GlobalCapital Asia regional capital markets awards 2016, Part III: Bonds
For the third part of our annual awards, we cover Best Local Currency Bond, Best Structured Finance, Best High Yield Bond, Best Investment Grade Corporate Bond, Best Financial Bond, Best Sovereign Bond, Best Local Currency Bond House and Best G3 Bond House.
BEST LOCAL CURRENCY BOND
Nirchem Cement Rp40bn ($600m) four tranche bond
Rp11.5bn due 2018, Rp12.5bn due 2019, Rp8bn due 2020, Rp8bn due 2021
Arrangers: Barclays, Credit Suisse and IDFC
Nirma’s acquisition of Lafarge India’s cement assets in July is the largest acquisition in the country this year and the most high profile one. However, as regulators forbid Indian corporates from using bank loans to fund an acquisition in the country, the consumer and industrial product manufacturer turned to the bond market for help.
The journey to sell the largest rupee bond for a leveraged acquisition and the largest AA-rated debt instrument was a bumpy one.
Investors had concerns over the success of the acquisition given that Nirma was going into a new business segment, not to mention the amount of work to be done structuring such a complex transaction.
More importantly, while there is a deep pool of liquidity in the onshore rupee market, Nirma was unable to fully access this as the same rule that prevents banks funding domestic acquisitions through loans, also stopped them subscribing to the bond. In addition, non-banking financial companies were only eligible to buy short-dated tenors. This left only mutual funds and insurers which make up just 5% of the domestic investor pool.
If that wasn’t enough, the rapidly changing global macro factors and the fast approaching deadline of the completion of the M&A left the leads no time to hesitate. The pressure proved too much for some, causing some banks who were uncomfortable with the underwriting risk to drop out.
A special purpose vehicle, NirChem Cement, was created for the buyout, as well as for the bond issuance. The management of both Nirma and Lafarge took part in the roadshow and the leads built a shadow book to ensure there was good demand and liquidity. In the end, the bond was wrapped up within four months and achieved a 2x covered order book.
The leads were pleasantly surprised by both the price compression and oversubscription, given that investors initially showed reluctance to commit below a price of 9% but the final yield for the longest tranche came in at 8.66%.
For opening up a new source of funding for acquisition financing in India while overcoming a number of regulatory hurdles, this trade is our pick for Best Local Currency Bond.
BEST STRUCTURED FINANCE
Astrea III $510m private equity collateralized fund obligation
Originator: Azalea Asset Management
Financial and structuring agent: PJT Partners/Park Hill Group
Joint lead managers: DBS and Credit Suisse
Structured finance transactions are notorious for their complexity and the time it can take to get to the finishing line. But the effort required to price Astrea III made it the standout winner.
Astrea III is one of the few securitizations anywhere to be backed by cash flows generated by private equity funds. PE CFOs have been largely absent globally since the 2007-2008 financial crisis with the only notable example being 2014’s Astrea II, which was mostly placed to a single investor.
But unlike its predecessor, the main objective of Astrea III was to engage a wider investor base in an effort to make the asset class more mainstream. This required a fully marketed transaction, which was no easy feat as most investors do not have the mandate or the technical knowledge to buy the product.
As a result, Azalea had to engage PE specialist Park Hill of PJT Partners to identify assets within parent Temasek Holdings’ collection that would suit a wider audience. The end result was a mature portfolio with weighted average vintage year of 2009 and total NAV of $1.14bn from 34 PE funds.
Lead managers Credit Suisse and DBS also had to spend a lot of time sounding out investors, educate them about the assets and get their thoughts on pricing when there were no comparables.
There were also concerns that needed to be soothed such as the uncertain nature of private equity distributions and the multi-currency exposure of the asset pool. The former was balanced by a liquidity facility provided by Credit Suisse to cover expenses and interest payments in case of cash flow shortfalls, while the latter was compensated by built-in currency hedges.
But it wasn’t just investors that needed educating. Months were spent talking to Fitch and Standard & Poor’s. Not only did the notes require a rating but the agencies needed to update their respective methodologies for PE CFOs.
The trade was officially announced on June 6 and an extensive one and a half week roadshow soon followed. But even when the meetings were complete, the issuer made a deliberate decision to not rush the trade and allow investors to digest the structure, complete their credit work and obtain internal approvals.
This cautious approach was also apparent in the bookbuilding process, which lasted for two trading days between June 17 (Friday) and June 20 (Monday) — a decision that was vindicated by an eight times covered book, plus an even distribution among fund managers (29%), private banks (32%), insurers (10%) and others (29%).
Astrea III might have taken 18 months to complete, but it was worth the wait as a strong benchmark has been set for Azalea to eventually meet its final goal of providing PE exposure to retail investors.
