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Emerging MarketsEM Asia

Beating expectations: Asia DCM is growing by leaps and bounds

There was a time when Asia’s dollar bond market was just a sideshow to the global market, offering little in the way of excitement, sophistication or innovation. How times change, as Rashmi Kumar finds out.

Few markets have changed as much over the last three decades than Asia’s offshore bond market. The issuer base has morphed from a handful of sovereigns, a smattering of Korean policy banks and a very rare high yield issuer, to a wall of Chinese property companies, local government financing vehicles and state-owned banks, as well as high yield and investment grade credits from across the region. Structures have become increasingly complex. Covenants have become flexible as ratings have improved.

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“The market has grown significantly over the last few years in terms of total volume and deal size,” says Terence Chia, head of Asia Pacific debt syndicate at Credit Suisse. “The pace of growth has surpassed expectations.”

In 1980, G3 bond issuers from Asia ex-Japan sold $55m of debt through two deals, Dealogic data shows. This jumped to about $2.5bn in 1990, before rising to $17bn in 2000. Last year, issuance volumes stood at $348.5bn, the highest on record. 

That’s not all. In 1990, the largest deal outside of Japan raised $300m. Last year, Postal Savings Bank of China bagged the largest dollar bond from Asia, netting $7.25bn from a Reg S-only transaction. To date, the biggest issuance is from Chinese e-commerce giant Alibaba Group Holdings, which added $8bn to its coffers in 2014 from a six-tranche transaction. 

“When I first became a syndicate banker around 10 years ago, the new issuance market was small,” says Chia, who spent almost 10 years with Citi from 2003 before moving to Credit Suisse. “Deal sizes were typically in the range of $100m to $300m, with $300m considered large. Most of the time if you wanted to do a high yield deal, you had to go to the US, in the 144A format. But now, in the high yield market, $300m is the base case size for Reg S-only transactions.” 

Issuance has certainly exploded, with borrowers from across the region, spanning China, India, Indonesia, Singapore, Malaysia, Thailand and the Philippines, eager to play in the international bond market. 

Different tack 

Perhaps the biggest change has been to the investor base. Asian issuers have gone from pitching their wares to often-cautious global investors to increasingly relying on home-grown demand, particularly the huge demand available from China. 

US investors no longer take up huge chunks of transactions, and neither is a US roadshow a necessity for large deals. Now, liquidity in Asia is more than enough for small and large deals, with some issuers doing away with US accounts altogether.

They are instead putting emphasis on tapping the liquidity in the regional Reg S-only investor base. 

This has led to a big shift in the execution strategy for transactions, reducing the time it takes for a borrower to come to the market. 

Singapore-based Stephen Williams, head of global banking for Southeast Asia at HSBC, has worked in Asia since 1994, when he moved to the region to head JP Morgan’s credit research group. He executed his first bond transaction in 1994 for a Chinese corporate client. 

“The mandate to launch was in hand for four to five months,” he says. “We had in-depth documentation and diligence sessions followed by a very, very long roadshow in the US. Roadshow presentations back then started off with a map of the world showing where the country was that the issuer was from. It’s inconceivable now to think that we needed to include a ‘this is China’ map. But we did!”

He adds: “Presentations also included a few slides delivered by the bank’s economist to set the scene for sovereign risk assessment.”

That was often not the end of it. US investors, who took a long time to get comfortable with the sovereign risk inherent from this part of the world, also often travelled to Asia to meet with borrowers. 

That approach has undergone a complete makeover. “The most satisfying thing is that now if you want to do a big bond deal in Asia, you can pick up the phone and call two or three banks and you can be in the market, in some cases, within a few hours,” says Williams.

“You can place the bonds within a few hours and the investors — if they are in Hong Kong — are probably within a mile of your office. You go back 10 years or 20 years and that process would be weeks long and typically involve a series of roadshows or conference calls and be far less efficient and challenging from a market risk perspective.”

China’s dominance 

In Asia, as the issuer and investor base has grown, so has the bookrunning group. In the 1990s, deals typically featured one bookrunner and a couple of co-managers.

Even if a firm held the latter role, the economics were reasonably juicy, making that role worth having. If a bank was a lead manager, the share of the fees was vastly bigger given full visibility on the bookbuilding. 

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That has now changed. An almost $3.4bn senior unsecured bond for China Huarong Asset Management Co, sold at the end of last year, had 25 bookrunners at the helm. Of them, nine banks were the global co-ordinators. 

Bloating syndicates have been a feature typical of many Chinese transactions.

For instance, Bank of Zhengzhou’s $1.191bn additional tier one note printed in October 2017 had 24 bookrunners, while China Cinda Asset Management Co hired 23 banks for its $3.2bn issuance in September 2016. 

In many cases, the bookrunners and lead managers — mainly Chinese — place chunky orders for the bond in advance, driving pricing talks. This move has come in for criticism time and again by market watchers, who reckon that market forces are not determining the final sale price. 

