IFR deal profiles: ANZ, Kexim, the Philippines, Vietnam

The following profiles appeared in IFR Asia’s Debt Capital Markets report, July 2008

VIETNAM

 There was a time when Vietnam was something of a darling of the global credit markets. No more: worries about the state of its economy have sent investors elsewhere.

In the debt markets, the starkest confirmation of this change in attitude came in June when the sovereign, the Socialist Republic of Vietnam, officially ended plans for a G3 currency issue this year. Last year Barclays Capital, Citi and Deutsche Bank were mandated on a US$750 million global bond, but it had been clear for months that the deal was not going to make it across the line. Vietnam’s finance ministry has indicated that the deal will come back at some stage. But both because of the state of the global credit markets, and Vietnam’s own problems, nobody is expecting that to be any time soon.

Corporate issuance has gone the same way. Rumoured deals from Vietnam National Textile and Garment (US$500 million, through Deutsche), Vinashin Petroleum Investment and Transport (US$200 million) and PetroVietnam have come to nothing.

It’s a far cry from 2005, when a $750 million 10-year bond flew out the door, with orders of more than $4.5 billion. That bond paid a yield of just 7.125% for a new emerging market issuer.

The biggest problem has been the headlong arrival of inflation into what had otherwise been a vibrant economy, which had grown at 8.48% in 2007. Inflation figures for April were 25.2%, a 10-year high. On the back of that data, the currency has been badly hit and spreads have widened dramatically. The trade deficit is growing (although it did narrow in May on the back of a tighter monetary stance) and there are problems in the property market. Some consider the situation to be so bad that a localised version of the Asian financial crisis, with currency devaluation and a painful period of write-offs and recovery, may be on the cards; a Morgan Stanley report outlined exactly this vision in May, causing some alarm among domestic banks and fund managers. Against all this the stock exchange halved in value in the first half of the year.

The domestic bond markets don’t look much better either. In April, the government failed in a fourth consecutive domestic bond auction, with the coupon said to be as much as 100 basis points below the level investors think is fair.

Domestically at least, there are still plenty of borrowers ready to launch when things improve.  Vietnam International Commercial Bank (VIB) got a Moody’s rating, from B1 to Ba2 depending on the structure and term of the issue, in July, having gained approval to sell D3trillion of bonds this year the previous month. Techcombank has also been given approval to sell D5 trillion of bonds this year. And Sacombank has also received approval for domestic borrowing.

And, despite Vietnam’s absence from the international debt markets, domestic deals have got away even in the current environment. Vinpearl Tourism and Trading sold D1 trillion of privately placed three year and five year bonds through Bank for Investment and Development of Vietnam in May; the same month, Vincom Joint Stock Co sold D2 trillion through Vietnam Bank for Agriculture and Rural Development (Agribank).

The big question now is what happens to Vietnam’s economy. While the Morgan Stanley crisis theory remains an outlier view, there is still widespread expectation of devaluation in the currency, although the improvement of the balance of payments position in May does suggest that Vietnam has a good chance of bringing inflation under control. The State Bank of Vietnam raised its base rate by 200 basis points on June 11.

A typical strategist view is to say that things can be fixed, but that investors should still be wary. “Although in our view the authorities are moving more forcefully against inflationary pressures, and we believe we have seen the worst in terms of the deterioration in the trade deficit and rising inflation, the country is not yet out of the woods,” said Nicholas Biddy at Barclays Capital in a June study of the country’s position. He expects at least another 200 basis points of hikes in coming months. “We currently recommend investors err on the side of caution in the case of Vietnamese financial assets.” The state of bank asset quality is a particular concern, which in turn is likely to have an impact on their funding programs and use of the local and international debt markets.

KEXIM

Kexim Bank has been a stunningly active borrower in the capital markets this year. It has been everywhere, from the major currencies to Asian and Latin American local capital markets.

“Kexim is one of the savviest borrowers in the region,” says Sean Henderson, head of debt syndicate Asia-Pacific at HSBC. “They’ve proven again this year they have significant flexibility to consider almost every global market – and that is a lot more complicated than it looks.

“It requires a degree of internal sophistication in understanding a number of different market practises across documentation and execution, as well as an ability to accurately time each currency as opportunities arise.”

Kexim’s most recent adventures have been global. In May it raised a Eu750 million SEC-registered five-year bond through Citi, Deutsche Bank, Depfa, RBS and HSBC – the first euro-denominated deal from Asia in a year. It is understood to be planning a dollar deal, with the five banks to handle it (Barclays Capital, Deutsche Bank, Depfa, Merrill Lynch and Morgan Stanley) already agreed although no firm mandate has been given. Market rumour is for a US$1 billion 10-year global.

It has also issued twice in the Swiss markets, most recently with a Sfr350 million two-tranche fixed and floating rate senior bond in April, led by ABN Amro. It had already issued a five-year in January and has voiced an intention to return regularly. Kexim said at the time that the deal achieved funding around 20bp inside what it would have managed in dollars. Elsewhere, a five-year Y1billion deal went through in February via HSBC, and a seven year HK$375 million trade through Citi the same month.

