Asean+3 bond market handbook 4: issuance

Emerging Markets Asean + 3 handbook

Chapter 4: Issuance

There are signs of improving cross-border issuance into Asean markets, although it is coming off a low base. “It’s already happening,” says Sabyasachi Mitra at the ADB. “You have Korean companies coming and raising money in the ringgit market, and more recently we have seen central banks doing cross-border buying of government bonds in the region. A healthy process has started.”

In Malaysia, for example, the Securities Commission says RM12 billion of bonds and sukuk have been issued by foreign issuers since 2004, comprising multilateral development banks, financial institutions and corporations from Korea, the Middle East, Singapore and India. Notably, there was a period when a series of Korean banks all tapped the markets for ringgit.

Malaysia has particularly differentiated itself through its Islamic development. “Our efforts to make Malaysia an international centre for sukuk issuance and listing are clearly showing results,” says Tan Sri Zarinah. “Issuers are seeing the sukuk as an attractive means for raising capital, while investors are increasingly seeing it as a new asset class in their investment universe. This has generated significant cross-border flows as funds are raised from beyond domestic financial markets and as investors diversify their portfolios into assets from other jurisdictions.” Malaysia, extraordinarily, accounts for 62% of global sukuk issuance; issuers who have come to ringgit for Islamic funding include the International Finance Corporation and the Asian Development Bank.

Clearly, Malaysia’s Islamic strength is unique to it, but many Asian nations see increasing cross-border issuance into their markets. “The interest by foreign issuers to issue in baht has been very strong,” says Thirachai at the Thai Securities and Exchange Commission. “The outstanding value at the end of last year was around US$2.4 billion. It is subject to an annual quota set by the central bank which involves flows of funds in and out of the country; the quota for this year was lifted quite a bit to US$4.8 billion, and we are hoping that there will be stronger interest in issuance in Thai baht.” Previous big foreign issues in baht have included the ADB, JBIC, Citigroup, Deutsche Bank and Korea Eximbank.

In markets like Hong Kong and Singapore, the presence of foreign borrowers is well-entrenched: many multinationals use these markets for currency diversification and, increasingly, for yield. In others, there is little to speak of. “The current currency law by Bank Indonesia does not allow the lending of IDR to non-residents,” says chairwoman Nurhaida at Bapepam in Indonesia. “We’ve received some requests by multilateral agencies to tap the IDR market, but given the current interest rate structure of Indonesia we do not forsee any significant interest in IDR-denominated issuance by a foreign entity.”

From an issuer perspective, there is a lot to recommend it. “I would think there would be more overseas issuance within the region,” says Monish at HSBC, pointing to the CNH market (see box) as an obvious area of growth. “Issuers are trying to create a profile for themselves in different markets to achieve cost effective funding, and at the same time to building a more diverse base of investors other than just the home currency, US dollars and the occasional euro or yen issue.”

But there are challenges, too, and as with the investment community, they chiefly relate to the time-consuming nature of documentation, and the lack of mutual recognition. “To make it work, you basically want corporates to incur minimal costs of extending the issuance cross-border, and to do that, you need mutual recognition, not harmonization,” says Lee. “If you ask an issuer to do a cross-border deal and they have to do regulatory submissions in individual countries as well as obtain a domestic rating in each country, they won’t bother.” This applies to marketing too. Just as for the buy-side, Lee sees the answer as mutual recognition of approvals between Asean+3 nations.”It’s not that difficult: it’s just that the impediments have to be taken away.”

Traditionally FX restrictions have been a big issue, and they obviously still are with China, but in many cases – such as Malaysia – they have come down. “Before the Asian crisis, the Asian bond markets were extremely well integrated: we had Malaysian banks issuing in baht, Indonesian banks in ringgit, and everything was swapped back,” recalls Clifford Lee at DBS. “Those cleared the market in huge volumes on a daily basis. But after the crisis, all the FX restrictions that were set up became a game changer. Everyone retracted back to their own shells.” Since then, he says, “in terms of true integration it would be very tough: the only open markets are Singapore and to an extent Hong Kong. There is still some way to go in terms of integrating Asian markets: there are a lot of political concerns we have to resolve, and a lot of protectionist features in the market we have to remove before we can truly get that done. As long as there are withholding taxes, restrictions on swaps, and limits on the deepening of the swap market, it’s very difficult.”

BOX: CNH AND PANDA BONDS

Until panda bonds take off in China, issuance by foreigners into RMB is instead happening in Hong Kong, in the so-called dim sum market for offshore RMB issuance. This has evolved since China and Hong Kong’s regulators allowed for wider circulation of the Chinese currency on a test-case basis in Hong Kong’s bond markets. Although the market has technically existed since 2007, the turning point was an agreement in July 2010 that opened it up to all corporate – including multinationals such as McDonald’s and Caterpillar who have since issued RMB bonds to finance operations on the mainland. “The reason for them to tap the offshore market rather than the onshore market is obvious: the funding cost of issuing RMB bonds in Hong Kong is lower than that in mainland China,” says Li at the HKMA. He says banks expect many more issues in 2011.

But this market, too, faces challenges. “The biggest obstacle is the remittance of the proceeds,” says Annie Qiu, head of international business at Citic Securities. “The aim from the Beijing government is to encourage the use of RMB overseas so it can become more international. The reality is that currently the use of RMB in other countries is still very limited, so in the near term you have to allow the RMB to get back into China. But the capital account is still not open in China.” This is why multinational corporate issues have been relatively modest so far. “The biggest hurdle is the cross-border capital transfer, and that’s why you have not seen many multinational companies in this market yet.” On top of that, accounting standards have not yet been issued.

For this reason, she sees greater demand for panda bonds – issuance in RMB onshore from multinationals active in China. Companies are restricted in bond size to 40% of net assets in China, but they are nevertheless increasing keen to have an additional method of funding. “Monetary policy in recent years has been getting tighter and tighter in China,” says Qiu. “It’s getting more difficult for companies to get financing and they need long term funding. So the bond, for them, is another useful channel.” Additionally, local currency funding solves fund mismatch problems in order to support local business on the ground, and gets around the limits on foreign debt quota for foreign investment companies in China. “From all perspectives, foreign investment companies have a real demand for RMB funding in China.”