were able to turn to debt investors not just for debt but also to boost equity capital levels. But did issuer aggression — and a spike in Treasury rates — close the market for corporate hybrids almost as soon as it had opened? Matthew Thomas investigates.

  • 14 Feb 2011
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International investors piled into Asia’s debt markets during 2010, helping Asian corporations lower their funding costs and raise a record amount from senior unsecured bonds. But the region’s companies benefited from the increased demand in another way: they turned to the bond market for equity capital, opening a new asset class in Asia’s debt market — and causing debate over how to value corporate hybrid issues.

Cheung Kong Infrastructure became the first company to issue corporate hybrids last year, raising $1bn, but parent company Hutchison Whampoa soon followed with its own $2bn deal. These issues met a specific need for the two companies: bolstering ratings that were put under pressure after the acquisition of UK power grid from France’s EDF Energy.

Commodities company Noble Group quickly followed Hutch’s deal with a $350m issue that got more equity credit from rating agencies than CKI or Hutch managed. But corporate hybrids can be used for more than just bolstering ratings.

Hybrids allow companies to increase their debt while improving their debt-to-equity ratios, and without weakening other measures of indebtedness. Most bankers think this will encourage other issuers to sell accounting-driven hybrids next year — deals that get full equity value under IFRS accounting rules, and so do not affect loan covenants.

"The right structure for corporate hybrids really depends on the issuer," says Frank Kwong, head of syndicate, Asia, at BNP Paribas, and chairman of the Hong Kong Capital Markets Association. "Some issuers don’t care about ratings; they just look at the accounting treatment. Other issuers that are working on mergers and acquisitions only focus on the rating impact. Every issuer has a different reason to raise capital, and there is a market for all these different structures."

Still pitching

Corporate hybrids in Asia had an image problem by the end of 2010. The aggressive structure of Noble’s deal — which included the possibility of coupons being cancelled, rather than deferred, if the Ebitda-to-interest ratio fell below 1.5 — led to accusations from some investors and bankers that it pushed the structure too far.

But a bigger problem affected all three deals sold last year: investors were being asked to lock in for perpetuity a fixed rate coupon set when Treasury rates were historically low. It came as little surprise when a sharp rise in 10 year Treasuries above 3% near the end of the year put pressure on Asia’s corporate hybrid deals, ensuring they all ended 2010 trading below par.

Hutchison Whampoa showed how to reduce concerns about locking in low yields, adding a step-up and successive coupon resets to its transaction — and bankers are quick to defend the longevity of the structure.

"It’s a bullish trade for weaker credits, but it’s sustainable for high quality corporations," says Andy Jones, co-head of global finance and risk solutions in Asia Pacific at Barclays Capital. "The rationale for them is multiple, but as long as the deal is structured in the right way, it will make sense to investors too."

That is likely to mean more deals like Hutchison’s issue, with structural features designed to calm investors’ nerves, as well as those designed to boost the equity ranking of the deal.

"The more ratings-friendly structures will be a theme for next year," says Dominique Jooris, head of investment grade capital markets, Asia ex-Japan, at Goldman Sachs, the sole bookrunner of Hutchison’s deal. "The fixed-for-life structures will have a tougher time attracting investors as many have not performed as well due to their higher sensitivity to rising rates."

The potential for hybrid issuance in Asia is limited by the lack of investment grade rating companies. It is not impossible that a high-yield borrower will be able to sell a hybrid bond next year but the big drop in ratings— hybrids can be rated three or four notches below senior ratings — makes it unlikely.

Bankers instead are pinning their hopes on potential supply from Hong Kong and Singapore — and crossing their fingers for a perfect deal to get things going in 2011.

"We need the market to be opened this year by a solid, well-rated name, ideally selling a deal that gets a lot of institutional support rather than relying on private bank money," says Roland Hinterkoerner, co-head of DCM, Asia, at Royal Bank of Scotland. "That should pave the way for other issuers to come. People will pay a lot of attention to the first deal."
  • 14 Feb 2011

Bookrunners of International Emerging Market DCM

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 Citi 17,167.41 51 13.64%
2 HSBC 12,009.22 57 9.54%
3 JPMorgan 9,925.38 40 7.89%
4 Standard Chartered Bank 8,001.92 42 6.36%
5 Deutsche Bank 7,715.91 23 6.13%

Bookrunners of LatAm Emerging Market DCM

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 Citi 6,966.21 15 18.50%
2 HSBC 4,464.24 7 11.86%
3 Deutsche Bank 4,144.09 3 11.01%
4 JPMorgan 3,634.02 11 9.65%
5 Bank of America Merrill Lynch 3,462.62 12 9.20%

Bookrunners of CEEMEA International Bonds

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 Citi 6,416.33 15 16.54%
2 Standard Chartered Bank 4,174.76 11 10.76%
3 HSBC 3,876.07 12 9.99%
4 JPMorgan 3,411.33 12 8.79%
5 Bank of America Merrill Lynch 2,765.80 5 7.13%

EMEA M&A Revenue

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • 02 May 2016
1 JPMorgan 195.08 50 10.55%
2 Goldman Sachs 162.26 37 8.77%
3 Morgan Stanley 141.22 46 7.64%
4 Bank of America Merrill Lynch 114.20 33 6.18%
5 Citi 95.36 35 5.16%

Bookrunners of Central and Eastern Europe: Loans

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 ING 3,668.64 29 9.01%
2 UniCredit 3,440.98 25 8.45%
3 Sumitomo Mitsui Financial Group 3,156.55 13 7.75%
4 Credit Suisse 2,801.35 8 6.88%
5 SG Corporate & Investment Banking 2,478.18 21 6.09%

Bookrunners of India DCM

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 AXIS Bank 761.34 18 14.55%
2 Standard Chartered Bank 435.32 5 8.32%
3 Trust Investment Advisors 415.64 12 7.94%
4 JPMorgan 366.31 3 7.00%
5 Citi 280.89 2 5.37%