Asia: buy side begins to bite as borrowers stay on the sidelines

  • 01 Jun 1998
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Asian bond issuance in the European market is unlikely to pick up until the region's financial crisis has at least stabilised - although, in the long term, there are signs that a single currency euro sector could rival, or possibly replace, the Asian FRN and US Yankee markets as the region's main offshore borrowing sources.
Instead it is to the buy side that investment bankers have directed their attention in trying to drum up interest in the euro - and with growing success.
Japanese investors are increasingly keen on the euro at a time when foreign currency bond investment is being fuelled by low domestic returns. And Asian central banks could become important players in the market, assuming that many countries overcome a degree of scepticism - and apathy - towards the whole Emu project.

Asian issuers have so far been infrequent borrowers in the Eurobond markets - whether in dollars, yen or any of the European currencies. And this trend seems unlikely to change over the near term while the region grapples with its devastating financial crisis.
Most Asian issuers looking for shorter term funds would previously have headed for Asia's once vibrant FRN market, while those borrowers seeking to diversify their investor base or source longer term funding would look towards the US Yankee bond market.
Before the regional currency crisis struck last summer, some Asian credits had begun to spread their wings into Europe - aware that the creation of a single currency market would bring new opportunities and challenges.
China produced three largely strategic Deutschmark bonds during 1997 - from the sovereign, state-owned Ka Wah Bank and Citic (China International Trust & Investment Corporation).
And India's leading corporate borrower, Reliance Industries launched a first ever Eurosterling transaction from the subcontinent - one of a growing number of emerging market issues in the UK currency.
But the greatest activity came from Korea, where the republic's increasingly cash-strapped borrowers sought to diversify their debt issuance into new currency markets - and at new investor pools - where it might still be possible to gain a slim cost advantage.
The Korea Development Bank launched issues in sterling, Deutschmarks and pesetas; the Export-Import Bank of Korea made two forays into Deutschmarks; and Korea Electric Power Corporation (Kepco), Korea's largest company by market capitalisation, launched a largely successful three currency funding exercise during the third week of October in lire, sterling and Deutschmarks.
If Asia had not fallen quite so dramatically off the cliff, many investment bankers believe that the pace of Asian issuance in European bond markets would have accelerated quite sharply.
Colin Blackwell, head of syndicate for Merrill Lynch in Asia, explains: "The only reason that Asia will be slower to develop a presence in the euro market is because of where we are in the current economic cycle - at the bottom."
Another Hong Kong-based investment banker adds: "Mention a prospective Asian issuer to our traders in London or New York at the moment and they will cross themselves and run out of the room."

Japan funds lead the way
As a result, most efforts to engage the Asian region's interest in the single European currency have been concentrated on the demand side - particularly in Japan, but also in countries like China, Taiwan and Hong Kong where there are large capital surpluses.
Already there are strong signs that institutional investors in Japan are starting to buy euro-denominated product in bulk. Says Ian Annand, co-head of Asian origination at Nomura: "We held a euro conference in Singapore and Japan this April, which would appear to have created a much greater degree of certainty in the minds of investors."
He adds: "What became apparent was that Japanese investors in particular were already quite well informed about the euro. Yet when they heard from Europe's top borrowers that each already has a very well defined euro borrowing strategy in place, the reality factor seemed to kick in. Since then we have found that the Japanese institutional market has really picked up."
Indeed, Nomura reports far greater breadth and depth of Japanese buying in euro than the dollar at present. "This partly reflects switching by Japanese accounts out of the Emu-11 currencies," Annand explains. "But also new transactions are being very well received. Approximately Eu100m of our recent Eu500m transaction for DSL was placed in Japan."
Most bankers attribute Japan's appetite for euro product to the low yields available in the domestic bond market, which has forced institutional and retail investors alike to search ever further afield to enhance their returns.
Greater buying of foreign currency bonds has been a feature of Japanese investment over the last few years as interest rates have remained at historic lows and domestic bond yields have offered little to tempt buyers.
It is clear that buying of euro product is picking up. Besides the largest institutions such as Japan's postal savings giant Kampo, the trust banks and the major life insurance companies, the smaller regional finance institutions as well as the smaller life firms and non-life fire and marine companies are also starting to bite.
Elsewhere in Asia, the picture is more mixed. Over the longer term, the attitude of Asia's powerful central banks is viewed as crucial. But bankers are divided as to how far many countries have progressed in developing a coherent policy to the new currency.

