European borrowers are finding Asia an increasingly attractive place to raise funding, as more private accounts join the central banks, which have traditionally provided most of the demand.
The primary investor focus is still on top quality names, such as AAA-rated sovereigns, or AA-rated European banks.
But more recently a new group of borrowers from Europe have begun to tap the low investment grade or high yield market, with offerings of perpetual bonds, usually non-callable for five years, and with or without step-up coupons.
Olivier Destandau, director at Deutsche Bank in Singapore, explains: “Over the past few years, Asia has developed a much broader investor base, from central banks to regional banks, insurance companies and private banking retail networks, and they are all looking at different parts of the curve, different currencies, and ratings all the way down to below investment grade.
“As part of this process we are seeing local Asian currencies becoming more important in attracting international borrowers.
“The AAA names being sold to central banks’ trade is still important, but at the other end of the market the retail clients of Asian private banks are looking for yield in the 7.5% to 8% area.
“To get that extra yield they are willing to buy structured transactions, or go to long-dated deals including perpetuals for borrowers with good name recognition such as [tourism and aviation group] TUI or Porsche.”
Teutonic arrival
The perpetual market has been most heavily used by Latin American names, but it is only over the past six months that Swiss and German borrowers have arrived. The latest was commodities company Glencore International.
“When HSBC brought Pemex [Mexican Petroleum] with a perpetual non-call-five deal in 2004 the depth of demand from Asia took many people by surprise, and this has since been followed by a number of deals for Brazilian names, and more recently for European companies,” says Sean Henderson, head of debt syndicate, Asia Pacific, at HSBC in Hong Kong.
“We have seen a very strong private banking bid for perpetuals out of Asia,” says Mr Henderson. “Asian private banks are currently highly liquid, and have more of a risk appetite than their European counterparts, and the Asian private banking bid has been the main driver for the success of these transactions.”
Subordinated bonds
These investors are looking for coupons around the 8% level, and will look at a variety of structured bonds. TUI sold R300m worth of perpetual subordinated bonds last December, which initially pay 8.625% until the first call date in January 2013. If not called they subsequently pay floating rate interest at three-month Euribor plus 730bps. TUI is rated below investment grade at B.
In January, Porsche launched a $1bn perpetual bond, with a non-call five-year structure. It may be called after five years, and does not feature a step-up. The unrated bonds, generally regarded to be the equivalent of BBB, paid investors a coupon of 7.2%. Merrill Lynch was the sole bookrunner.
The high coupon tapped right into heavy demand from both European and Asian private banking accounts, but bankers say that it is the Asian bid that is crucial to getting perpetual deals away.
In contrast to their counterparts at Swiss private banks, who primarily buy very safe investments, Asian private bankers have to explain themselves to highly demanding customers looking for aggressive investment strategies with above average returns.
Porsche is unusual in that it still has family majority ownership who give out little information, and do not have a credit rating. But for private bank clients, name recognition is more important than a rating. “They know the company well, and may even own a Porsche, which makes it ideal for this market,” comments one banker.
Glencore sale
They were followed in January by Glencore International, which sold $700m worth of perpetuals, yielding 8%. The lead managers were HSBC and Citigroup, and the deal was upsized after the initial $300m offering was 10 times oversubscribed. Asian accounts took up 70% of the paper on offer. Bankers expect to see the appearance of more European names in 2006.
But though the perpetuals are causing plenty of excitement, the Asian market remains mainly one for the very top quality borrowers, typified by the French Treasury, Kreditanstalt fuer Wiederaufbau (KfW), or AAA-rated Dutch commercial bank Rabobank.
During 2005, KfW raised €50.6bn, and as well as issuing in euros and Asian currencies it sold dollar bonds heavily into Asia. Of the three dollar offerings done in 2005 Asian investors bought 60% of the paper, with central banks the most important investor group.
“Over the past 12 months we have seen Asian investors focusing on other currencies such as sterling, Australian dollars and New Zealand dollars, in addition to dollars and euros,” says Horst Seissinger, head of capital markets at KfW.
“It is normal that in a low interest environment, investors are looking for extra yield, and are prepared to take a currency risk, but they still want top-rated issuers. The same investors who have already bought a top credit risk in dollars or euros will then look at offerings in other currencies.
“Asian investors still invest mainly at the shorter end of the curve. For example, in January we launched a 15-year euro-denominated bond, which was 98% sold to European investors, but for tenors out to 10 years we would usually have substantial distribution in Asia.”
