Observers see the lack of Asian participation in dollar deals as a temporary blip, due largely to current conditions. However, European bankers are still keen to cultivate investment from Asia. Michael Marray reports.
Over the past 12 months, Asian central bank investors have faced growing competition from European investors for allocations of dollar-denominated AAA bonds, leading to a lower Asian distribution on many offerings.
Nonetheless, bankers see this as a short-term dip, and point to the growing long-term importance of the Asian investor base. And European borrowers continue with their efforts to cultivate investors across Asia.
US hikes
The short-term fall in Asian participation on dollar deals comes after a long series of US interest rate hikes persuaded European accounts to buy more dollar bonds.
At the same time, over the past year many borrowers have moved to protect themselves against rising interest rates by selling bonds with tenors of 10 years and longer. This trend has also favoured European investors on dollar deals, since many Asian investors buy mainly at the short end.
Diversified investor base
“The investor base for Kreditanstalt für Wiederaufbau (KfW) benchmark programme offerings is becoming much more diversified, and just as Asian investors are buying more euro-denominated bonds, we are now seeing many more European investors coming in on our dollar transactions,” says Frank Czichowski, treasurer at KfW in Frankfurt.
“When we started our dollar benchmark programme, deals were typically sold 50% into Asia (depending on tenor) and 30% to 40% into the US, with a very small amount sold in Europe,” he explains. “Since more European investors are now buying our dollar bonds, the relative amount bought by Asian investors in primary distribution has gone down somewhat.
“More second-tier investors in Asia are starting to invest in KfW bonds, but central banks still do most of the buying in Asia, and are mostly interested in the short end of the curve, especially in Euro deals,” says Mr Czichowski, who points to the €3bn benchmark deal in May 2006, which was 40% sold in Asia.
“You may see central banks buying into 10-year dollar deals, but for euro-denominated 10-year paper there would typically be quite a small uptake.”
Less Asian dominance
“Over the past year we have seen less dominance from Asian investors in top quality dollar deals,” adds Guy Reid, executive director, frequent borrower coverage, at UBS in London.
“However, this has not always been because of lower absolute demand from Asian investors, but rather due to stronger demand from European and US investors. Also, a lot of recent US dollar deals have been in the 10-year sector, which not all Asian central banks can buy.
“There has been a lot of talk about more central bank reserves moving from dollars into euros, but this shift has not been as large as many people had expected,” says Mr Reid. “US dollar yields are higher than euro yields on an absolute basis, so a lot of central bank money at the short end of the curve has remained in dollars.”
In shorter tenors, Asian central banks can also be large buyers of sterling paper. For example, the £500m 3.5-year offering launched late last year for Network Rail – led by UBS, Royal Bank of Scotland and HSBC – enjoyed a placement of 30% into Asia.
Network Rail, which carries a UK government guarantee, has worked hard to develop its investor base in Asia, for both dollar and sterling offerings.
Asian investors typically do quite large deals, and Asian central banks and institutional investors are attracted to the good secondary market liquidity.
“In dollars, we tend to issue at three to five-year maturities, and most of those bonds go to central banks in Asia, the Middle East and Europe, with anything between half and two-thirds going to Asia,” says Samantha Pitt, head of corporate finance at Network Rail.
Asian central banks also buy heavily into shorter-dated sterling bonds, and can sometimes buy more than half of a deal, though recently we have seen growing interest from Scandinavian investors and other buyers from continental Europe,” adds Ms Pitt.
Regional roadshows
Regular regional roadshows are a key part of building up a long-term Asian investor base, and institutional investors in Japan, and to a limited extent in other countries, are joining central banks as sizeable buyers.
One European issuer that has a regular programme of non-deal related roadshows is the Belgian Debt Agency, for offerings of its obligations lineaires (OLOs). Last year, this included three separate trips to Tokyo; Beijing, Seoul and Taipei; and Bangkok, Singapore, Kuala Lumpur and Manila.
“We did our last five-year deal, for €5bn, back in 2005, and this had an Asian participation of 20%, and we have since seen some buying of our 10-year issues as a number of Asian investors move further out on tenors,” says Jean Deboutte, director, strategy and risk management at the Belgian Debt Agency.