Problems closer to home
Some financiers argue that, with far more pressing problems closer to home, many central banks have shown little interest in switching some of their huge reserves out of the dollar and yen markets.
"What we have found is that while Asian central banks are aware of the euro, they are taking a wait and see approach and will only start to build their portfolios gradually if it doesn't all blow apart," says one banker. "There seems to be a degree of latent scepticism to the whole enterprise that is very similar in concept to the right wing of Britain's conservative party."
Others, however, counter this argument with the examples of the two nations with the highest foreign currency reserves in the region, China and Taiwan. China, with reserves of $140bn, has already indicated that it is likely to switch out of dollars and yen over the medium term if the euro establishes itself as a stable currency.
In the case of Taiwan - with reserves of $88bn - the central bank has already moved 25% into European currencies. With 57.5% of reserves held in US dollars ($50.6bn) and 14.8% in yen ($13bn), the remainder is split between Deutschmarks (23.1%, accounting for $20.3bn) and Swiss francs (4.6%, accounting for $4bn).
Deutsche Morgan Grenfell pointed out in a recent research piece: "If, for instance, non-industrialised countries were to follow the example of Taiwan in recent years and increase the proportion of foreign exchange reserves held in Europe to 25%, this would create a transfer of some $85bn out of the dollar and into the euro."
But the report added: "The US dollar remains the international currency of choice in South America and Asia and it is unlikely that the euro would threaten this position in the foreseeable future."

An alternative to FRNs?
In terms of the supply side, most bankers also agree that the Asian central banks will do little as investors to underpin demand for credits from the region, given their historical preference for highly-rated paper. Instead, it is likely that the central banks will focus attention on high-grade European sovereign and supranational paper, while European fund managers - whose appetite for credit and spread products is set to grow sharply - provide the bulk of demand for lesser-rated Asian credits.
Says Ifty Islam, a strategist at Deutsche Morgan Grenfell: "We have just spent two weeks in Asia as part of a global roadshow promoting the euro and were asked what Emu could do to help Asia. That seems to suggest that, while the region is in an emergency situation, it will not be the main focus."
But he adds: "Should there be greater stability in Asian markets, there will be much greater enthusiasm for the region from European fund managers as they change their traditional approach and start to focus on spread product.
"I think we will start to see this happening even before the end of the year and over the longer-term Asian sovereigns and corporates looking to do global transactions will have a very credible alternative to US dollars."
Other bankers agree that new issuance of euro-denominated bonds could pick up in the second half of the year, particularly from Asian sovereigns and quasi-sovereign public sector issuers. Already Korea Asset Management Corporation (Kamco) has given a possible signal of things to come, mandating Deutsche Morgan Grenfell for a DM1bn euro-fungible bond which is due for launch in early July.
In addition to providing a necessary sovereign benchmark for future corporate issuers from Korea, the government's decision to tap a European currency - following the Republic of Korea's $4bn bond earlier this year - has also been driven by the realisation that it needs to diversify its funding sources as broadly as possible if it is to meet its substantial funding requirement this year.
Provided that a measure of confidence returns to the region, bankers also argue that funding in the euro could provide an attractive alternative to the now moribund Asian FRN market.
Martin Hibbert, head of syndicate at Deutsche Morgan Grenfell in Asia, remarks: "We will never see the Asian FRN market return to its former glory. A lot of that business for shorter-term funding will be redirected towards Europe, where the investment pool will become so much greater."

  • 01 Jun 1998

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