As Asia’s share of the global economy and private capital continues to increase, it is no surprise that international borrowers are keen to build relationships with the region’s institutional and private investors. Increasingly, European borrowers are targeting Asian investors when selling their bonds.
Benedict Nielsen, co-head of syndicate for Asia ex-Japan and head of DCM and syndicate for Europe, Middle East and Africa at Nomura, who is in Hong Kong to coincide with Nomura’s financial institutions group conference, discusses the development of the Asian bid.
How has the allocation of global bond issuance to Asian private banks and institutional investors evolved?
Historically, we have seen greater allocations of higher yielding debt instruments going to Asian private banks rather than institutional investors, while the reverse has been true for secured and senior unsecured securities. The clients of private banks, typically high-net-worth individuals, are less focused on subordination; as long as they are comfortable with the issuer name, they want the highest returning instruments from those borrowers. That is why, to date, this community has been the key driver of capital issuance. In the process, they have become educated on tier-1 and tier- 2 debt and have thus developed strong views on their preferred debt instruments.
However, slowly we are seeing this balance of international debt allocation between institutional and private banks shift. As we get more clarity around the regulatory treatment of debt instruments, Asian institutional investors will play an increasing role. However, private banks will remain very important.
How much appetite do Asian investors have for European debt?
Asian interest in European debt has certainly increased — clearly the region still faces challenges, but recent stability has made investors more comfortable with the state of the eurozone and the slowly improving stability of the periphery. At the very least, they have shown appetite for national champions and other familiar names.
On the investor side, over the past three years, we have certainly seen a deepening of the Asian investor base, as they have increased allocations towards fixed-income products. Over the past few months, fund flows have remained more balanced. Retail and institutional investors are thoughtful and selective in terms of what they buy; in terms of the issue itself, the structure and, to some extent, the currency. This gives issuers more options than previously, as long as they are prepared to cultivate long-term relationships with investors. You have an interesting dynamic at play: issuers looking to tap the Asian investor base are hoping to achieve ever tighter spreads and absolute yields, whilst at the same time, the investor base is becoming more structure sensitive and looking for higher yields.
How do institutional investors and private banks differ in their receptiveness to subordinated debt from international issuers?
When it comes to investment in international bonds, there is a clear distinction. Institutional accounts are more conscious of where notes rank in the capital structure, and have shown a preference for secured and senior notes. Private banks and hedge funds — as long as they like the overall credit story of a borrower — are comfortable investing further down the capital structure to benefit from the higher yields. Traditionally these investors have focused more on equity-type instruments, or at least those carrying equity-like returns, rather than traditional debt instruments. For these reasons, hybrid and contingent capital securities are of particular appeal.
Since mid-January, Asian-led contingent capital instruments have significantly outperformed the rest of the Asia US dollar bond market, with spreads tightening by approximately 30bp. This has occurred despite the fact that tier-2 subordinated debt issued globally last year has widened by an average 30bp over the period. In addition, they have outperformed the contingent capital transactions issued to the onshore US market.
At least $10 billion worth of European hybrid debt specifically targeted at Asian retail investors was sold in 2012, according to estimates by analysts, up from the previous two years. What is driving this?
Towards the end of 2012, we saw a resurgence and this was predominantly driven by increased Asian demand for dollar-denominated hybrids. The majority of this interest came from Asian private bank investors. There are two factors driving Asian interest in hybrid instruments. Firstly, Asian retail investors are very familiar with equity in general, and for them, the idea of shifting from outright equity to something that sits between equity and debt in the capital structure is attractive. With rates at or close to historic lows in recent years, it is easy to see why investors have looked favourably at the hybrid space. However, we need to be cautious about reaching the conclusion that because we have had a wave of hybrid debt issuance, it will trigger more. Over the long-run, the level of issuance for these instruments is driven more by the needs of borrowers than by investor demand.
The Asian bid, particularly the private banking bid, has been criticised for being “fickle” and quick to sell when sentiment changes. Do you think this is true?
Typically, Asian investors have always demanded high-quality credit, a good brand name, and a track record of solid performance. Issuers know and understand this. Yet there is a misunderstanding from some European issuers who see the Asian investor base as out to make a short-term profit. On the whole, the opposite is true. The majority of our private banking clients in the region are long-term holders.
Do international borrowers see cost savings when they tap Asian investors?
The major issue for borrowers who have not had an opportunity to issue in Asia yet is that they have to pay a premium to enter, and need to ensure a solid performance with their debut offerings. Borrowers that have taken a long-term view and work hard to develop relationships with the region’s investors, have found it extremely beneficial for both diversification and economic reasons.
As the search for liquidity continues, can we expect to see more international issuers turn to a range of Asian currencies such as the Singapore dollar as a new source of liquidity?
The Samurai market has long been established as a means of diversification for international borrowers. Beyond that, there are three main currencies international issuers have recently been looking at in Asia — the offshore renminbi, the Singapore dollar and the Australian dollar. When it comes to issuing in a foreign currency, it all comes down to the coupon that can be achieved and then the basis swap level. How attractive does it look compared to the home currency?
The offshore renminbi market is growing, particularly for high-grade names in both the financial and corporate sectors. From an investor perspective, they want the highest quality names in their portfolios. The Australian dollar bond market has hit its peak and experienced a big rally post crisis. The majority of issuance in this market comes from high-rated financial institutions and sovereign, supranational and agency names. In terms of the Singapore dollar bond market, it had the highest number of foreign issuers on record in 2012, and total issuance in the currency was up 54% year-on-year. So yes, it is a growing market that is driven by private bank money and retail money. It can be leveraged, and investors are very yield hungry. This is an attractive market for some European issuers who are looking to build a presence in Asia and diversify their funding sources.