KfW accesses the Japanese market with large numbers of small structured private placements. In 2005, KfW raised 5% of its 2005 funding in yen, 4% in New Zealand dollars, and another 2% in Australian dollars. With NZ$3.8bn (€2.1bn), KfW was the biggest foreign issuer in the New Zealand currency.
Asian demand
And KfW is stepping up its funding efforts in domestic bond markets such as Thailand and Malaysia, where the demand for high grade assets is growing from local pension funds and fixed income fund managers.
In late April, KfW was roadshowing two separate deals, an offering in Thailand led by Deutsche Bank, and a Malaysian offering led by ABN AMRO.
KfW is also likely to follow in the footsteps of International Finance Corporation and Asian Development Bank with a domestic yuan bond offering in China, and has already started negotiations with the relevant authorities.
Another highly favoured borrower in the region is Agence France Trésor (AFT), and deputy CEO Benoit Coeure stresses the importance for any issuer of building up long-term relationships with investors.
“We visit each major central bank buyer of our bonds, or big institutional investors such as insurance companies or fund managers, once a year on average, and explain the overall economic picture in France, as well as our funding requirements,” Mr Coeure explains. Issuance of about €119bn is planned for 2006.
“Asian central bank investors continue to buy mainly at the shorter end of the curve, but they are important buyers of OATs [Obligations Assimilables du Trésor or fungible treasury bonds],” he adds. AFT does not have data on who owns its bonds, since they are sold by auction via the primary dealers, but according to an International Monetary Fund survey the biggest non-French market (central banks excluded) for French treasuries is Japan.
Asian auctions
There is also demand for more structured products across Asia. In late April, AFT held an auction of four-year notes indexed on eurozone inflation, and there was a strong bid from Asia.
Bankers suggest that the trend towards central banks buying more euro-denominated bonds has temporarily slowed, in the wake of interest rate hikes in the US, but may resume again once the gap between eurozone and US rates narrows again.
Most big issuers still sell dollar and euro paper into Asia, and take a flexible approach depending on current market conditions. Speed of execution is crucial, which underlines the importance of long-term investor relations, and not having to roadshow individual deals.
Nimble programmes
Dutch bank BNG has benchmark programmes of large, liquid offerings in dollars and euros, and can move rapidly to take advantage of market conditions.
“BNG is not normally involved in specific deal-related roadshows, because you don’t know how the market will look in a few weeks time,” explains Bart Van Dooren, head of capital markets at BNG.
“It depends where the investor demand is at a particular moment whether we issue in euros or dollars,” says Mr Van Dooren. “Some central banks have begun to look for diversification, since the bulk of their foreign reserves are in dollars, so some new money is being invested in euros.”
Asian demand is particularly strong at the short end of the curve. In January, BNG did a five-year R1.5bn offering, led by BNP Paribas, Citigroup and UBS, and this was 80% placed in Asia.
Asian investors like bank paper in general, and are particularly attracted to the Rabobank name, with its extremely rare AAA rating for a privately owned financial institution.
Rabobank will sell about €20bn worth of bonds in 2006, and has built up good long-term relations with investors across Asia. Deals thus far in 2006 include a R1.5bn five-year bond and a ¥50bn (R346m) five-year bond.
Rabobank does three regular roadshows every year, so that regular investors know when to expect a visit. The bank starts in January with a visit taking in South Korea, China and Hong Kong. In May there is a specific visit to Japan. The September roadshow includes Singapore, Malaysia and Australia.
| “There is a clear shift in demand from Asian investors towards other currencies, as well as buying dollar and euro bonds,” says Rabobank CFO Bert Bruggink, with sterling, Australian dollars or New Zealand dollars bonds all in demand across the region. |
“We have certain currencies, such as the Australian dollar, where we want to try and build a curve, so, for example, in the Australian dollar market we did four transactions last year going out to 10-year fixed,” Mr Bruggink explains. “In contrast, the Hong Kong dollar is a more opportunistic trade, depending on investor appetite and swap rates are always an important driver of issuance, since we look at our cost of funding from a Euribor perspective.”
The future belongs to Asia
The general outlook is that Asia seems set to become even more important for European borrowers in the coming years. Most central bank reserves globally are now held in Asia, and demand for AAA unsecured bonds, covered bonds and even residential mortgage-backed securities will likely increase.
At the same time, local pension funds and fixed income funds are buying more domestic bonds in countries such as Malaysia and Thailand, making them attractive to top class European names. And the private banks are looking for higher yielding assets issued by lower grade borrowers.
Bankers report anecdotally that placement of global bonds into Asia from Europe and the Americas grew rapidly in 2005. One investment bank alone did 50 regional roadshows for European and US borrowers last year, and expects to be even busier in 2006.
