IFR Asia: Southeast Asia debt capital markets guide – region

IFR Asia Southeast Asia debt capital markets – region

December 2009

If Asia came through the global financial crisis in better shape than it did the Asian financial crisis a decade earlier, one of the most crucial differences was the strength of local currency bond markets. In 1997, borrowers were over-exposed to the dollar, so when their currencies declined in value, their ability to service debt or to borrow again was badly damaged, often fatally. This time, the closure of G3 funding sources barely made a difference to southeast Asian borrowers: they just went local.

Jan Wipplinger, co-head of risk syndicate at Deutsche Bank, thinks the point was proven in the week when Lehman Brothers defaulted and Merrill Lynch was taken over by Bank of America. That same week, Deutsche, Aseambankers and HSBC led a deal for Maybank, a M$1.1 billion issue of tier one debt. “During the height of the crisis internationally, for a bank borrower to be able to go ahead with a tier one transaction shows how resilient the local markets were,” says Wipplinger. “They were somehow isolated from the crisis in the international markets, while local investors at the same time turned to the local borrowers they understood.”

It’s a sentiment echoed widely by international and local bankers. “A lot of countries benefited hugely by having their local currency markets ticking over through the crisis,” says Sean Henderson, head of debt syndicate, Asia Pacific, at HSBC. “When you’ve seen countries that are heavily reliant on offshore borrowing going through a state of volatility, that volatility is significantly enhanced when you’re having to apply to an offshore investor base that is typically the first to pull back its horns.”

ThomsonReuters data shows that local currency debt in southeast Asia had hit US$32.3 billion by November 19 this year, certain to beat the US$32.5 billion for all of 2008 and quite likely to top the boom-time figure of US$35.9 billion from 2007. Thomas Meow, head of debt capital markets at CIMB, estimates that local currency markets provided 85% of necessary funding through the crisis, and G3 markets 15%. “Governments in the region have focused on developing local currency markets” since the Asian financial crisis, he says. “This time around we can see there was not so much of a currency mismatch risk. There was a liquidity risk, when G3 currency markets shut down, but markets like Malaysia and Thailand stayed open.”

In this respect Asia stood apart from many Eastern European jurisdictions whose borrowings in euros became problematic. “If we’d had a very broad exposure to needing to borrow G3 from the Asian region in the depths of the crisis, we would have seen more questions being asked of some of these countries,” Henderson says. “But actually you got almost none: Malaysia, the Philippines, Singapore and Hong Kong were all seen to be relative safe havens through the depths of the crisis, and to a large degree borrowers kept the ability to turn over their refinancing in the domestic currency markets.”

One can argue that, in addition to proving their worth, some southeast Asian local debt markets actually took the chance to develop while other markets were shut. The most obvious example is probably the Philippines, where 2009 issuance was already up more than 50% on the whole of 2008 by mid-November. The record-breaking P38.8 billion San Miguel deal there, discussed in more detail in the Philippines chapter, was arguably the region’s standout deal in demonstrating an untested ability to provide significant funds in a dark global climate. “In the Philippines we’ve seen jumbo issues getting done domestically,” says Terence Chia, vice president, Asia debt syndicate, capital markets origination at Citi. “Local banks were doing subordinated debt there at a time when the dollar markets were shut” to sub debt paper.

Local capital markets were also well supported by the fact that in uncertain times local money wanted to stay invested in credits it was familiar with in its home markets. “Local investors are very comfortable with local credits,” says Chia. “Given what’s happened globally investors are more open to buying local credits than a more highly rated international name. We do see some interesting investor behaviour, and it really results from investors here viewing global credits as something they cannot control: they can’t see it, they can’t feel it.” That said, the Asian bid has returned to G3 issues now, and is an increasingly vital source of liquidity.

Prior to the financial crisis, some markets – notably Malaysia – were succeeding in attracting foreign issuers into their local markets. Singapore continues to do so, with strong interest from the supranational community (see story), but in Malaysia the influx of Korean names into ringgit has faded in 2009, a successful and opportunistic deal for Hana Bank notwithstanding. The basic reason is, as Wipplinger puts it, “the local markets became more local.” So instead of being driven by the offshore bid taking advantage of liquidity, the markets remained active with both local borrowers and local investors.

