CitiÆs Zorrilla discusses the outlook for Asian bonds

As Citi opens its sixth annual Asian fixed-income investor event in Hong Kong today, FinanceAsia spoke with the bank's co-head of markets for Asia, Rodrigo Zorrilla, to discuss the outlook for the rest of the year.

It has been a surprisingly busy start to the issuance year, what will you be telling your issuer clients at the event about the outlook for the rest of 2009?

The first month of the year was actually the busiest on record for the Asia debt markets with over $33 billion raised according to Dealogic data, 65% up on the previous record - which was 2008.

Regular benchmark issuers such as the Export Import Bank of Korea, Korea Development Bank and the Republic of the Philippines took advantage of windows of opportunity to raise capital for their various needs. Local markets also remain active as underlined by a $1 billion equivalent issue in rupees that Citi led for ONGC-Videsh at the start of the year.

Other trends have included continued issuance from Australia, with government guaranteed transactions for the likes of Suncorp Metway in sterling, Commonwealth Bank of Australia in dollars and Westpac in yen. One of the key points we noted on all these deals was the strong global fixed income investor support, underlining that fixed income investors investing in the right credits and just as importantly, the right structures.

This will be a key theme that will run through this week's event, where we are bringing together some of the world's leading fixed income investors and leading issuers from around the world. Markets are open for business for quality issuers if they are willing to pay the prevailing rates - there is access to capital.

Many Asian borrowers though are reluctant to issue as they feel their credit spreads are not reflective of their credit strength and that is understandable and many ask why issue if you don't need capital.

But amid this, volatility windows can shut as soon as they open. The old proverb a bird in the hand is worth two in the bush is valid for many issuers. It is also worth noting that for many issuers what they have lost in credit spread is compensated by the dramatic decline in US Treasury yields so all in cost of funds are still competitive.
 
What are the key themes on the agenda for the conference and what will your clients learn from this week's event?

Clearly the global economic outlook is top of the list for most investors and clients will hear the views of our team of economists and strategists across interest rates, equities, fixed income and foreign exchange.

But away from the macro or big picture themes there is an agenda that will give issuers and investors a better understanding of some of the opportunities available in Asia and hopefully provoke an interesting dialogue between investors and issuers.

One of the major themes in recent weeks has been recaps from the financial sector and there will be a panel discussing both investment and issuance opportunities in some of these capital structures.

Issuers also need to be as flexible as possible in these markets and there will be discussions around the opportunities of establishing Medium Term Note programme to be more responsive to reverse enquiry. Many Asian issuers still take too long to respond to real demand from investors. In these markets, a day, let alone week, can see demand for a specific credit dry up.

The growth in the Islamic market in Asia is also on the agenda and we expect to see more Asian issuers utilising this product and increasingly conventional fixed income funds are also investing in the Islamic market.

But the over-riding theme as in previous years is the opportunity for issuers to discuss opportunities with key investors, face to face.

What are your views on Asia's local markets? Are they still offering opportunities for issuers to raise capital?

The growth in Asian local bond markets is perhaps one of the great success stories since the Asian crisis. Pre-1997, they were largely non-existent. In the last 12 months, more than $100 billion has been raised from Asian local currency markets.

There remains strong liquidity in many local markets, which underpins local bond issuance. The growth of pension funds in Asia and local currency asset managers is also of growing significance. Opportunities are still available for both the buy side and issuers and this will be a theme for the conference too.

But while issuance is high, structural changes are needed to make these markets more sophisticated. Many markets still have withholding taxes and are in practice very difficult for foreigners to purchase. Several others specifically prohibit foreigners from involvement, either as dealers or investors. Furthermore, fully functioning and active derivatives markets for greater corporate risk management are needed. These are still patchy ranging from the developed and sophisticated in some to the non-existent in many countries.

If governments and regulators take the lead, as they have done over the last decade in developing local bond markets, and push through some of these structural changes it will be of the benefit to the whole market and will help increase liquidity.

Fees on recent deals have risen dramatically. Is this a short-term move or are the days of issuers paying zero fees to a few basis points gone forever?

The days of paying zero or a few basis points in fees were those during the bull market when executions were simpler and the liquidity in both primary and secondary markets was readily available.

I would say fees are now back to "normalised" levels. You don't see fees in single digits in the US. Fees paid on new issues are for structuring, documentation, distribution and after-market support. What we experienced in the past was rather abnormal. After the volatility that we have experienced, issuers are valuing the work and the advice provided by banks such as Citi.