BEST HIGH YIELD BOND
HT Global IT Solutions $300m senior bond due 2021
Joint global co-ordinators: Deutsche Bank and Standard Chartered
Joint bookrunners and joint lead managers: ING and UBS
The Indian high yield market had a rough year, with only one deal pricing during the first six months of 2016. Asia’s choppy first half, driven by macro problems, ended with the Brexit vote, further shaking investors. But the six month silence meant there was a good opportunity for the first issuer to brave the market.
For HT Global IT, an investment vehicle wholly owned by Baring Private Equity Asia, Brexit posed but a mere speed bump. The issuer began preparations to launch its new bond in the second quarter, pausing its intended launch right before the Brexit vote and instead waiting to enter the following week and reopen the Asian high yield market. The push also benefitted the issuer, giving it time to receive a surprise rating increase.
The deal was a debut for HT Global, opening up a new investor base for the company. And, the 144A/Reg S deal marked the first successful instance of a bond take-out for acquisition financing of an Indian asset — HT Global’s purchase of a majority stake in Hexaware Technologies.
Investor education, which took place over two weeks of global roadshows, proved essential for the deal. HT Global issued the transaction at the holding company level, a rare move in the Indian debt market. The banks also chose a non-call two structure, as opposed to a more common non-call three, to reduce risk. The transaction was also set up with an interest reserve account in dollars, which had funds equal to the amount of interest due for the first two years of the bond, in addition to a separate collateral account. The intricacies of the structure and the unique sector created some difficulty in finding a ready comparable, but also gave investors the security they sought.
The move proved the correct one and investors ate up the unique tech sector transaction. The banks were able to tighten the deal 50bp from initial price guidance and the order book peaked at $2.1bn before closing at $1.9bn. In an unusual move, the leads revised price guidance twice, in an effort to create a more efficient price discovery process. The $300m 7% notes were sold at 99.482 with a yield of 7.125%.
In a year that proved difficult for many high yield issuers, HT Global stands out as a well-executed transaction.
BEST INVESTMENT GRADE BOND
Citic $1.25bn dual tranche bond
$500m due 2021, $750m due 2026
Joint global co-ordinators: Citic CLSA Securities, HSBC and UBS
Joint bookrunners: BOC International, China Citic Bank International and Natixis
The first half of 2016 was tough for all Asian bond issuers. But for Citic, launching an investment grade transaction presented unique challenges, as it marked the company’s first bond since completing a reverse merger with Hong Kong unit Citic Pacific that saw it gain a listing on that city’s exchange.
After the restructure, the company was cautious about re-entering the market, waiting until the new structure had bedded down and it was ready to educate investors on the new Citic.
Ahead of announcing the transaction, Citic embarked on a non-deal roadshow, meeting with more than 100 investors in Asia and Europe.
The restructuring created massive changes for Citic which required explaining. But it also created an opportunity as it boosted the company’s credit rating from high yield to investment grade. It did make comparables hard to find for a company whose operations span financial services, resources and real estate, as its only outstanding offshore dollar bond was sold before the restructuring.
The borrower announced the dual tranche bond in early June and the timing proved to be perfect, as Citic was the only dollar issuer out on its launch day.
Citic was able to tap a large number of international buyers, with its order book peaking at $4.25bn across the tranches. The 5.5 year portion closed with an order book of $1.6bn and a yield of 2.805% while the 10 year attracted bids of $2bn and priced with a yield of 3.726%.
The deal proved to be the biggest international bond offering by Citic, its first dual tranche international offering, and presented the lowest ever yields at the time for an international dollar bond offered by a Chinese conglomerate.
BEST FINANCIAL BOND
DBS Group Holdings $750m Basel III AT1
Sole global co-ordinator: DBS Bank
Joint bookrunners: Citi, Deutsche Bank, HSBC and Société Générale
Pricing for additional tier one (AT1) bank capital offerings from Asia experienced a downward trend during our awards period. But even in that context, the coupon achieved by DBS was remarkable on a global scale.
The transaction was always going to be a landmark. It was DBS’s debut dollar-denominated AT1 and the first from southeast Asia.
But it came at a time when there was noise around Singapore banks' exposure to the oil and gas sector, and shortly afterwards DBS reported a 6% fall in net profit, dragged down by its exposure to troubled energy firm Swiber Group.
The issuer addressed investor concerns during an extensive four-day roadshow in Hong Kong and Singapore engaging with over 100 accounts including those from Europe and the US. Originally seeking to raise just $500m, a well-capitalised DBS garnered $2bn in indications of interest before the deal was announced.
Following Janet Yellen's Jackson Hole speech in late August, after which fixed income investors continued the hunt for yield, the leads opened books knowing that demand would be there for the highest ever rated AT1 (A3/—/BBB). But a 40bp tightening still came as a pleasant surprise.
Piercing through an initial 4% handle to a final yield of 3.6% meant the trade secured the lowest yield and the tightest spread ever achieved by an AT1 globally.