The growth of importance in local currency debt is such that it is attracting new foreign banks to seek underwriting mandates. “It’s one of the key factors underpinning our regional strategy,” says Reuben Tucker, head of debt capital markets for Asia at ANZ. “We have seen emerge out of the disruption of the last two years a far more resilient set of currency markets in Asia.” In southeast Asia, ANZ is active in Singapore and Vietnam in local currency debt, and plans to move into Indonesia and the Philippines too.

Certain funding structures seem to lend themselves particularly well to local markets. For example, raising lower tier two debt in G3 currencies is challenging for even large and respected Asian banks: OCBC raised US$500 million in November but widened 20 basis points in secondary trading the day after pricing. But lower tier two can be raised at competitive rates in Philippine pesos and Malaysian ringgit, for example.

Structurally, most issuance has naturally been quite straightforward, but there has been room for innovation even in these difficult conditions. For example, in February, as credit markets blew out in the west, Indonesia had its first ever launch of residential mortgage-backed securities, backed by Bank Tabungan Negara. Led by Standard Chartered Securities Indonesia as lead manager and underwriter with Sarana Multigriya Finansial (a government-owned agency mandated to promote Indonesian home ownership) as global coordinator, standby buyer and credit enhancer, it was a modest deal – Rp100 billion – but still a standout for bringing a new structure to a market in the middle of unprecedented global market turmoil (albeit at a coupon of 13%). A second deal, with the same originator, closed later in the year raising Rp391 billion, again led by Standard Chartered as arranger. Stanchart was also involved in a landmark securitization in the Philippines this year, the first to be done in local currency, for the Philippine National Housing Mortgage Finance Corp.

Interestingly the investor base varies quite widely among the six countries covered in this report. Bookrunners say that in Singapore dollars, an institutional base of banks, domestic insurers and pension funds typically create an order book of 20 to 25 investors, while retail can be tapped for tier one capital; Malaysia is chiefly institutional, made of asset managers, insurers, pension funds and some government related entities, often targeting different parts of the curve; Thailand is the market with by far the greatest contribution from retail; the Philippines is diverse, with a large contribution from private banking as well as institutional money.

“Retail is a very interesting angle for Asia generally and will continue to develop,” says Henderson. “We’ve seen a broadening of retail interest from equities into debt. There’s still some way to develop but it will become more important in the next 12 to 24 months.” In 2009 retail has represented the majority of the bid for bond issues in Thailand in 2009, and there is some appetite in the Philippines – where a recent Ayala deal caught strong retail demand, for example – and, previously, Singapore for tier one bank deals, although there have been few recent issues.

“The two countries with a very strong retail bid are Thailand and the Philippines,” says Terence Chia at Citi. “In both, retail investors are very used to buying bonds as part of their investments. When you compare that with what they can get from bank deposits or government securities, corporate bonds certainly do give them a pretty decent yield pick-up over other investment products.” Ling at Standard Chartered, a bookrunner on some of the bigger Thai deals, also highlights the retail phenomenon in Thailand and the Philippines, where the simple approach of going out to local distributing banks to reach as many retail investors as possible has proved very effective.

On the institutional side, Jan Wipplinger notes, “compared to the international markets what you don’t have is the more fast money: you don’t see the hedge fund community, and if you do, it’s on the government bond side rather than corporate bonds. You see a much more buy and hold investor base in local currencies than you see in US dollars.”

One question is whether, now G3 markets are back open again, the status of local currency markets has in any way changed or if borrowing behaviour will return to the way it was before the crisis. Many major Asian borrowers – most recently Hutchison Whampoa – are borrowing opportunistically in dollars, despite not really needing the money. Nevertheless, “local currency markets will still be extremely important,” says Henderson. “The majority of flows still happen in local currencies away from G3.”

Rod Sykes, head of debt capital markets, Asia Pacific at HSBC, points out that “this year you’ve had people doing five or six quarters of funding in one year because the market was shut for a significant portion of last year,” but nevertheless thinks the local currency pipeline is good for next year because of the number of expected redemptions coming up.

Although it’s easy to think of the importance of these markets of having diminished now the financial crisis has passed, that is short-sighted. “It’s easy with the current liquidity of G3 markets to say that local currency is not important, or is less important – that it was just a phase,” says Henderson. “But liquidity in G3 is a volatile beast. The quality of local currency markets is high: it is real economy driven, private wealth, with growing funds under management, insurance and pension funds. It is a real money economy. It’s nice to be able to tap G3 but doing it completely leaves you beholden to global forces. Local currency gives you that escape valve that keeps you out of the worst of the crisis.”