European issuers welcome new Asian liquidity

For European borrowers, the Asian bond market has long been a go-to place for debt-raisings. In 2015, issuers raised $10.48bn via 194 bonds sold in various Asian local currencies, according to Dealogic. This was a big jump from the $5.4bn raised from 72 deals the year before and also exceeded volumes in each of the years since 2010.

And if activity in the first few months of 2016 is anything to go by, the attraction of Asian markets has only increased.  Year-to-date issuance in Asian local currencies by European issuers stands at $3.28bn via 50 deals at the time of writing.

In addition, European names have been keen to tap into local dollar liquidity in Taiwan. Financial institutions have led the issuance with the likes of ABN Amro, Deutsche Bank, Natixis, Rabobank and Société Générale heading to the Asian country this year — some multiple times. Year-to-date sales of dollar bonds in Taiwan by European names are $6.74bn from 27 deals. To put that into perspective, $7.57bn was recorded all of last year from 32 deals.

“Financial institutions are generally active throughout the year as they have wholesale funding programmes,” said Ashish Malhotra, Standard Chartered’s Singapore-based global head of bond syndicate. “They already have MTN programmes set up to take advantage of liquidity wherever it is. That is why for the last few months we’ve been seeing interest from financial institutions looking at Asian pockets of liquidity.”

According to Augusto King, managing director and head of capital market group, Asia, at Mitsubishi UFJ Financial Group, the region has developed a significant pool of liquidity that can support not just Asian issuers but also other recognisable names. This is thanks to ample liquidity from wealth management firms in Singapore and Hong Kong, life insurance companies from Taiwan and some home-grown asset managers, he added.

That has not gone unnoticed by European borrowers, which are finding different ways to tap into Asia. Some are focusing on specific markets like Taiwan or Singapore while others adapt their bookbuilding strategies to either open books during Asian hours or keep the deal open for an additional half day.

This is not just about capturing broad Asian liquidity but also wooing sovereign wealth funds and central banks, which are increasingly taking up bigger portions of European bonds, say bankers. These include funds from China, Singapore and South Korea, which are considered among the more engaged and savvy fixed income investors. “Sovereign wealth funds always invest in multinational names,” said an Asian head of capital markets. “Issuers from Europe frequently visit [Singapore’s] Temasek and GIC which invest globally in bonds. But their appetite is skewed towards investment grade and well known issuers.”

He added that one of the reasons such funds are more active in pursuing European credits is because Asian debt volumes have dropped significantly this year. Year-to-date, 90 public G3 bonds worth $68.05bn have been sold by Asia ex-Japan issuers. During the same time last year, $85.5bn had been raised from 108 transactions.

“If I’m a sovereign wealth fund in Asia and if I have a portion of my funds to invest in bonds but there is no paper, then I will go to European credits,” added the capital markets head. “It is not necessarily a change in investment strategy, it’s more about looking elsewhere for opportunities.”

While there is no official data to show the average take up by Asian sovereign wealth funds in European deals, anecdotally bankers say that their activity has increased in both European bonds that are marketed in Asia and transactions without any Asian bookbuilding.

One investor base that has cemented its importance to European issuers is Taiwan. The country’s investors have a long history of buying European credits and so European issuers frequently sell notes targeting just the Taiwanese market.

Last year, the continent’s borrowers sold $9.65bn of bonds through 58 deals into Taiwan, in currencies including renminbi, Australian dollar, South African rand and US dollars. Already this year, $6.79bn has been raised from Taiwan — $6.74bn of which was in US dollar-denominated debt and the remaining in renminbi, which are called Formosa bonds.

“The Taiwan bond market has seen a natural progression,” said Benjamin Lamberg, managing director, global co-head of MTNs and private placements and Asian syndicate at Crédit Agricole. “Taiwan, which was the land of ‘SSA zero callable’, has diversified into credit a few years ago. The innovation in the market has been to let Taiwanese lifers invest their domestic portfolio into more diversified global credit names — hence why the flurry of strong household names for the last 18 months.” 

In 2015, the Financial Supervisory Commission loosened rules governing bonds sold by foreign issuers into Taiwan. Until then, the debt fell into the international category and onshore insurance firms are prohibited from having more than 45% of their total portfolio in foreign bonds.

But following the change, such notes — provided they are listed in Taipei — no longer fell within the investment cap meaning there was no limit on how much domestic lifers could buy.

The Taiwanese regulator went a step further in January 2016 by giving the nod for financials to sell tier two debt, provided they have issued senior debt in the past. Eligible issuers are required to use the same issuing entity as the senior debt and again the bonds must be listed in Taipei. The changes have shifted the dynamics of the country’s bond market.

“The Taiwanese regulator’s objective is to promote the development of Taiwan’s financial markets,” said Alan Yeoh, executive director, head of structured products, at MUFG. “By allowing Taiwan lifers to buy foreign issued debt as their domestic investment bucket, it effectively allows higher foreign currency investment. Also, more issuers then have the incentive to issue bonds in Taiwan, again promoting the development of its financial markets.”

“Taiwanese insurance companies who hold a lot of insurance funds are major investors in international bonds in Taiwan,” said Taipei-based Raymond Wang, an of counsel lawyer at Jones Day. “Given the FSC wanted to keep the insurance funds onshore (rather than have them go offshore) as well as to boost local capital markets, the restriction on foreign investments by insurance companies was relaxed.”