But indications of interest ahead of launch, and orders from Chinese investors, are not all that bad. Borrowers can hardly be blamed for taking the demand that is available to them. Nor is it just the Chinese lead managers that are putting in bids, bankers argue. 

“Global and Asian real money investors have grown in size in Asia over the past few years and this has helped create significant anchor demand for the regional DCM deals,” says Hong Kong-based Amit Sheopuri, managing director and co-head of Asia debt origination at Citi. “We have seen key investors show interest for anything between 10% and 50% of deal sizes, which is a win-win for both issuers and us banks.”

“In addition, even for non-China deals in the region, we are seeing various Chinese investors show interest, thereby adding to the overall liquidity pool.” 

Innovation push 

Mainland borrowers have been front and centre in recent years, stealing much of the limelight. Where the country’s borrowers and investors were minnows in the Asian debt market 10 or 20 years ago, they account for the majority of the issuer and investor base now. 

China high yield issuance alone, for example, reached a record high of $35.4bn last year, more than triple the $10bn printed in 2016, shows Dealogic. Issuance has come from every type of credit, such as financial groups, corporations, local government financing vehicles and bad debt managers. 

As borrowers from the country flock to the debt market, the sell-side has been forced to adapt to capitalise on the opportunities. 

“As the Chinese market has grown, naturally more resources are needed to service that market,” says Credit Suisse’s Chia. “And one of the main shifts has been in terms of hiring bankers with the right capabilities — Mandarin language skills and local knowledge — to serve Chinese clients.” 

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As Chinese issuers become more confident in tapping the international buyer base, they have not shied away from testing appetite with aggressive transactions. Almost every week, new and relatively unknown credits have tapped Asia’s liquidity base with a range of trades – perpetual notes, subordinated deals, fixed for life bonds, longer and longer tenors, and ambitious bank capital trades.

Asian corporations, banks and other financial institutions have issued some $103.5bn of subordinated and senior perps since 2010, over $44bn of which came last year alone, according to Dealogic.

Of the 63 corporate perpetual deals priced in 2017, many came from investment grade credits such as China National Chemical Corp, China Jinmao Holdings Group and Power Construction Corporation of China. But high yield names were also in the mix, including Cifi Holdings, Overseas Chinese Town, Yuzhou Properties and Malaysia’s Yinson Holdings.

Bull market trades

Firms such as Li Ka-shing’s Cheung Kong Infrastructure Holdings and Cheung Kong Property Holdings, Nan Fung International Holdings, Regal Hotels International Holdings and Road King Infrastructure have opted for a more aggressive fixed-for-life structure for their perpetual transactions, meaning no step-up margins will be applied to the coupons if the issuer decides not to redeem the notes on the call dates.

Many bankers privately admit these are bull market trades. But more often than not, investors have lapped them up. 

“There’s not a single product that’s done in the developed markets in the West that is not done here — liability management, switch and intermediated offerings, hybrids and perpetual transactions, including fixed for life structures, among others,” says Citi’s Sheopuri.

“We also had equity-accounted perps for some of our clients which, as you may appreciate, are more aggressive than some of the debt-accounted ones. While these structures have been driven more by Asian investors, even when it comes to marketing deals for some of our global clients, we find that Asian investors including private banks play a key role in the overall distribution of the deals.”

But along with the market’s development over the past three decades, there has been some disappointment — mainly from the fact that the market is so concentrated, say bankers. Dealflow is predominantly driven by China, although there is some issuance from borrowers in Indonesia, Singapore, India and South Korea. 

Thai and Malaysian trades are few and far between, meaning bankers and investors have little opportunity for diversification. 

Digital disruption? 

One thing DCM bankers are keeping a close eye on is the potential impact of digitalisation on their businesses.

In January 2017, Commonwealth Bank of Australia sold a sterling-denominated covered bond in which investors and banks, for the first time, used financial services technology provider Ipreo’s Investor Access channel to deliver orders and communicate final allocations. 

Whether that will trickle into the Asian debt capital markets, and what impact that will have, however, is still a big question. But the consensus is that DCM bankers and advisers will continue to have a key role in transactions. 

“Some things can be automated and some cannot,” says Chia. “Automation makes our life easier. But what can’t be automated is providing advice to clients, both the issuer and the buyside, which is hard for a computer to give. Clients prefer to talk to a human than to a computer. People still appreciate the human touch, especially if they are making important decisions.” 

HSBC’s Williams adds that there has been a flurry of interest in the past few years around using technology to allow companies to go out and issue debt on an auction basis, without a bank acting as intermediary. 

“It’s fair to say that the jury is still out on the success of these transactions,” he says. 

Issuers and investors still want the buffer of a bank to provide the necessary due diligence and handle the documentation. In addition, as regulators become more active in overseeing the market in terms of distribution, intermediaries will be critical in ensuring market dynamics are fair and appropriate, say bankers.

The debt market has changed significantly over the past three decades, and is likely to shift again over the next few years as technology becomes a useful tool for speeding up the time to market. But automation is unlikely to replace syndicate desks in Asia in the foreseeable future.   z

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