The first 10 years of FinanceAsia.com have been topped and tailed by two very different financial crises that share a common underlying theme -- misallocation of credit on a grand scale. When Financeasia.com was launched in June 2000, Asia was still grappling with the fallout of a spectacular regional lending boom that had gone bust. It was a crisis magnified by currency mismatches that crippled companies, which had borrowed heavily in US dollars only to find they could no longer repay debts, which spiralled after foreign investors fled and their country's currency pegs collapsed.
Asia's determination not to be caught in the same trap twice had a number of consequences - one unforeseen. Where previously excess liquidity had been funnelled into the pet projects of Asia's crony capitalists, it was now hoarded by central banks and partially recycled back to the West where it fuelled a new and equally unsustainable consumer credit boom. But Asia in 2007 was better prepared to withstand the new global financial crisis which swept across the world, and that was because it had also been channelling domestic savings into building up local currency debt markets.No country better underlines this trend than the Philippines, which has made huge strides in both the international and domestic debt capital markets over the past decade. In 2000, the country barely had a domestic debt market to speak of. Its government had consequently been forced to become a mainstay of the G3 (dollar, yen and euro) bond markets. But, at that point in time, its eternal quest to plug a budget deficit constantly straining under poorer-than-expected tax receipts, was being undermined by a poor reputation for deal management as well. Hence its major deal of 2000 -- a $1.6 billion cash and exchange offering involving power company Napocor - was badly received.
The deal was mistimed, coming hard on the heels of an escalating corruption scandal involving an associate of then President and former movie actor Joseph Estrada. Investors also said they were tired of the government constantly telling them it had launched its last bond issue of the year, only for another one to miraculously appear the next time spreads tightened.
One decade on, the Philippines still remains in thrall to its colourful politics, with Estrada back contesting a new Presidential election. But the reputation of the country's financing team has entered a completely different league thanks to the hard work and experience they've gained in the markets over the past decade. As Stephen Williams, HSBC's head of Asia-Pacific debt capital markets, puts it: "The Philippines is very disciplined in the way it conducts its bond business these days. It's learnt to choose good market windows and it does deals fast and efficiently, intra-day."
And borrowers now have the option of a domestic bond market as a source of financing as well. In March 2009, for example, the brewer San Miguel opted to make its debut bond deal in the domestic rather than the international bond markets where spreads had ballooned and market access was still difficult. Its Ps38.8 billion ($800 million) deal was four times the size of anything that had gone before it.
Indeed, 2009 was a record year for the domestic Asian currency markets (ex-Japan). Dealogic figures show that $356 billion was raised over the course of the year via 2,176 transactions (excluding asset- and mortgage-backed securities). That was five times the $71 billion raised through the G3 bond markets that year (itself a record) and 15 times the $23 billion raised through local currency markets in 2000 when 370 transactions were priced.
Much of that growth has come from China whose corporate borrowers accounted for about $221 billion during 2009, up from just $3.5 billion at the start of the decade when the government operated an extremely strict quota system. Back then, only large state-owned enterprises (SOEs) were allowed to issue debt and were subject to an approval process that could take up to a year. They also required a bank guarantee before issuance, which effectively killed any credit differentiation between them.
That all changed in the middle of the decade when the government realised it needed a strong domestic bond market to counterbalance the omnipotent banking sector in funding the country's growth. In 2004, for example, the latter accounted for 83% of all financing in China compared to just 1% for corporate bonds.
But the big growth for corporate bonds in China only really came in 2009 when issuance doubled, mirroring a similar jump in bank lending. However, with the exception of UBS, foreign banks haven't been able to take advantage of this issuance bonanza and gaining access to it will be their major challenge of the next decade. The Swiss bank is the only one which has been able to muscle its way up the league tables thanks to its Sino-foreign joint venture, UBS Securities, which it has management control over.
To date, foreign banks have had to limit themselves to a couple of Panda bonds issued by the IFC and ADB in 2005, plus a handful of renminbi-denominated bonds issued in Hong Kong by financial entities incorporated on the mainland.
For the rest of the region, domestic bond markets have provided a valuable complement to Asia's liquid and ultra competitive bank lending markets. And their resilience during the recent global financial crisis has also highlighted that, in some respects, Asia has been able to decouple itself from the rest of the world. During the week in which Lehman fell in September 2008, for instance, global credit markets remained paralysed with fear. But in Malaysia, Maybank was able to raise M$1.1 billion ($344 million) in tier-1 debt to help fund its acquisition of Bank Internasional Indonesia.
The G3 bond markets were to remain closed to Asian issuers from September 2008 until January 2009 and when they re-opened again it was at spreads borrowers hadn't had to stomach since the height of the Asian financial crisis. But it was a short-lived phenomenon, with 2009 characterised by extraordinary spread compression. Take one of Asia's most respected borrowers - the Export-Import Bank of Korea (Kexim). At the beginning of 2009, it had to pay 677.7 basis points over Treasuries to raise $2 billion from a five-year deal with a coupon of 8.125%. Just over a year later, the A1/A rated deal for the quasi-sovereign credit is currently trading around the 141bp level.This article continues on page 2.
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