Issuers try to stay one step ahead

  • 17 Jan 2007
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The quest for innovation means more tier one to come

Subordinated bank capital was one of the biggest growth stories in Asian bonds last year and will be one of the most important parts of the market in 2007. But many banks have already reached their regulatory limits, and arrangers are turning their attention to new products and new markets. Steve Garton reports.

The remarkable growth of Asian bank capital issuance throughout 2006 owed much to the solid foundations laid by a series of successful debut deals across the region. For the first time, regulators in Thailand, Indonesia, the Philippines and India all allowed banks to raise capital through new subordinated structures, and issuers were quick to take advantage.

"Bank capital has become an established feature of the Asian bond market over the last few years, as individual countries have approved their own regulations and issued guidelines," says Mark Follett, head of financial institutions capital markets for emerging Asia at JP Morgan in Hong Kong. "Last year marked the growth of this into a real pan-Asian market for the first time, with issuers coming from a large number of different countries."

The more mature markets, in particular Singapore and South Korea, were also active in 2006, and the size of the financial institutions in those countries dictates that the potential for large deals is greater here than in the rest of Asia.

Lead managed by Deutsche Bank, Goldman Sachs, Morgan Stanley and Woori Securities, Woori Bank's $1bn 10 year non-call five bond, launched at the end of April 2006, remains the largest lower tier two issue in Asia.

Development Bank of Singapore, which issued $900m of upper tier two debt in June via sole lead Morgan Stanley, was close behind. The 15 year non-call 10 deal is also the largest upper tier two issue from Asia outside Japan and Australia.

"The largest markets in 2006 in terms of volume were Korea, Singapore and India, and this trend is likely to continue in 2007 as banks refinance maturing subordinated debt and replenish their capital," says Patrick Tsang, director, debt capital markets at Deutsche Bank in Hong Kong. "One of the most exciting developments in 2006 was Reserve Bank of India's approval for Indian banks to fund their capital needs via the overseas markets."

Indian market open

India issued guidelines in the summer allowing banks to issue tier two and hybrid tier one capital in the international markets, and the country's financial institutions were quick to take up these new products.

UTI Bank became the first Indian bank to issue upper tier two capital offshore with a $150m deal in August. Lead managers Barclays Capital, Citigroup and Deutsche Bank structured it as a 15 year non-call 10 bond with a step-up coupon. The bond was sold under a Eu1bn MTN programme, which will allow UTI to repeat the issue quickly and easily in the future.

ICICI Bank followed later the same month with a $340m hybrid tier one issue — India's first — arranged by JP Morgan, Merrill Lynch and Morgan Stanley. The perpetual bond, callable after 10 years, was priced at an aggressive 193bp over mid-swaps and distributed to a wide range of investors including several big US accounts.

Bank of India launched its own $240m hybrid deal in September, before Canara Bank issued $250m of tier one securities in November, as issuance from India's financial institutions gathered pace.

India holds much promise for bond markets. The growth of the country's banking sector has been tremendous over recent years, with lending by Indian banks growing by as much as 30% in 2006. Banks will have to raise more capital as their assets grow.

Bankers are expecting this pace to build through 2007 with several banks said to be considering subordinated deals. ICICI Bank announced its first upper tier two bond in the first week of January 2007, while the fast-growing Bank of Baroda was also listening to pitches. State Bank of India, the country's largest bank, has yet to issue subordinated debt and was also being closely watched.

The market's potential has, however, led to intense competition between arrangers and complaints over rock-bottom fees surround almost every new deal.

"The structures that have been approved by the regulators in India are as clean and simple as possible, using a straightforward direct structure," says Richard Grainger, head of financial institutions for Asia at Barclays Capital in Hong Kong. "As a result, issuers and banks have flocked to them, and a degree of commoditisation is inevitable."

Room for innovation

Concerns over structures being copied and fees being eroded are not limited to the Indian market, and arranging banks are struggling to balance the cost of winning business against their expected returns. As a result, bank capital specialists are focusing their attention on developing new markets and structures where returns are more attractive.

"Products become commoditised very quickly, but there is still room for innovation," says Follett at JP Morgan. "The challenge in each market is to work with regulators and others to develop suitable products that can be placed both domestically and in the international markets."

Many countries across Asia have already produced their first subordinated deals, and the number of jurisdictions where arrangers can develop new products is limited. 2006 was an especially busy year for Asia's regulators.

