Asia grows its influence in European private debt
Gradually over the past decade, Asian investors have become more and more important to European corporate private debt markets, to the point where they are now often indispensable. Asian borrowers have been slower to appear, but are now arriving. However, while these arrivals have largely benefited these markets, they have introduced a few complications.
Private debt markets in Europe have been growing fast. In the past five years, annual Schuldschein borrowing has trebled to €27bn and issuance by European companies in the US private placement has swelled to roughly $15bn-$20bn.
There are many reasons for this growth, but experts believe it can be explained in a single sentence: Asian investors have energetically increased their interest.
Private placement markets attract institutional investors, which offer borrowers longer dated debt than banks and the opportunity to diversify their sources of funding. Cash-rich Asian institutions, such as banks and insurance companies, have been drawn to the opportunity to invest in a fresh range of Western companies with which they do not have relationships.
But because US PP transactions involve complex credit work, investors from further afield have made few direct inroads. Instead, Asian investors have been investing by giving mandates to asset managers in Europe and the US to manage for them.
“The overall market’s grown to $100bn from the figure five years ago, of around $60bn,” said a US PP agent in London, referring to global annual issuance. “Without third party money, the increase would not be anywhere near as big — third party funds mean the market can compete with other funding options effectively.”
In the Schuldschein market, on the other hand, deals are simpler and there is less of a tradition of third party fund management.
Asian investors have become very prominent as direct buyers of deals. In particular, Chinese banks with offices in Europe have become the dominant buyers of deals from borrowers outside Germany and Austria.
A senior agent at a Landesbank said more than half of international issuance in 2019 was bought by Asian accounts, and roughly 30%-40% of the entire issuance, including from the German-speaking region, of €27bn.
Chinese banks particularly active include Agricultural Bank of China, Bank of China, China Construction Bank and Industrial and Commercial Bank of China.
They offer big tickets compared with the German cooperative and savings banks that are the traditional Schuldschein buyers.
An agent in Frankfurt said that, without these banks on side, an international trade could struggle. In the €2.1bn transaction last year for German car parts maker ZF Friedrichshafen, for example, one Chinese bank bid between €400m and €500m. “We have indeed seen tickets in the hundreds of millions from east Asian accounts,” said a senior arranger at a German bank. “They have the deepest pockets, and if they’re interested [in a company], they’re interested in offering a sizeable chunk of debt.”
But some agents believe Asian investors may be populating the market for years rather than decades. "Every state or commercial bank from an Asian country operates similarly," said an arranger in Germany. "If the central authorities want banks to pull back, they will all pull back."
For example, Carillion, the UK construction and services company, issued a £112m Schuldschein in euros, dollars and sterling in March 2017. Several Taiwanese banks bought into the deal, but lost a lot of their investments after the firm got into credit difficulties in July of that year. The following January it went into liquidation.
According to these sources, Taiwanese authorities then told the country's banks not to participate in Schuldscheine from the European support services sector.
Asian investors are now well established as providers of a large share of the capital in the Schuldschein market and an important share in US PPs. Asian borrowers have been slower to come to the market, but that is now changing.
A large listed company from Thailand has mandated banks to arrange a Schuldschein issue this year, according to a head of Schuldscheine in Frankfurt.
In May, Reliance Industries, the conglomerate headquartered in Mumbai and founded by Dhirubhai Ambani, raised €405m in a debut Schuldschein arranged by KfW Ipex-Bank and LBBW.
In the same month, Tianjin Rail Transit Group, 100% owned by the city of Tianjin and China’s central government and rated A3/A-/A-, raised €200m of 10 year Schuldschein notes via Deutsche Bank — the first deal from a Chinese issuer.
Senior Schuldschein bankers now tour Asia regularly to promote the instrument to borrowers and investors. ZF Friedrichshafen, which raised the largest Schuldschein transaction last year, roadshowed across Asia before the issue.
Nissan sold upwards of $600m of US private placements in September, via Barclays and Citi. "Investors are becoming more interested in opportunities from Asia," said a PP agent in London. "They realise that there's a lot of growth to be had out there."
However, there are complications. According to three sources in the Schuldschein market, Chinese telecoms equipment supplier Huawei had mandated banks to raise Schuldschein debt. But then last year lawmakers and regulators in Europe, as they roll out the 5G mobile networks, began questioning Huawei’s broader motivations, prompted by US concerns about Chinese espionage.
Huawei suspended its Schuldschein transaction last summer.
Another deal from Asia was launched and then delayed indefinitely last year, too. Adani Transmission, the power transmission unit of the Indian conglomerate Adani Group, entered the US private placement market in the autumn via Bank of America and Barclays.
This was the first US PP from India for a decade. “Back in the day we saw Indian Oil, Indian Railways, Reliance and Tata Chemicals — most were brought by Bank of America and/or Barclays,” said a private placement banker in September.
“After a little run of Indian deals around 2005 to 2008, banks went crazy, running around India looking for borrowers to bring, including my bank,” said another arranger in New York. “But once we got into it, we realised [the deals] were a nightmare to run and the fees were terrible — plus borrowers from that region found attractive funding conditions in Asia.”
Several sources said there had been a particularly tricky situation after Reliance Energy (renamed Reliance Infrastructure in April 2008), a subsidiary of Reliance Group, which is a rival to Reliance Industries, had issued $150m of 10 and 12 year US private placements in October 2006.
According to one source, several years after borrowing the money, “Reliance Energy struggled to make interest payments and wanted to prepay the debt early. But there was a problem. The Reserve Bank of India needed to approve early repayment for the investment, and RBI wouldn’t approve the make-whole clause.” Another source said Reliance had obtained permission from the RBI to repay the principal, but not the make-whole amount.
"Asia of course brings certain complications, largely due to little known legal requirements," said a London agent. "But investors realise that there's great opportunity out there, too, especially with all of the excess cash they have available."