Institutional Investor: Europe seeks Asian liquidity

Institutional Investor, November 2012

European sovereigns and agencies need money; Asian investors have money they need to invest. This convenient synergy is leading to ever-greater participation of Asian institutional capital in the debt of European borrowers.

The precise numbers vary according to borrower, structure and time, but the one inescapable trend is that Asian involvement in European agency borrowing is on the increase. “It varies a little from one year to another, and also by currency, but in general the Asian investor base is very important,” says Eila Kreivi, head of funding for EIB in Luxembourg. Kreivi says this year, in all currencies, Asian participation has grown to 35% from 30% last year and 20% in 2009.

It’s a similar picture elsewhere. According to Philippe Mills, chief executive of Agence France Tresor, Asian investors’ share in the net buying flows of French nominal bonds increased to 50% at the end of August 2012, from 31% at the end of 2011. And Petra Wehlert, head of new issues for public markets at KfW, says that in euro benchmark bonds, the proportion of Asian allocation has increased from 10% in 2009 to around 30% in 2010, while in dollars the figure has increased from the 20s to the mid-30s. “Overall we have placed one third of our benchmark programs into Asia this year,” says Wehlert – the equivalent of about Eu15 billion.

Within that, a number of distinctions have to be made. The first is between Japanese buyers and those elsewhere in Asia. “Non-Japan Asia is relatively stable; it’s largely a central bank audience who don’t vary much from year to year in aggregate terms,” says Kreivi. “Japan can change much more from one year to another depending on swaps and spreads. Many Japanese investors look at the value of EUR or USD paper in yen terms versus JGBs or yen-Libor.” It is, though, a far wider range of potential buyers in Japan. “It’s been banks, city banks, regional banks, insurance, pension funds – not just one type of investor but a bit of everything,” says Kreivi.

Others see a similar distinction. “Traditionally the central banks play the most important role in the Asian market, whereas the Japanese market is more diversified, with a lot of institutional investors from asset managers and insurance companies to banks,” says Alexander Liebethal, head of new issues, structured notes and private placements at KfW. He does, though, see an evolution in the non-Japan Asian base. “My impression is things are developing here,” he says. “In Asia, there is private wealth ahead on the horizon, and this might lead to a more diverse variety of investors in the future.”

Mills at AFT speaks of a broader investor base in Asia. “Central banks, sovereign funds or other public entities, who are buying high quality sovereign debt to diversify their foreign exchange reserves, are the main buyers of French debt,” he says. “There are also banks, life insurers, asset managers, pension funds and corporates. Our investors come from a lot of different countries: Japan and China of course, but also Singapore, Hong Kong and Southeast Asia.”

The further development of the Asian institutional investor base will have an impact on European borrowers, since it will affect the type of paper that can be sold into Asia as well as the quantity. “The evolution of our investor base is a constant point of attention for us and our policy aims at satisfying a large diversity of categories and geographical areas,” says Mills.

While we wait for that diversification of investors to occur, there are certain patterns about the type of debt that sells best. “Different products sell in different markets,” says Liebethal. “If you aim for Asia, they are more likely to buy up to five years.” Wehlert adds: “The central banks used to buy very short paper, but the main segment of them have moved from there to the five year part of the curve.” In a recent five-year euro deal from KfW, 46% of demand came from Asia, and 43% in a five-year dollar deal. “It shows that demand is very high at the moment compared to the past, and it is especially remarkable on the euro side,” she says. “Central banks have to buy low risk assets and the universe of AAA assets is shrinking.”

Kreivi sees the same trend. “If you look at the central banks this year, everyone has gone longer,” she says. “If they had been in three years before, they’re now probably more interested in five and seven.” Mills says that “Asian investors have positions at all points of the French yield curve”, with a preference for nominal debt (BTAN, OAT), and in particular debt with a medium and long term maturity. He says many Asian investors are buy and hold, helping to stabilise French debt.

Borrowers tend not to speak of seeking out Asian investors, but they’re certainly welcome. “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 Mills. “However, we’ve been very active in Asia for years, meeting new investors and traditional investors to give them complete information about France and French debt. We also receive a lot of visits from Asian investors in Paris.”

So what’s the appeal? Isn’t Europe in a mess? As Wehlert points out, “if we look at the European debt crisis we might expect Asian investors to be more reluctant to buy euros. On the other hand, they are very interested in the AAA space. It is remarkable, to my mind, that their share in euro paper is increasing in spite of the markets we face here, but this is currently especially because of KfW’s safe haven status.”

Outside of euros and dollars, Asian participation varies. Kreivi says Asia’s role in sterling deals is very low; Wehlert says it is a major force in Australian dollars. Yen can be useful, but is market driven. “As a borrower, most of us international managers do not need yen for funding purposes, so the attraction of direct JPY funding depends on the basis swap and the spreads,” says Kreivi. Liebethal says the yen market has been active for KfW “for more than a quarter of a century”, but in percentage terms its importance has declined from 4% over the last decade to under 2% this year, partly because of low yields in japan and partly because KfW has grown so much in other markets, diluting the percentage yen accounts for. “We are a market leader in the uridashi markets, but nonetheless there is an upper threshold of what we can sell to Japanese investors in reach,” he says. “Yet it is a well established market for KfW, with reliable investors who appreciate our credit quality.”

And what of Asian currencies? Europeans do not tend to issue a significant amount in these markets, though that may change. “We have been talking about the depth of the Asian capital markets, and it is of crucial importance for KfW to be part of that success story,” says Liebethal.

In particular, the growth of the RMB as an international currency has obvious appeal; KfW made its first issue in offshore RMB earlier this year. “We consider this to be a first step,” says Liebethal. “However, there are still a lot of stones on the road ahead of a true liberalisation of the Chinese capital markets. We closely monitor what’s going on there; we believe this market is of strategic importance for the future. We clearly see an advantage here for KfW and a mutual benefit, because we are already very active on the loan side around export finance.”

Other borrowers are looking at RMB without yet having ventured into the market. “The currency everybody asks about is the RMB,” says Kreivi. “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 depth and liquidity of basis swaps, we could do funding there and swap into dollars. But that hasn’t happened yet.”

The trend of Asian involvement in this debt is likely to continue, if only because the dynamics – European borrowers needing money, European and American investors being less free-spending than they used to be, and Asian investors having money that needs to be deployed – are not going to change any time soon. “I think demand from Asia will stay here,” Wehlert says. “The AAA world is not growing.”