Asiamoney: Why European borrowers are turning to Asia

Asiamoney, April 2013

You are a European borrower and you need to raise funds. European investors are distracted and cash-strapped; US buyers largely want to keep their money at home. So where do you look for investors? Asia, that’s where: where liquidity is plentiful and the biggest challenge is knowing where to deploy it.

That’s an over-simplification, naturally, but it demonstrably has some truth in it. Take France, rocked by a downgrade from its safe haven AAA status two years ago, and unavoidably exposed to the problems of economies further south in Europe. “According to our primary dealers, the share of Asia and Middle East investors in the net buying flows of French nominal bonds increased significantly to 46% at the end of 2012, from 31% at the end of 2011,” says Maya Atig, deputy CEO of Agence France Trésor, which is responsible for French sovereign debt. 31% was already an exceptionally high number, when one considers the far smaller proportion of world debt markets that Asia accounts for; 46% is extraordinary.

And it’s not just France that is seeing this trend. KfW Banking Group, the German government-owned development bank, has seen significant increases in Asian and Middle Eastern participation in its paper. According to data provided by KfW, in 2009 Asia made up 9% of participation in the bank’s euro-denominated paper. In 2010 it was 22%, then dropped back to 16% before leaping to 30% in 2012 and 35% in 2013. In dollars, there has also been an increase, “and importantly we have seen substantial new demand from the Middle East as well,” says Horst Seissinger, head of capital markets at KfW.

At the European Investment Bank in Luxembourg, the most recent benchmark offering, a US$5 billion three-year global launched on February 19, 33% of the deal went to Asia, according to those close to the deal. The launch was timed to come after the Chinese New Year holidays; there was a time when European issuers needn’t have bothered about that.

Why is this? It comes about through a convenient alignment of interests. Asian liquidity is dominated by central banks and sovereign wealth funds, rather than the still-emerging pension fund and insurance sectors. These institutions need to diversify, but particularly in the case of central banks, they are picky about where they do so. Investing in their domestic markets provides no diversification; investing in other Asian markets does, but for the most part, it also raises questions of liquidity and efficiency. So they still have to go to the West. And having gone there, they find themselves confronted by a host of once-secure and now-shaky sovereign credits, so they gravitate, more than ever, to the handful that remain exceptionally strong: the so-called core sovereigns of Germany, France, the Netherlands, the UK, and a second tier of highly rated but less liquid markets like Finland, Austria and Belgium. Names like KfW, Agence France Trésor, and the UK’s gilts market, all benefit.

This is all happening at precisely the same time that the home investor markets for these European issuers have become less reliable, which is why the two sides of the trade – European borrowers, Asian investors – have embraced one another so warmly. France recorded a medium and long-term cost of funding of 1.86% in 2012 – “a record low,” according to Atig. One can safely bet it wouldn’t have been that low without Asian buyers.

Today, it is commonplace for European borrowers to put great effort into courting Asian investors, or at least to making sure they feel loved. “We do not target a particular category of buying investors, because our goal is to secure the high quality of French debt in diversifying as much as possible the investor base in terms of geographical area and category,” says Atig. But “one of our principles is also to be flexible to the demand of investors and seek constantly to ensure the credibility of the French signature to investors. It is true that the trend in the net buying flows from Asia indicates a strengthened interest from this region of the world and that the number of countries ATF has visited in Asia has increased.

“In all cases, we meet very regularly new investors and also traditional investors,” she says. “Regular roadshows and conference calls are an effective way to give them complete information about French debt and its funding strategy, and communicate all the information necessary on the French economy or public finances and policies.” AFT hosts frequent visits in Paris from Asian investors, and has a website with information on data and French debt that is translated into English, Japanese and Chinese.

Other sovereign issuers take a similar approach. At the time of Asiamoney’s interview, KfW is about to hit the road and visit Korea, Taipei, Hong Kong, Beijing, Singapore, Shanghai and Sydney in the following weeks. “There is a lot of activity, and regular meetings with Asian investors,” says Seissinger.

What about further down the credit curve, though? Here, the picture is very different.

Do Asian investors play a role in Spanish treasury paper? “Traditionally they did,” says Pablo de Ramón-Laca, senior advisor at the funding and debt management department of the Spanish Treasury. “But given our rating, it becomes more difficult for them to look at a syndication for Spain. A similar trend can be seen in the secondary market as well.”

“They’ve traditionally been quite important, but in the past year and a half unfortunately have had to reduce some of their positions.”

Prior to Spain’s downgrades, a typical 10-year deal might see “a good 20% participation” from Asia, de Ramón-Laca says. It is now hard to measure precise regional distribution because of a change in reporting systems, but the pattern is clear from another 10-year syndication completed on January 22. Then, Asia fell into a category of ‘other’, which accounted for just 1%. “The change Is very visible. We do have a significant amount more and more from the Middle East, but Asian investors, because of rating constraints, have to concentrate more on core markets – perhaps more than they would like to.”

Spain’s Instituto de Credito Oficial, a state-owned bank attached to the Ministry of Economic Affairs and Competitiveness with the status of a state financial agency, also suggests that the ardour is rather less for lower-rated and troubled European economies. “In 2012, ICO printed only EUR deals, hence the participation of Asian investors in our deals was marginal,” says Rodrigo Robledo, head of capital markets at ICO. In fact, the currency is not the point, as both Agence France Trésor and KfW demonstrate; it’s the rating.