It has also been active in less obvious funding markets. In April it launched a S$50 million one-year deal through HSBC, increased to S$70 million on demand. In March, it went for the ringgit markets, raising M$1 billion in five and 10-year bonds, placing to 40 local accounts. This was the first issuance by a South Korean borrower in ringgit; RHB led the deal with CIMB and OCBC as joint lead arrangers and Merrill Lynch as global financial advisor. Kexim has a M$3 billion MTN funding programme in Malaysia, so is likely to be back in that market before long.

And it’s not just in Asia that Kexim has been busy. In January it launched a Ps1.2 billion five-year floating rate bond issue in Mexican pesos through Merrill Lynch. This followed a 10-year Ps750 million global last October, again led by Merrill, which was tapped for a further Ps800 million in April this year. Earlier, the bank had taken a foray into Brazilian reals with a series of MTN deals in August 2007. It has even been active in Turkish lira.

This diversity looks set to continue, with the bank approved the right to sell up to Bt3.5 billion of local currency debentures in Thailand in the second half of this year. Once again, it will be a trend-setter: the first Korean financial institution to borrow in the baht market. Also looking ahead, Kexim has filed updates for Y200 billion of issuance between the end of June 2008 and 2010.

“It’s difficult to overstate the value of diversification in the current market,” Henderson says. “Global liquidity is shrinking, and various currencies can open at different times; often a borrower’s ability to lower cost will depend on being able to access the most appropriate market at any one time.”

He adds: “It pays not to overload one particular funding source. If you are too reliant on one market, it increases the risk you’ll eventually get backed into a corner either on a challenging market environment or investor capacity issues, and this adds up to more expensive funding.”

It hasn’t all been plain sailing, though. In April it cancelled a three and five-year Samurai issue two days before it was due to price, after failing to reach the Y50 billion the bank was hoping to achieve. Leads on the planned trade were Daiwa SMBC, Nikko Citi and Nomura. On April 23 the bank put out a statement blaming unfavourable markets, meaning it could not achieve the size or the pricing it wanted, although it is understood that there was demand for at least Y22.5 billion. There has been some conjecture in the markets that part of the problem was the fact that Kookmin Bank had launched a bigger deal, worth Y24.4 billion, just a week earlier in its inaugural Samurai issue, and that Kexim couldn’t countenance a smaller deal than its Korean contemporary. It remains to be seen whether the late pulling of the deal damages Kexim’s ability to return to Japanese investors.

This remarkable activity is to help get through a US$ 5 billion funding requirement for this year, spurred by an announcement in January that Kexim plans to lend W40 trillion this year, the largest amount since the bank’s foundation. There’s more to do, but Kexim has already got much of the hard work behind it.

ANZ

ANZ has demonstrated its strength and sophistication as a borrower consistently through the credit crunch. It says something that, despite ambitious capital raising requirements, it has almost completed its 2008 funding program already without having to pay through the nose for any of it.

So far this year ANZ has raised the equivalent of around A$32 billion. It has been active in euros, dollars, yen, Australian and New Zealand dollars, Swiss francs and Singapore dollars; increasing the period under review to the last 12 months adds several sterling deals to the mix as well.

“Since the onset of the global credit crisis our approach to funding has been to maintain an evenly balanced strategy much as we would do within normal market conditions,” says Rick Moscati, group treasurer at ANZ. “We set a strategy at the commencement of the year, we articulate that strategy to the market, and try to stick to that strategy.” That means not surprising investors with unexpected volumes. “If we say we’re going to do $25 billion of term debt issuance we don’t then do $40 billion or $15 billion. Transparency is very important for investors.”

It seems to have worked. Moscati says that since the credit crisis began, “we have had the opportunity to issue in all major global debt markets. By and large it has continued to be an issue of price.”

Perhaps the most significant was a domestic deal in April. The bank initially raised A$1.35 billion in senior five year fixed and floating rate transferable deposits, in a self-led deal; a day later it increased it by another A$150 million. Pricing, at 128 basis points over the three month bank bill swaps rate for the floaters, and an 8.5% coupon yielding 8.615% with a 128bp spread over A$ mid swaps for the fixed, was not especially cheap but did demonstrate the viability of a market that had been largely inactive for months. A month later, ANZ tapped the bonds again, bringing the total outstanding on them to A$1.75 billion.

It was a very closely watched deal. “There had not been a lot of issuance at the longer end of the domestic curve prior to this transaction,” Moscati recalls. “I think that deal gave the market some confidence: it was at the upper end of our volume expectations and it confirmed the Australian market was working well for domestic issuers.”

Another striking transaction was ANZ’s samurai debut in March. This deal raised Y135.8 billion, or US$1.3 billion, in a three-tranche issue that represented the largest ever yen-denominated bond from Australia. Daiwa SMBC, Mizuho and Nikko Citi were joint leads. “That’s been an important new market for borrowers this year,” says Moscati. “It brings with it some increased diversification, which is always attractive for us.”

