How Asia’s capital markets have endured
Covid-19 has fundamentally altered the way people work, communicate and live. It has also tested the resilience of Asia’s capital markets, writes Matthew Thomas.
After China revealed the first cases of ‘pneumonia of an unknown cause’ at the end of 2019, the capital markets — and, indeed, leaders of many of the world’s largest countries — reacted with little more than a shrug.
Asia’s capital markets started 2020 at a breakneck pace. In January, bankers worked on G3 bonds in Asia ex-Japan worth $51.9bn, around 53% higher than the previous year, according to Dealogic. There were $26.7bn of IPOs, follow-ons and convertibles in the region during the same month, more than double the amount they had managed at the start of 2019. That strong start is just a distant memory.
The coronavirus has now spread around the world, infecting well over three million people and causing 239,227 deaths by May 2. Stock markets have collapsed. Asia ex-Japan G3 bond issuance in March was down more than 70% on the previous year. High yield issuance has all but disappeared. US interest rates, the benchmark for the vast majority of the region’s offshore bond issuance, are now close to zero.
Bankers have also been forced to adjust to a new way of working. Singapore, India and parts of the Philippines are on lockdown, leaving offices closed and most bankers working from home. China has imposed strict travel restrictions even on its citizens going from one province to another. Hong Kong appeared to be getting back to a semblance of normality in early May but video conferences, rather than physical meetings, are still common.
Banks have reacted in a variety of ways to the spread of the pandemic. Some have split teams between two or more locations, relying on disaster recovery sites that feel ill-designed for a pandemic. Others have told almost all of their staff to work from home. GlobalCapital reporters, for our part, have spent much of the last two months communicating only over video calls.
The coronavirus has raised important questions for senior capital markets bankers in Asia. There are short-term questions about pricing, deal volumes and likely revenues and longer-term questions about working practices, risk management and asset allocation. There are also more optimistic questions, particularly — what can the capital markets do to help?
Not all of these questions have clear answers. But the recent performance of Asia’s capital markets, and the efforts being made to develop Covid-19 response bonds in the region, offer glimmers of hope in a world that has been overcome by doom.
The impact of the coronavirus on Asia’s bond market has been clear. Asia ex-Japan G3 bond issuance fell to $7.9bn in March, a more than 70% fall on 2019. It rebounded to $35.9bn in April, but that was still an 11% year-on-year fall.
The high yield market looks even worse. Although there was $16.9bn of G3 high yield bond issuance in Asia ex-Japan in January, by March supply had fallen to $1.09bn, a drop of 82% from the previous year. It got worse. Last April, there was $10.8bn of high yield issuance. This year, April passed without a single high yield deal being sold.
There was at least some good news. Although issuers chose to stay away from the bond market through much of March, they have since pulled off some remarkable successes. Malaysian oil company Petronas raised $6bn in the middle of April, generating a peak order book of $37bn. The Republic of the Philippines sold one of its largest-ever deals, raising $2.35bn from 10 and 25 year bonds.
Asia’s equity markets have fewer landmark successes to point to, but they have also suffered less. Between January and March, there was $50.1bn of ECM issuance in Asia ex-Japan, according to Dealogic, a fall of around 6% on 2019. But in April, the market came back with a bang. The $24.5bn of issuance makes it the busiest April in the history of Asia’s capital markets.
“There is an unprecedented rate of company formation in Asia at the moment,” says Jan Metzger, Citi’s head of banking, capital markets and advisory in Asia Pacific. “It’s not like during the dotcom boom when a lot of these companies were not real. Real companies are being created and they need access to the capital markets.”
“Our bankers are busy speaking to these companies, advising them and — believe it or not — baking off for their IPOs. These companies are not hiding down a rabbit hole. They are inviting bankers to pitch. There are some changes in terms of how we go about that, particularly the move to pitching over video calls. But companies are still eager to raise capital.”
How many of these deals will actually hit the market? Bankers are even more reluctant than usual to make long-term predictions — and for good reason. Although it is common to hear comparisons between the current crisis and the global financial crisis of 2007-2008, there is one clear difference: we’re still in the middle of this one. No-one knows when the coronavirus will start to abate, nor how bad the long-term economic impact will be.
The International Monetary Fund thinks the global economy will contract by 3% this year. But it has also warned about the “extreme uncertainty” of its forecast. What path will the virus take as it spreads? How will governments respond? How will supply chains be interrupted? How will spending behaviour change? How should we account for the impact of extreme commodity price volatility? These are among the many uncertainties the IMF has pinpointed.
This makes it hard for capital markets bankers to talk with any certainty about the future. But most agree that in the short term, at least, their markets will suffer.
“We’re not forecasting any strong recovery in primary volumes in Asia until after the summer,” says Henrik Raber, global head of credit markets at Standard Chartered, in Singapore. “We need better clarity on the economic environment. Debt issuance is not just driven by working capital or capital expenditure, but also M&A and event-driven transactions. Those deals are all on hold at the moment.”
Bankers across the capital markets talk about the surprising resilience of their markets in this crisis. InnoCare Pharma’s HK$2.2bn ($289m) IPO, the first meaningful listing to be done following a virtual roadshow, offered a template for others to follow. The Indonesian sovereign’s $4.3bn triple-tranche deal in April, and Kookmin Bank’s $500m bond soon after — both for Covid-19 response — have opened a new market for Asian issuers (see box). But although the recent deal flow offers some good news, the road ahead is still rocky.
“I was surprised at how fast the market reopened but I predict it will shut again,” says the Hong Kong-based Metzger. “It’s like a dam. When the floodgates open, there is going to be a rush of liquidity but then it’s going to shut again. The supply builds up every time the market shuts.”
