Asia's millionaires prefer bonds

Asia is home to 33 million high-net-worth individuals and it is this growing population of rich and affluent people that has been driving the demand for many of the bonds that have priced this year across the region. This has especially been the case in China, Hong Kong and India.

A list of borrowers that have attracted a strong response from these high-net-worth individuals (HNWI) include Bank of East Asia, Kaisa Group, KWG Property Holdings, PCCW, Union Bank of India and Yanlord Property – just to name a few. To add a little bit more colour to the picture, out of the combined $2.55 billion of debt issued by these six borrowers, $907 million was allocated to private banks, which is where the money of the rich sits. This represents a very big piece of the pie -- over a third, in fact -- that has been dished onto the plates of the HNWI community, a group that also includes investors referred to as "friends and family", ie individuals close to the issuer.

However, the term "friends and family" is not entirely correct. What some analysts are finding is that members of the management of tycoon-led companies have been buying the company’s bonds as public-side investors on the assumption that the company will succeed, said Brayan Lai, a credit analyst at Credit Agricole CIB.

“It’s a confidence factor for other investors when they know the management is investing its own money in the company it controls, regardless of which slice of the capital structure it goes for – equities or debt,” explained Lai.

Particularly in China, which recently surpassed Japan as the world’s second largest economy, there is a tremendous amount of liquidity onshore that needs to be put to work. In the past, China’s wealthy have either put their cash into stocks or property. However, with the jitters in the stockmarkets and the woes over the domestic property sector, fixed income has become the safer choice for their assets.

And certainly from a diversification standpoint, bonds make sense.

Added to this, the markets are looking like a flash back to 2003 and 2004 when interest rates were low and equity markets were struggling. “In such an environment retail and private banking accounts can thrive,” said Paul Au, head of Asia debt syndicate at UBS.

Debt market specialists have observed that the participation of private banks in new deals this year has been on par with institutional investors – and in some instances the involvement of private bank accounts has been able to drive the market substantially.

“Some new hedge funds in Asia are quite small in size and a lot of their trades range from $500,000 up to $2 million,” said Annisa Lee, a credit analyst at Nomura. “Whereas we see some private banks trade in sizes of $2 million to $3 million,” she said.

Given the buy-and-hold nature of private bank accounts, bonds bought by them have historically had a relatively stable performance in the markets. As Lee puts it, private banks “don’t need to mark-to-market and they don’t trade as frequently as institutional accounts”.

However ,Au at UBS does not hold this view. “I don’t think necessarily that there is a certain performance pattern for bonds that attracts a lot of interest from private banks,” he said. “In Asia, orders are too diverse for one theme to emerge. Not all private banking customers hold their bonds and not all customers flip.” This investor group is just one component of the entire investor universe, he said.

However, what is clear to both Lee and Au is that, in the current market environment, borrowers that sell their credit based on the company’s reputation as opposed to pure metrics are more likely to target HNWI through private banks.

With this in mind, demand from private banks is going to continue to be relevant for select issuers.

“Individuals have liquidity and are buying into certain credits because of their understanding of that credit’s reputation,” said Au. “This was the case with State Bank of India, Country Garden and Shimao Property.”

Market conditions are expected to remain a “free-for-all environment” across the asset-class spectrum as 10-year Treasury yields continue to post record lows, equities remain volatile and the primary bond markets, although quiet, stay open. And for borrowers looking to take advantage of the climate and lock in some long-term funding, their ticket to get a deal over the line may lie in Asia’s strong base of high-net-worth individuals driving the demand.