"One of the key themes [last year] was the regulatory momentum and release of guidelines for bank capital securities from countries including the Philippines, India and Thailand," says George Kim, director, debt capital markets at Citigroup in Hong Kong. "Malaysia's central bank issued guidelines for non-innovative tier one capital over the summer, and this caused an increase in the number of hybrid tier one and upper tier two transactions from Asia."

Hybrid hopes

The development of tier one securities is one of the most obvious areas where arrangers can still add value through innovation.

Hybrid structures have begun to take hold in Asia, with deals for new issuers such as Public Bank in Malaysia, which launched a $200m 30 year non-call 10 hybrid bond in August 2006. Arranged by Barclays Capital, the deal introduced to Asia a new structure, where Public Bank is obliged to issue new equity to raise cash to repay the tier one investors if it has not called the bonds by the 30 year mark.

Thailand's Thai Military Bank also opened the hybrid tier one market in that country with a $200m perpetual issue at the end of April, arranged by Barclays Capital and DBS Bank.

Banks in the Philippines and India, as well as the more mature markets of Singapore and South Korea, also issued hybrid tier one securities, but the product has yet to take off elsewhere in Asia, and bankers are working hard to open new markets such as Vietnam, Taiwan and Hong Kong.

The potential size of the hybrid tier one market in Asia is limited by the size of the banks in many countries. The Bank for International Settlements, the institution behind the Basel II capital adequacy rules, restricts the amount of a bank's tier one capital that can be issued as hybrid securities — referred to by regulators as 'innovative' tier one — to 15%, and the smaller banks in Asia will find it hard to justify the fixed cost of issuing a small amount of debt. The same limitations mean the potential for repeat issues from any single bank is limited.

Nonetheless, demand for a product that qualifies as core tier one capital has been growing from banks that have already used up their innovative allocations.

"One of the next evolutionary steps in Asia will be the introduction of 'non-innovative' tier one capital," says Grainger at Barclays. "This has been used in other countries to build on the 15% maximum that can be issued as hybrid tier one."

To satisfy regulatory criteria in other regions, bankers have devised a structure that looks similar to traditional preference shares. In practice, these perpetual, non-innovative products are designed to be called after five or 10 years, although there is no step-up coupon and issuers are not allowed to indicate an intention to call at any time during the sales process. Investors are instead compensated for this added uncertainty with a yield that is 40bp-50bp higher than on a more traditional hybrid tier one issue. The product has been successfully placed in Europe.

At the end of 2006, Malaysia, Singapore, Japan and Australia were the only countries in Asia Pacific to have issued guidelines for the use of this product and bankers expect the focus on this structure to grow through 2007.

"The establishment of innovative guidelines across much of Asia has put in place the building blocks to extend into other forms of hybrid solutions," says Robert Fitzgerald, joint head of the Asian hybrid capital group at UBS in Hong Kong. "One of these will be the development of non-innovative capital solutions. Four countries have non-innovative guidelines, and we expect to see continued activity in this space."

One country that has yet to release guidelines for hybrid tier one also has the potential to become by far Asia's largest bank capital market. China took an important step in 2006 when Industrial Bank, a privately-owned Chinese lender, launched the first upper tier two issue by a Chinese financial institution. Although Chinese banks have long been able to sell lower tier two debt in the country's domestic bond market, it was the first time a local institution had issued this class of paper, and bankers hope international deals will follow.

  • 17 Jan 2007

All International Bonds

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 JPMorgan 197,914.90 895 8.14%
2 Citi 186,839.59 774 7.69%
3 Bank of America Merrill Lynch 157,260.21 654 6.47%
4 Barclays 146,338.50 589 6.02%
5 HSBC 123,031.11 650 5.06%

Bookrunners of All Syndicated Loans EMEA

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 Credit Agricole CIB 23,205.24 91 7.83%
2 BNP Paribas 22,856.10 93 7.71%
3 Bank of America Merrill Lynch 17,912.30 51 6.04%
4 JPMorgan 15,832.35 43 5.34%
5 UniCredit 13,242.71 72 4.47%

Bookrunners of all EMEA ECM Issuance

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 Morgan Stanley 6,646.08 29 10.31%
2 JPMorgan 6,222.43 38 9.65%
3 Goldman Sachs 5,596.92 27 8.68%
4 UBS 4,205.38 21 6.52%
5 Citi 4,178.15 30 6.48%