That and a $6.5bn final order book demonstrated the strength of DBS’s credit profile and name recognition, the investor-friendly structure of the transaction, and is a testimony to the textbook execution, which also enabled the issuer to increase the deal size to $750m from $500m.
The leads were also mindful of the bond’s secondary performance. The landmark AT1 traded well in the aftermarket, seen as high as 100.875 before settling down to around 100.40 the next day.
And in light of DBS’s success, compatriot bank UOB ventured out with a tier two deal the following day.
BEST SOVEREIGN BOND
Republic of Indonesia €3bn dual tranche bond
€1.5bn due 2023, €1.5bn due 2028
Joint bookrunners: Barclays, Deutsche Bank, JP Morgan and Société Générale
Co-managers: Bahana Securities, Danareksa, Bank Mandiri and Trimegah Sekuritas.
The sovereign is no stranger to euro-denominated debt, having made its debut in the currency in 2014. But this year’s transaction impresses by allowing Indonesia to achieve new targets while strategically maintaining a presence in the liquid euro bond market.
A dollar deal would have been easier to sell, but given the frequency that Indonesia taps that investor base, the borrower is mindful that it is unwise to rely on just one set of investors.
And so even though this was just the borrower’s third appearance in the currency, on the roadshow the leads took the issuer to less frequently visited cities including Helsinki, Madrid and Rome as well as the traditional euro hubs like Frankfurt and Paris.
Around that time, there was an expectation that Baa3/BB+/BBB- rated Indonesia would receive an upgrade from Standard & Poor’s, so it came as a disappointment when that failed to materialise. Nevertheless, the leads decided to take advantage of a low rate environment and go ahead with the deal ahead of the upcoming UK Brexit referendum in late June. It was proved the right thing to do.
The sovereign’s strategy was clear. Offering a seven year portion, which is euro investors’ sweet spot, while extending its euro curve to 12 years to set a new a benchmark for SOEs and corporates from the country. The trade also represented Indonesia’s first dual-tranche offering in the currency and the largest euro transaction from Asia and from a non-European sovereign.
And unlike some euro deals from Asian borrowers, of which the majority makes its way into the hands of domestic investors, 58% of the seven year and 49% of the 12 year was allocated to Europe, with 21% and 39% going to the US.
BEST LOCAL CURRENCY BOND HOUSE
For the third year running, HSBC takes the gong for the Best Local Currency Bond House for continuing to build and innovate its strong franchise that has a scope that is hard to beat.
In what was a watershed year for the onshore renminbi market, HSBC’s credentials were unrivalled. Credit needs to be given to the fact that the bank began positioning itself for the opening up of China’s onshore bond market last year, when it sold a Panda bond in its own name – becoming one of the first financial issuers of a Panda in September 2015.
Since then, HSBC has been a key underwriter of transactions that raised the profile of the Panda market. Whether it was leading the first sovereign transaction (Republic of Korea), the first from a European sovereign (Republic of Poland) or the initial Panda from North America (Province of British Columbia), HSBC was a lead bank.
Its dominance was down to the realisation that Chinese regulators were keen to internationalise the domestic market and bring the best international standards onshore. HSBC was well placed to deliver given its closeness to Mainland regulators. This was despite having to navigate regulatory challenges in the onshore market and lack of clear guidelines.
Part of HSBC’s strength comes from the fact it has a dedicated local currency syndicate desk in Hong Kong, allowing for co-operation with counterparts in London and New York. This helped the lender find liquidity from sovereign wealth funds in overseas geographies that were keen to buy Asian local currency debt. The bank also has a strong on the ground presence in many Asian countries.
Landmark trades run by HSBC during the awards period included New Development Bank’s onshore RMB green bond and World Bank’s SDR trade. Even with offshore RMB volume taking a hit since the devaluation of the currency in August 2015, HSBC still managed to work on some ground-breaking transactions, including the first Chinese sovereign dim sum bond sold outside of the Mainland and the first Malaysia-listed offshore RMB deal for a Chinese commercial bank (CCB Asia).
Critics that consider HSBC to be effectively a Hong Kong/Chinese bank should think again given its strength outside of Greater China. In liability management, a key strength of HSBC’s platform, it helped the Kingdom of Thailand raise Bt58.682bn ($1.65bn) while extending the country’s debt maturity. And in the offshore rupee market, which took off this year with the first Masala bond by an Indian issuer, HSBC was very much active. It was involved in trades for HDFC Bank, British Columbia and NTPC’s green Masala among others.
The banks’ structuring expertise was also evident in local currencies with HSBC working on a number of bank capital and hybrid market trades. For instance, it advised United Overseas Bank to issue a Singapore dollar additional tier one in May, as it was a cheaper option than funding in dollars.