This deal was actually cheaper than the Aussie dollar bonds that followed it. A Y37.1 billion three-year fixed rate note had a 1.77% coupon, making 80 basis points over Libor; A five year fixed rate deal raised Y27 billion at 2.07%, or Libor plus 95; and a Y71.7 billion five-year floating rate note was priced at 95 basis points over three-month yen Libor. The five year pricing was equivalent to around BBSW plus 110 basis points, making it 18 basis points cheaper than the Australian trades of the same tenor.

Recent months have also brought benchmarks in euros and dollars. Barclays Bank and Credit Suisse led a Eu2 billion bond for ANZ in May, followed in July by a US$2 billion raising through JP Morgan, Citigroup and Goldman Sachs. “Part of our strategy  is based around executing at least one benchmark bond transaction annually in each of our core strategic markets,” Moscati says. “Traditionally these markets have included the Australian domestic, euro and to a lesser extent the US markets. We have already initiated a strategy to expand this to include all major currencies, including yen, sterling and a greater focus on distribution into Asia.”

ANZ is likely to be quieter in the second half of the year, having already done almost all it needs to for 2008. “We’ve largely completed our 2008 funding task,” says Moscati. “To the extent we issue any larger public deals for the remaining part of this year it will be mainly about pre-funding 2009 requirements, which we expect to be similar to what we’ve done in 2008.”

THE PHILIPPINES

Some decent-sized deals are getting away in the Philippine peso bond market. There’s not much going right in the country’s stock market or economy, but at least it’s clear the local debt markets are maturing.

For example, in May Banco de Oro Universal Bank raised P10 billion, the equivalent of US$235 million, in a bond through HSBC, ING and Standard Chartered. The deal, a public offering of lower tier 2 notes, was originally planned as a Ps5 billion offer but was doubled in size after applications reached five times the initial amount. It flew out the door so fast that the public offer on the bond was ended a week early.

The coupon attracted investors – at 8.5% on the unsecured subordinated notes, it was higher than some other lower tier notes sold this year – but it was not widely priced. Instead, it reflects the growing liquidity in the peso market.

Another example came with a lower tier 2 deal for Philippine National Bank, which raised P6 billion in June in a deal led by Deutsche Bank. This deal, a 10-year non-call five subordinated bond, had drawn Ps8 billion of demand by a week before the scheduled close so, just like BDO, closed a week early. Again, the notes were priced at 8.5%. And while BDO had priced at a zero spread over the benchmark, PNB actually came inside it, pricing at 40 basis points below the Philippine Dealing System Treasury rates.

Other deals, if not quite as tightly priced, have found an enthusiastic following. Rizal Commercial Banking Corp raised Ps7 billion in February, through HSBC and ING, even after lowering its price guidance on the 10 year non-call five issue.

Seeing this, other banks are likely to follow. Metropolitan Bank & Trust is expected to launch a Ps10 billion lower tier two issue in the fourth quarter of this year; it has previously raised Ps8.5 billion in a sub debt issue through ING and Standard Chartered last October. This next one, however, may be partly in US dollars. Additionally, Allied Banking Corp has approved from Bangko Sentral Ng Pilipinas, the Philippine central bank, to go ahead with a Ps5 billion lower tier two offering, with ING understood to be mandated.

An upper tier two deal is also believed to be in the works for Philippine Export-Import Credit Agency – the first major such deal in pesos by a Philippine financial institution. (An upper tier two deal did get away last October, for GM Bank, but at Ps75 million it was not considered particularly significant.) The issue, understood to be slated for the end of the third quarter, is expected to raise up to Ps3 billion.

Aside from the banks, some other groups have been active in the market. National Food Authority raised Ps8 billion in a corporate bond in February, with AB Capital & Investment, Philippine Commercial Capital, Deutsche Bank, United Coconut Planters Bank, Multinational Investment Bancorp and SB Capital Investment lead managing it. Ayala Corp raised Ps6 billion in November, and its affiliate Ayala Land has mandated BPI Capital, HSBC and Land Bank of the Philippines to lead and underwrite a Ps4 billion five year-bond, expected to be launched in August (and, unusually, to list them on the Philippines Dealing & Exchange, as Ayala Corp has also done).

And among foreign issuers, something of a landmark was launched by European Investment Bank, the supranational, in January. It raised a Ps2 billion five-year bond with settlement in US dollars. While not especially large, the deal – led by HSBC – was seen as heralding the start of a synthetic peso market, allowing offshore investors to get exposure to the peso. The issue was mainly taken up by Asian investors but European and American buyers participated too. EIB has previously used a similar model in Indonesian rupiah.

The activity reflects greater local liquidity, a more established benchmark along the curve which makes it easier for other issuers to price off, and also favourable interest rate policy. But it’s really one of the few areas of optimism in the Philippines today. HSBC noted in a recent bond market report: “The Philippines’ unpopular Arroyo administration and the central bank will face an extremely difficult time ahead trying to strike a balance between inflation containment and sustaining economic activity.” Noting high inflation, political uncertainty, poor tax collection and potential revenue shortfalls, HSBC says: “Clearly, the sovereign credit metrics will stay under pressure and investors will be disappointed that the government will have to tap the offshore market to finance its growing budget deficit.”