“It is a market that is growing in importance for us, and as we look at this year’s funding requirements, and have to decide whether to issue at five years or a longer 10 or 15 tenor, the possibility of Asian participation could be an important factor in that decision,” says Mr Deboutte.
The Dutch State Treasury Agency (DSTA) is another sovereign issuer that views Asia as an important investor base. In 2006 it made some adjustments to its Dutch direct auction rules, in order to increase the focus on real money accounts, and no longer categorised asset/liability management (ALM) desks as real money.
“In the Dutch direct auction, banks bid on behalf of their clients, and they submit a list of clients to us, and we allocate first to those end-investors, and only then allocate bonds to the banks,” says Erik Wilders, agent at the Dutch State Treasury Agency. For example, in the 10-year auction last July, about 51% of the €5.1bn worth of bonds sold were allocated to real money accounts, with remaining allocation helping ensure secondary market liquidity.
“There was an allocation of about 7% to Asian investors on the new 10-year offering, but demand from Asia would generally be higher if we were issuing at five years, which we did not do during 2006,” says Mr Wilders. “Asia remains an important investor base for us, and we have regular non-deal related roadshows in the region, as well as attending conferences where Asian investors will be present.”
A number of regular European borrowers make efforts to place paper mainly with real money accounts, but strategies vary widely from one issuer to another. For example, KfW has no set guidelines for the banks distributing its deals.
Fast money accounts
“Real money accounts may hold the paper longer, but fast money accounts will add to secondary market liquidity,” says Mr Czichowksi at KfW. “We influence the distribution of our paper to a very limited extent, leaving the lead managers to ensure broad distribution and good liquidity. From KfW’s point of view, every investor is a good investor,” he says.
Outside of AAA agency and sovereign bonds, and the covered bonds asset classes, Asian institutional investors still have a strong appetite for top quality European banks, and names such as Rabobank and SNS Bank from the Netherlands are regular issuers.
In addition, below-investment grade credits with a good story to tell have also had success accessing the fast-growing pool of private banking money.
Early in 2006, travel group TUI and Porsche both did offerings out of Europe, while Brazilian media group Globo Comercial did a $325m deal with a 9.375% coupon.
More recently, in January 2007, Brazilian asset management and private equity group GP Investments was in the market with a $150m deal paying 10% interest.
“In 2005 and early 2006 there was a lot of issuance of dollar-denominated perpetual non-call-five bonds from Latin American and European issuers, and these deals were placed almost entirely with Asian private banking accounts,” says Mark Leahy, head of debt syndicate for Asia at Deutsche Bank in Singapore.
Attractive aspects
“Issuers like the relatively low cost, lack of fixed maturity and the ability to repay the bonds on the call dates at no premium, while investors are attracted to the high coupons and are comfortable with call risk.
“But in the second half of 2006, borrowers were potentially able to take advantage of very tight pricing in mainstream emerging market vanilla bond offerings, so there was a lull in perpetual non-call-five issuance,” he says.
“With regard to straight corporate debt, major borrowers from the US and Europe continue to invest time and effort in broadening their investor base in Asia,” says Mr Leahy.
“For example, this year Deutsche Bank joint lead managed a €3bn offering for GECC with three and seven-year tranches. While this European-targeted deal was being marketed we had requests from Asian institutional investors for dollar paper, so we quickly followed this up with a $500m five-year Eurobond transaction.”
Domestic deals in local currencies are another way for issuers to broaden their investor base. Last year, KfW did a Malaysian ringgit transaction, and its long-awaited yuan deal in China is still in the works.
Aussie dollar
The Australian dollar is another popular currency to issue in, and these deals can be marketed internationally as Eurobonds, or strictly targeted at domestic Australian investors.
But even on domestic deals, Asian non-Australian investors can sometimes place large orders.
“If a large part of a domestic deal ends up being bought by the same investors as international Australian dollar offerings it can be disappointing for the issuer, but we may be still asked to give them an allocation to keep them happy, if they happen to be regular investors in other deals from the same issuer,” says one banker.