HSBC also ran ABN Amro’s tier two Formosa bond in Taiwan and AusNet Services’ Singapore dollar hybrid. And in the ringgit market, it led the way for project finance bonds, providing advisory and structuring services while putting its balance sheet to use.
In short, HSBC’s breadth of coverage in a year when regional banks gave international firms a run for their money was unmatched. Strong competitors include Bank of China International and Industrial and Commercial Bank of China International, and Singapore’s DBS but so far they have tended to dominate in one currency.
For its broad geographical reach and structuring capabilities, HSBC clinched the award this year.
BEST G3 BOND HOUSE
BANK OF AMERICA MERRILL LYNCH
Picking the best G3 DCM house in Asia in what was an exceptionally tough year for capital markets was no easy task.
Increasingly there is a bifurcation between houses that dominate the league tables thanks to their breadth and depth across markets and products, and houses that provide a more focused offering in which they excel. Both models have merit, but this year for staying relevant and increasing market share in the key region of China, Bank of America Merrill Lynch is our pick for the Best G3 Bond House of 2016.
The US bank received league table credit for 87 deals in Asia ex-Japan ex-onshore China worth $14.8bn during the awards period, giving it a market share of 6.8% and placing it in third position behind HSBC and Citi. In a year of tougher competition, BAML boosted its position from fifth with a 6.1% share from a year earlier, according to Dealogic.
Efforts were given a lift this year by the decision to create a more integrated debt team, which bankers at the lender say paved the way for a more cohesive approach to clients.
In June, the bank formed a new debt solutions unit encompassing the DCM, leveraged finance and syndicated loans businesses, which until then were run relatively separately. Devesh Ashra and Conan Tam were put in charge of the new platform.
As a result, the bank was able to target clients in a more efficient manner, which was evident in the suite of transactions it executed during the awards period. It was one of the bookrunners on CK Hutchison Finance’s €2bn ($2.12bn) dual-trancher and Sinopec’s $3bn trade, as well securing a top role in Indonesia’s opportunistic dollar deal from the end of 2015, South Korean Kia Motors’ $700m issuance and Lippo Karawaci’s high yield deals.
Away from corporates, BAML’s long-standing relationship with Industrial and Commercial Bank of China was a key part of the US lender’s growth story this year. ICBC, through its various arms, hit the debt market more than 10 times during the awards timeframe, and BAML featured on a chunk of those transactions. But the bank had a broader effort to increase its focus on the FIG sector, leading deals for names including Agricultural Bank of China, ICICI Bank and Shinhan Bank, among others.
The effort started in October 2012 when Margaret Ren returned as China chairman — a new position at the time — and country executive at BAML. Since then, the entire China team has been revamped, with BAML working proactively to make sure it had the right mix of personnel, say bankers at the firm.
More recently, BAML appointed Anthony Lin as head of China corporate banking and branch manager of Bank of America Shanghai last year, and Helen Qiao as Greater China chief economist and head of Asia economics ex-Japan also in 2015.
Another coup was hiring Alex To in 2014, who is now head of Asia Pacific investment banking, as well as head of China IB and co-head of China global corporate and investment banking from Morgan Stanley. BAML also strengthened its distribution platform by adding more sales force capabilities.
This multi-year focus on China was reflected in the numbers. In the China offshore G3 bookrunning league table, BAML ranked sixth during the awards period with a 4.8% share, having failed to make a dent in the top 10 a year earlier.
Its rise came despite the bank eschewing bonds from one issuer sector that was behind a large pick-up in China bond volumes. BAML was noticeably absent from local government financing vehicle transactions given its strategy to focus on clients where there is potential for repeat mandates. The desk made the conscious decision to let those deals pass by, but nevertheless gained market share in China.
And in a year when green bonds really took off in Asia, BAML was able to leverage on its global capabilities to win business in the region. Its roster of green deals included Bank of China’s multi-currency $2.8bn trade — the largest international green offering globally — Axis Bank’s debut and the first from a Hong Kong corporate, Link Real Estate Investment Trust. Where there was a green transaction this year, there was BAML.
Special mention goes to GlobalCapital Asia’s winner for the past two years HSBC which continued to lead the G3 league tables during the awards timeframe and deserves credit for its consistency. The close collaboration between HSBC’s investment banking and commercial banking arms went from strength-to-strength this year, with the firm moving Wallace Lam, formerly the head of high yield capital markets and CMB debt origination, to commercial banking in October to further strengthen the tie-up.
In a year when issuance windows shut as quickly as they opened, HSBC was able to use its CMB relationship to help bring high yield names to the market, with bankers saying that 13 of its 17 high yield mandates came from commercial banking clients.
HSBC’s strength did not fade this year, but for growing during a difficult period and for steering its business successfully while staying disciplined, BAML is our pick for the Best G3 Bond House in Asia.