ASIAN CAPITAL MARKETS: The colour of money
The loan market – long the primary source of funding for Asian companies – is fast being eclipsed by a burgeoning bond market. But the shift is unlikely to be straightforward
Asian companies and banks raised a record amount in the bond market during the first quarter, but they did not boost their funding options in equal measure.
The loan market went in the other direction and after bank lending ground to a halt, market participants are wondering whether a seismic shift has taken place for capital raising in Asia.
The loan market has been a reliable source of funding for Asian borrowers over the last decade, helping companies refinance, fund new projects and keep them afloat when times get tough. The bond markets, and especially the international bond market, have been far less reliable: open for all-comers one week, closed to all but the best credits the next.
But foreign investors have increasingly flocked to Asias bond market, making up for volatility and uncertainty in their domestic markets. That has given demand a permanence it previously lacked, and helped drive a huge spike in volumes at the start of this year.
Borrowers in Asia (not including Australia or Japan) raised $42.3 billion in the first quarter, including only those deals sold in dollars, euros or yen. That was the most ever raised from the bond market, and more than 60% above that for the first quarter of 2011, which at the time set a new record.
These eye-popping growth rates form a mirror image of those in the loan market. Asian loans volumes were $19.95 billion in the first quarter of the year; again, using dollar, euro and yen volumes. That was the worst quarter since the end of 2009, when banks were reducing risk en masse after the financial crisis. It was also around 23% lower than the first quarter of last year.
The figures look even worse when all currencies are included. Some $44.5 billion was raised in Asian loans over the first quarter of the year, around 48% lower than the same period in 2011.
Some loans bankers point out that syndications are so long and drawn out that a weak first quarter this year reflects a weak last quarter of 2011. They hope that things will improve in the second quarter, and even bond bankers bidding for the same business largely agree that loans will start to return before the end of June.
But the move from loans to bonds now appears undeniable. The extent of the shift from the loan market to the bond market is not sustainable, but we will certainly see a gradual movement from loan funding towards bonds, says Robin Phillips, co-head of global banking and head of global banking and markets at HSBC. This is not a passing fad.
THE BIG SHIFT
There are a number of reasons why Asian borrowers are turning to the bond markets rather than relying on loan funding, and part of the reason is, perhaps unsurprisingly, being driven by tougher conditions in the loan market.
Banks preparing for Basel III regulations are being forced to maintain higher capital levels, and must be more careful with their lending; some European banks have scaled back their lending in emerging markets as they face big problems at home; and rising bank funding costs have made negotiations more difficult as well as making successful syndications harder to achieve.
But funding is not just being pushed from the loan market to the bond market it is also being pulled.
Global funds are becoming increasingly interested in Asian debt as their investments in European and US markets prove more volatile than expected; the rise of China is dragging up expectations for other countries in the region; rising currencies are making domestic market investments more attractive and the relative juicy pricing on offer for corporate deals is attracting US investors, who compare deals to their own domestic, more tightly priced benchmarks.
The rise of the bond market is the single biggest reason why loan volumes have fallen this year, says a loans syndication banker who works on south-east Asian business.
The rise in bond issuance has been a boon for global banks hoping to grow their revenues in Asia. But some local banks have instead tried to make the most of the slowdown, firming up relationships with regional clients and helping to fill the gap left by the scale-back of their European rivals and stop loans volumes from plummeting further.
Japanese banks, in particular, have managed to grow their lending to their regional clients. But without the explosion in bond volumes this year, there could have been big trouble for borrowers in the region.
The European crisis and the preparations for Basel III have forced some European banks to scale back their exposure to Asian credits, and there was no way Asian banks could have stepped in with the size that was needed, says Justin Crane, head of loan syndication for Asia ex-Japan at Credit Suisse.
There would have been a very difficult situation if the bond markets hadnt opened up so spectacularly in the first quarter.
The transfer of business from the loan market to the bond market is not as clear-cut as it might seem. Those well-regarded investment grade companies that can rely on the bond markets for billions of dollars of funding can also turn to bank lenders in large size.
The loan market might be shut for some borrowers, but we have got a good reception, says a funding official at a South Korean policy bank. We could actually increase our loan funding this year compared to the last.
Those credits which would have struggled late last year, and at the start of this year, to get demand for dollar bonds have had some success turning to bank lenders. But many of these deals have been in bilateral or club format, allowing these companies to mask the extent to which they are willing to pay up to secure funding.
Chinese property companies, for example, have been able to turn to the loan market for funding. Longfor Properties and China Overseas Land & Investment have each closed Hong Kong dollar loans, Shui On Land has tapped the US dollar market, and several more companies are in negotiations with lenders, many of them looking for club deals.
Bankers across Asias capital markets expect loan volumes to grow in the second quarter, but think the bond market will still post higher volumes and more eye-catching deals. It was not too long ago that anything apart from senior funding was hard to achieve for Asian borrowers. That is no longer the case.
The corporate hybrid market, which allows companies to target bond investors with subordinated debt that has some equity features, was opened by a stream of dollar and Indian rupee deals last year, and it has started this year at a frenzied pace. But debt capital market bankers think even more noteworthy than the big corporate hybrid issue this year is the market that it has been placed in almost all of this years hybrids have been sold in Singapores domestic market.
Hong Kongs Cheung Kong Infrastructure Holdings and the Philippines International Container Terminal Services have both sold dollar-denominated hybrids this year, but Ascendas, Genting Singapore, Global Logistics Properties, Mapletree Logistics Trust, Olam International and Singapore Post have ensured that the bulk of issuance has been in the Singapore dollar market.
Hybrid funding can help companies boost their ratings or ease their loan covenants without angering shareholders. Because the debt has equity-like features and is often considered 50% equity by ratings analysts companies can bolster their capital base without selling additional shares and diluting their equity base.
The introduction of more hybrids into the domestic market is a sign of Singapores growing maturity as a financial hub. The city-states central bank, the Monetary Authority of Singapore, is considering adding covered bonds into the mix providing banks with opportunities to place deals even when the dollar bond market slows down.
Singapore has been one of the few bright spots in Asias local currency bond markets so far this year. The offshore renminbi market continues to generate huge excitement among bankers and investors, and the recent placement of a Rmb2 billion ($320 million) three-year bond by HSBC to a majority of European investors shows that the market still has plenty of room to grow. But it is still far from being a major source of funding for Asian even Chinese companies.
The Indian rupee bond market has kept up the strong pace of domestic issuance that started in the second half of last year, but has attracted few foreign sellers; Thai baht volumes in the first quarter were lower than any quarter of 2011; Hong Kong volumes swelled slightly compared to the same period in 2011, but the debt market continued to be driven by small, flow deals.
Bankers and analysts say that the big rise in dollar liquidity this year has meant that Asian companies did not have to rely on their local markets for cash, especially when they have plans to swap that into dollars anyway.
The rise in dollar bond issuance in Asia may have stopped some of the regions local currency debt markets from growing at a faster pace, and it certainly helped keep down the volume of loans transactions placed this year. But it also gives Asian companies a liquid, attractive and increasingly reliable place to find funding. Bankers doubt the pace of issuance can keep going at the rate it has but they are confident that things will keep going in the same direction over the second quarter of 2012.
Were not going to have another quarter in the bond market like the first three months at least not this year, says Gordon French, head of global markets, Asia Pacific, at HSBC. But it wouldnt surprise me if second quarter volumes were worth around 80% or 90% of the first quarter. There is still plenty of business left to get done.