Spain has attempted to keep dialogue open with Asian investors; it receives institutional visitors from Asia in Madrid, and conducts at least one annual roadshow, most recently visiting Asian investors to tie in with the IMF annual meeting  in Tokyo. They say the most recent meetings showed a clear Asian institutional interest in peripheral credits, after the announcement of the availability of outright monetary transactions (OMT), through which the European Central Bank would participate in secondary and sovereign bond markets as a method of financial assistance in order to bring longer-dated bond yields in troubled markets down to levels that allow them to continue to borrow. “We saw the Asian investor base very interested in the opportunities that would be afforded to peripheral sovereign debt with OMT,” says de Ramón-Laca.

“We are getting encouraging ideas and signs from Asian investors, but it will take some work.”

Rodrigo adds: “Based on the long relationship with Asian investors of more than 20 years we are constantly making efforts to keep them informed about the latest developments at ICO and in the Spanish economy.” Asked if ICO specifically targets Asian buyers, Rodrigo says: “ICO never stopped its fluent conversations with Asian investors.” Alongside the IMF annual meetings in Tokyo last year, a delegation of ICO’s top management visited Japanese investors, and also saw big southeast Asian investors in 2012. “This year, another management delegation will visit Japan and China,” Rodrigo says. Then there are the usual SSA meetings, investor emails, conference calls, investor newsletters and so on.

As the Asian investor base matures, this will have knock-on effects for European borrowers. “Japan is the most developed market, and the investor base there is very broad: banks, insurance companies, asset managers and so forth, whereas other markets are still developing,” says Seissinger. “This is especially true for China, where we are very much at the beginning of that development.” As it does develop, though, it increases the pool of capital seeking to be put to work and needing high quality debt to invest in. “I hesitate to believe there will be a substantial change within the next two or three years; it will take time for pension funds in some Asian countries to be allowed to invest in foreign currencies. But, in the long run, our activities in the region will increase.”

The most sophisticated European borrowers have ventured out to Asia to attract investors in their own currencies. Last year KfW raised funds in the offshore RMB dim sum format for the first time. This made sense, since KfW is an active lender around export finance with China, creating a natural need for RMB; it was just a first step, but a significant one. Others may follow in time. “The currency everybody asks about is the RMB,” says Eila Kreivi, head of funding at the European Investment Bank in Luxembourg. “We haven’t yet done anything. It depends on two things. We could use it for lending purposes – we do lend in China – but first we would need a client who wants a local currency loan. Or, if you look at the offshore market, then if that developed in terms of tenor and liquidity of basis swaps, we could do funding there and swap into dollars. But that hasn’t happened yet.”

KfW wasn’t active in Singapore or Hong Kong dollars last year, but was in Australian dollars; besides, Asian investors tend to participate wherever it goes, be it sterling or Scandinavian currencies. Why no Sing or Hong Kong dollars.

“Investors in these currencies are very sophisticated and keen on yield,” says Alexander Liebethal, head of new issues, structured notes and private placements at KfW. “They have the choice to take a risk and get a higher yield; they like to do it.” That’s not an environment in which one seeks safe-as-houses KfW paper. Set against that, Japan does represent a vital part of KfW’s funding sources. “The Japanese investor base is historically up to 10% of our benchmark programs,” says Liebethal. And in yen, KfW is active in two respects: MTNs, and Uridashi for Japanese retail. “We have seen very strong demand over the last two years with the equivalent of Eu2.2 billion respectively in 2011 and 2012. That amounts to more than 2.5% of our funding and clearly has spillover effects. We have a perfect reputation in Japan as a platinum credit, and Japanese investors do pay attention to what we do in other markets.”

The lower-rated European sovereigns also keep an eye on local currencies. “We’ve issued in Asian currencies before: we did a number of private placements in yen in 2010 for very specific investors that wanted Spanish credit,” says de Ramón-Laca. “But the problem the Kingdom of Spain has with issuing in foreign currencies is we are on principle opposed to assuming any currency risk ourselves.” The Treasury must take into account the cost of involved in these swaps before issuing, he says.

Borrowers like these want to appeal to Asian central banks across a range of currencies rather than just euros or dollars, and there are signs of this happening. Seissinger at KfW recalls being in a meeting with an Asian central bank. Five years earlier when he visited, he would just see the central bank’s dollar portfolio specialist, but this time, they were joined by a specialist for euros, then another for Scandinavian currencies, then one for sterling. “The room was crowded with people from the central bank. This is exactly what we are aiming for: we want to demonstrate that we offer a single top credit across currencies.”

In terms of preferred maturity, some patterns emerge. “Asian investors have positions at all points of the French yield curve with a preference for nominal debt, and more precisely debt with medium and long term maturity,” notes Atig, who adds that “quite a number of them are buy and hold, stable investors.” At KfW, Liebethal says that “institutional investors in euros recently focus mainly in the five year bucket, but Japanese investors buy along the entire curve, including 10 year maturity in euros.” In dollars, he says, the focus lately is on three to five years, again with Japanese investors prepared to go longer. “This may be because of the current yield environment. We haven’t seen them in long maturities in previous years.” Rodrigo at ICO adds: “Asian investors are looking for a wide range of products. We try to be very nimble and flexible in order to meet their preferences as much as possible. We are very interested in increasing the participation of Asian investors, and with the latest positive news about the Spanish economy we are really encouraged this is going to happen sooner rather than later.”

Generally, says Seissinger, there is renewed confidence about the euro, and that is driving Asian appetite for top paper here. “It is definitely something where we will see ups and downs. But investors are now convinced that the Eurozone will survive, and therefore are much more confident overall in the market,” he says. But there are no illusions about the challenges Europe faces. “Investors are also aware of the differences among Eurozone credits, and know that on the road to a final solution for the euro sovereign debt crisis, there might be some accidents.”