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Asia-PacificMay 1 2005

European bond issuers hit the sweet spot

Although Asian investors still favour dollar-denominated bonds, their interest in euro deals is growing, stimulating European issuers to work on building up their Asian investment base. Michael Marray reports.European bond issuers are devoting an increasing amount of their time to the Asian investor base, tapping into the fast-growing demand for fixed income assets from central banks and private accounts.
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Thus far the much-hyped move away from dollar assets into euros has been somewhat exaggerated, and most Asian investors continue to favour dollar-denominated deals. But they are making small adjustments at the margins of their portfolios, and the amount of new cash available for euro paper is sizeable.

Thus European issuers are following a twin strategy of building an investor base for euro-denominated offerings and continuing to place a sizeable proportion of their US dollar bonds in Asia.

One recent example was the $3bn global bond launched in January by Kreditanstalt fur Wiederaufbau (KfW). The five-year deal was led by JPMorgan, HSBC and Citigroup, and was priced at 24 basis points (bp) over comparable US treasuries.

“In the past three years there has been an increase in demand from Asian investors with respect to KfW euro benchmark bonds though, for example German investors [alone] still buy more of this paper than Asian investors, who account for around 15%,” says Horst Seissinger, head of capital markets at KfW. “But for our US dollar global bonds the demand from Asia is higher and on a typical deal, over 40% of the paper is placed in Asia.

Special focus

“We have a special focus on Asian investors and we try to have high-level face-to-face meetings with our most important customers at least once a year, as well as meeting at conferences in the region,” says Mr Seissinger.

“Outside of the benchmark programmes in euros and dollars, we also market other products, including structured bonds, to Asian investors via public transactions or private placements.”

For example, the KfW exchangeable bond launched in January was targeted entirely at the Japanese market. The deal, featuring bonds exchangeable into shares of Deutsche Post AG, met with strong retail demand and was increased in size from an initial €500m to €1.1bn.

“The three-year deal fell into the sweet spot where central banks wanted to invest and about 60% of the paper was sold into Asia,” says Scott Lampard, managing director and head of Frequent Borrowers Group at JPMorgan in London. “The appetite is still strongest for US dollars and, although euro-denominated bonds are increasingly becoming a factor, up to now a move into euros is talked about more than it is actually happening,” he argues.

“However, Asian central banks are undoubtedly diversifying their portfolios and that may have less to do with currency diversification than with decreasing the proportion of their portfolios invested in US treasuries and increasing the proportion in asset classes such as covered bonds, European sovereigns and European agencies,” he says.

Building bases

Many European governments and agencies are spending time building up their Asian investor base. For example, in the mid-1990s, Agence France Tresor only had 20% non-French investors and now has 49%. The initial broadening of the investor base took place in the eurozone but today Asia has become the major area of growth.

“We target central banks but also large institutional investors – such as asset managers and life insurers in Japan – and public institutions and we meet with these major Asian accounts on average once a year, since we want to build a long-term relationship,” says Benoit Coeuré, deputy CEO of Agence France Tresor. “But in addition we are now spending more time holding meetings with new investors, usually organised by one of our primary dealers. These new investors, for example Chinese banks, are mainly invested in dollars but have a big potential to diversify into euros.

“When we travel across Asia as a French sovereign issuer, we are also selling the credit and economy of the eurozone,” Mr Coeuré stresses. “We are viewed by Asian investors first as part of the eurozone, and second as France within the eurozone. So we spend a lot of time talking about the economics and the institutions of the eurozone, before coming to the actual product itself.”

Central bank sweet spots

Central banks have a strong preference for BTFs (short-term treasury bills) and BTANs (fixed-rate treasury notes with two and five-year maturities), and the Obligations Assimilables du Tresor (OATs) at the shorter end of the maturity curve, generally 10 years or less. And various other Asian investors are interested in new products to diversify their portfolios.

“We have a eurozone-inflation linked programme and, although most deals are auctioned, from time to time we do a syndicated deal in order to maximise the marketing of the product,” says Mr Coeuré. “Early in 2004, we did a 15-year eurozone-inflation linked bond and, in spite of the relatively long tenor, there was 4% Asian participation in the order book. And we see plenty of potential for that level of demand to grow.

“Inflation-linked products are now spreading across Asia, where many investors have already bought US treasury inflation-protected securities (Tips) and are now interested in euro-denominated securities. They recognise this as a new asset class, and want to include these bonds in their portfolios, says Mr Coeuré.

It is not just sovereigns and agencies that are increasingly tapping into Asian demand, but also private sector financial institutions. They are doing various types of conventional bonds and structured products. Triple-A rated covered bonds are very popular with central banks because jumbo issues are highly liquid. And bank paper is popular with private investors.

“In December 2002, Allianz AG became one of the first European non-banks to issue directly into the Asian market, with a $500m perpetual subordinated bond offering,” says Stefan Theissing, head of corporate finance at Allianz in Munich. “It was targeted at Asia ex-Japan, and retail investors showed a strong appetite for the long dated, higher yielding subordinated paper.

“In addition, some non-Asian targeted issues denominated in euros are sold partially into the Asian market. For example, in 2004 we launched a €1.5bn perpetual subordinated bond, which was targeted at European investors, but some of this paper was placed with Asian accounts. And we have also seen secondary market flows into the Asian market of our euro-denominated paper,” he says.

“There is a fast-growing pool of money in Asia, which is positive for issuers such as Allianz,” says Mr Theissing. “However, although Asia is increasingly absorbing some portion of our euro issues, the region is still predominantly a dollar-based market.”

Part Two (Cost-efficiency)

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