This all means bankers and their clients need to be realistic about the short-term impact of the coronavirus on Asia’s capital markets. Deal flow is likely to be sporadic. Pricing expectations will rise. Revenues will fall.
Bankers have dealt with struggling primary issuance markets in the past. But the coronavirus could also have a longer-term impact.
Home comfort and chaos
There are two main ways the coronavirus could alter Asia’s capital markets. First, it could lead to lasting changes to the way people work. InnoCare’s virtually-marketed IPO is now just one of a handful to hit the market. Bankers across Asia have now become used to pitching their clients over video calls, often from the comfort — and occasional chaos — of their own homes.
“Investors would rather have access than not have access and they don’t really want to meet in person either, so they are happy with this arrangement as long as this virus continues,” says Selina Cheung, a managing director on UBS’s ECM team in Hong Kong.
But could the arrangement last even after the virus retreats? There are advantages to virtual roadshows. The reduced carbon footprint is good news at a time when banks are increasingly concerned about environmental impact. The cost saving is likely to be significant. But some senior bankers say video conferencing actually allows them to reach a wider, higher quality audience.
Global fund managers previously expected a face-to-face meeting with the management of any company they were considering investing in. Those face-to-face meetings didn’t just take an hour or two; they also required hours on planes that could otherwise be used talking to other investors. Now bankers have an excuse to maximise the number of meetings their clients can have — without offending investors who would otherwise expect special treatment.
The coronavirus could lead to wider changes for the banking industry. Months of working from home has shown bank bosses and employees what is possible. Will working from home now become more common? Senior bankers told GlobalCapital Asia the most lasting changes would be among back office staff and those in legal or risk functions — essentially anyone who is not expected to continually be in front of clients. But for those in the capital markets, things are likely to go back to normal, or close to it.
“The fact that everyone is working from home means it is much more manageable,” says Standard Chartered’s Raber. “People expect to do video calls now. But it’s not as efficient as working in the office, so we do need to move back to normality. That’s probably going to happen in waves, rather everyone going back in one day.”
Asia embraces Covid response bonds
Capital market innovation may have helped cause the last crisis — but it can soften the blow of this one.
Capital markets bankers like nothing more than a new debt instrument. During the financial crisis, their obsession with innovation led to sharp criticism. Subprime mortgage securitisation was partially blamed for starting the global financial crisis. But as the coronavirus spreads around the world, and as the need to find solutions grows, bankers are proving that their innovations can also help the world recover from a crisis.
Chinese issuers took the lead first, selling Rmb332bn ($47bn) of domestic coronavirus-linked bonds in the first quarter. The market has since gone global. The Asian Development Bank, the European Investment Bank and the World Bank are among the supranational issuers to have sold explicit Covid-19 response bonds, which bankers are defining as part of the growing social bond market. There was $25bn of international bond issuance linked to Covid-19 by April 24, according to GlobalCapital data. That includes an Indonesian rupiah deal from the Inter-American Development Bank.
In early April, the Republic of Indonesia raised $4.3bn from a dollar bond designed to soften the damage of the pandemic, becoming the first Asian issuer to sell a public dollar bond linked to Covid-19. Later the same month, Kookmin Bank raised $500m from a five year issue that will be used to finance small-and-medium sized enterprises impacted by the coronavirus.
Bankers are working on more deals from Asian borrowers, although they warn that the rise in these bonds will not lead to a net increase in volumes.
This is evident from the Philippines’ recent sovereign bond. The country’s funding officials had considered billing their deal as a Covid-19 response bond but the need for broader funding — and a welcome loan from the Asian Development Bank — encouraged them to stick to a vanilla deal. Perhaps that is for the best. Covid response bonds will have the most impact when they meet a clear funding need.
One of the complaints that bankers have had about the social bond market in the past is that the definition of ‘social’ varies so widely between countries with differing levels of economic development. Global warming meant green bonds served a common cause in a way that social bonds never did. Who would make that same argument now? The coronavirus has given the social bond market a clear purpose – and given capital market bankers a chance to help.
The other way the coronavirus might have a long-term impact on Asia’s capital markets is by fundamentally changing the risk-return picture across the debt and equity markets.
After seven years of near-zero interest rates following the financial crisis, the world had finally returned to the old normal. But after two emergency rate cuts that once again pushed the US Federal funds rate to between 0% and 0.25%, and a swathe of quantitative easing measures announced by global central banks, the cost of money is now back to what it was after the financial crisis.
That looks unlikely to change any time soon. Although the Fed shocked the market with two emergency rate cuts to ease the burden of the crisis, it is unthinkable that it would do the same in the other direction. That makes a strong argument for investors to allocate their money to equities. The stock market has fallen dramatically but a quick recovery is possible. Interest rates — and bond yields — will take time to return to what they were after the crisis.
“The age of fixed income is over,” says a head of private banking in Taipei. “We’re telling our clients to shift aggressively to equity right now. This is a once-in-a-lifetime opportunity.”
This is debatable. Although low rates will make the bond market less attractive to investors, they will make bonds more appealing to issuers. Investors may also take time to get back their optimism, a necessary ingredient for buying shares. A rival private banker, based in Kuala Lumpur, said the market was too unpredictable at the moment to know how investment allocations will change.
But one thing is clear: the huge movements in global markets means investors will be forced to reconsider where they put their money. A combination of steady high yield issuance, low default rates and relatively stable interest rates has been a boon for Asian bond investors. But as rates plunge and defaults rise, investors may have second thoughts.
This may all be moot if the coronavirus gets worse. Those “extreme uncertainties” the IMF warned about should give anyone making predictions pause for thought. But there is reason to be optimistic. The world has shown remarkable resilience during the coronavirus — and that resilience has extended to Asia’s capital markets. GC
Additional reporting by Jonathan Breen