But while Taiwanese investors are keen to put their funds to use, not every kind of credit will win them over. Investors are sensitive to ratings even if they have ample liquidity, because of a rating threshold imposed by the FSC. This means that only issuers that are triple-B rated or higher can sell notes into the country.

ABN Amro was the first to capitalise on the 2016 relaxation. The Dutch bank sold a $240m privately placed medium term note to Taiwanese investors on March 3, laying the groundwork for a tier two trade. It followed up on March 16, selling a $300m 15 year Basel III compliant tier two with a 5.6% coupon. With that, it became the first international issuer to sell bank capital notes in Taiwan following the rule change.

The same month, it also returned to Singapore’s bond market for the first time since 2012, raising S$450m ($329m) in tier two format.

“We have a long history in the Asian debt market,” said Danielle Boerendans, head of long-term funding and capital issuance at ABN Amro. “At the end of 2015 we did a roadshow in Asia and got pretty positive feedback. At the start of the year, the European bond market was shut so it is always helpful if other markets are open for us to raise funds. So these deals are not about arbitrage. It is about diversifying in currencies and investor base and if we see opportunities in niche markets we will do it.” 

That said, many issuers will only tap new markets where there is either the chance to price at the same level or below existing curves. This means the decision to venture out to different markets is often swap-dependent. In some cases, favourable swap costs have allowed European investment grade names to save as much as 50bp-60bp on their existing euro curves.

For investors, yield and diversification are the key focus.

“Asian investors are looking for yield but they are not yet prepared to go down the credit curve to get that for now,” said Clifford Lee, head of fixed income at DBS. “They are more likely to buy from issuers they know and are comfortable with and take on more duration and structural subordination risks where needed to achieve a higher yield.”

One country where that trend is evident is Singapore, which bankers say is typically the go-to market for smaller transactions, especially for bank capital trades.  In 2015, three European borrowers — BPCE, BNP Paribas and Julius Baer — raised S$850m collectively from Singapore’s bond market. This year already, ABN Amro net S$450m and France’s SocGen sealed S$425m on May 11.

But while Singapore provides a good alternative, there are challenges holding it back. For starters, benchmark issuance that is normal in the dollar market ($500m) is not often seen in Singapore dollars, given the market’s smaller size, say bankers.

This effectively means that issuance is driven mainly by domestic issuers, rather than foreign names. “The Singapore dollar bond market is domestic for domestic where three banks own 70% of the market and 85% of the issuance is domestic,” said a DCM banker in Hong Kong.

That doesn’t mean there are not opportunities. Given Singapore’s investor base is dominated by private banks, bank capital, subordinated and high yield bonds have the potential to gain traction, added the banker. It can also become the market of choice during periods of volatility as banks are viewed as safe bets, while the structural subordination can offer investors extra spread over typical senior notes. With so many multiple fundraising avenues available, international investors too are keen to take advantage of the growing opportunities in Asia.

“It’s not surprising that overseas funds have started looking outside of Europe to put their money, given Europe is in a negative rate environment at the moment,” added Sean Chang, head of Asian debt at Baring Asset Management.

He added that Barings’ Asia portfolio is expected to raise its exposure to European names in the next six months, given the expectation of more credits coming to tap liquidity in the region.

However, interest is unlikely to spread quickly to many other Asian currencies given regulatory challenges such as withholding taxes or difficulties in moving funds offshore.

But many bankers and investors remain hopeful about the renminbi, despite the public market being more or less shut following the currency’s devaluation last year in August.

In publicly offered dim sum bonds, just Rmb2bn ($317m) has been raised so far this year from four transactions globally, of which Rmb1.4bn (two deals) came from European names. But private placements have proven more popular, with European borrowers raising Rmb3bn, shows Dealogic. Global CNH private placement bond volumes year-to-date stand at Rmb10.9bn via 57 trades.

“Since last August, we have seen more offshore renminbi issuance from European issuers in the private placement format as the public market has not been stable enough to launch benchmark transactions,” said Lamberg. “Having said this, the current period of stability we are experiencing in the second quarter may reopen this market.”

According to Lamberg, Asian liquidity can be best accessed via private placements especially as not all local markets can absorb large and frequent public benchmark trades.

This becomes all the more important for diversification as private placements help them match their needs with a new investor base.

“Renminbi will be the trend going forward,” reckons Barings’ Chang. “Lots of global issuers have factories in China, so they will need to borrow in the Chinese currency to fund their units.”

Lamberg added that he was a big believer in the “exponential growth and internationalisation of the renminbi – both onshore and offshore”.

“I do not buy into the end of ‘offshore CNY market‘, the so called dim sum, because there is so much RMB liquidity offshore, which you can see when you look at usage of renminbi for payments of goods and services or speak directly to any corporate treasurers,” he said.

In fact, many bankers reckon that onshore RMB will eventually co-exist with the offshore market. And given the domestic market is massive but underdeveloped, there is a large potential for non-Chinese issuers to access the market via Panda bonds, or onshore renminbi debt sold by non-Chinese issuers.

That said, while the Panda market has potential, there are also plenty of drawbacks at the moment. Issuance has to be approved on a case-by-case basis and no official guidelines have yet been published.

But the outlook is positive. Bankers are of the consensus that the Panda market will grow steadily, potentially to hit 20-30 transactions a year. At the moment, the market has jumped from three trades in six years to six in six months.

“The Chinese bond market will welcome the diversity offered by this new asset class,” said Lamberg. “When we compare the current size of the Yankee bond market [dollar bonds sold in the US by foreign issuers] of around 20% versus domestic US market, we may only hope that the Panda will follow this path.”