Asset hungry Asian banks have long been blamed for the absence of Asian borrowers in the international dollar bond markets. For most of this year, however, the Yen markets appeared to have escaped their attention, with an ever increasing number of Asian sovereign and semi-sovereign borrowers opting to follow the lead of the Korea Development Bank, which re-opened the sector in November 1999.
For many borrowers, the low absolute coupons on offer combined with the diversification opportunities of a market where investors were flush with liquidity and chasing yield proved a winning mix. So too, for mandate-starved debt capital markets specialists, the Samurai sector seemed to offer a promising new area of business.
But yesterday (Thursday), the Kingdom of Thailand announced that it had decided to scrap plans for a new Y30 billion to Y50 billion ($472 million) Samurai bond, because it said that it could source funds cheaper from the loan markets. Likewise, the National Power Corporation of the Philippines (Napocor) is almost certain to select a Yen syndicated loan over a Samurai bond as its preferred method of financing under the Asian Development Bank's (ADB) Asian Currency Crisis Support Fund (ACCSF).
Bankers conclude that Thailand's decision is hardly surprising given the procrastination which has consistently characterised its half hearted considerations whether to re-establish itself in the international debt markets. Behind the scenes, the constant politicking between the Bank of Thailand and Ministry of Finance over which department should control international borrowing is also said to have played a part in the prospective transaction's demise.
"Aside from price, there were a lot of political reasons," says one banker. "And with elections coming up, the government just decided it would easier if it put the whole thing on hold."
The Kingdom last issued in the international markets just prior to the Asian crisis in the spring of 1997. Raising $600 million from a 7.75% Yankee bond due April 2007, the sovereign achieved a launch spread of 90bp over Treasuries on an issue price of par.
Exactly a year later, it decided to take advantage of the fact that it had managed to hold onto one investment grade rating (BBB- from Standard & Poor's) and issue a $1 billion to $1.5 billion bond. Five months later, after farcical beauty parades which may or may not have led to the appointment of Goldman Sachs and UBS Warburg as joint bookrunners, the government officially abandoned the plan and has looked to its domestic debt markets for funding ever since.
Re-establishing itself in the Samurai market, on the other hand, has been viewed as a sensible move given that Japanese investors have been establishing new lines for the Kingdom since Easter and the sovereign has a number of issues coming up for redemption.
bond market pricing double what could be achieved from a loan
But the main stumbling block to what was going to be a five, seven and ten year deal has been price. In addition to the fact that Thailand's outstanding dollar bond is trading at an artificially tight level, bond houses have simply been unable to compete against the highly aggressive benchmark set by the Electricity Generating Authority of Thailand (EGAT) in the Asian loan markets only two months ago.
On a dollar-libor basis, the BBB-/Baa3-rated sovereign's 2007 issue is trading at about 70bp over, equating to a yen-libor spread of about 45bp to 50bp. Were the sovereign to issue a new dollar bond, however, it would have to pay a considerable premium. As one banker puts it, "The whole issue has been asset-swapped back to Thai baht and sold domestically. One of the reasons why the government hasn't wanted to issue a dollar bond for so long is because it knows pricing would have to be re-set a much higher level."
By contrast, EGAT managed to achieve a seven year tenor in the loan markets at 30bp over Libor, 40bp tighter than where the Kingdom is currently trading in the bond markets. Arranged by ABN AMRO and with a guarantee from the Kingdom, the electricity utility raised Y20 billion at the end of June.
Initial pricing came at 35bp over Libor, but was subject to a sovereign upgrade back to full investment grade status, at which point the coupon would be cut by 5bp. Syndicate banks which committed to Y4 billion and above would also receive a commitment fee of 45bp.
A number of banks and particularly the Japanese, however, believed that the deal had pushed pricing beyond its limits and refused to join. In the end, only Fuji Bank subscribed to Y2 billion and Asahi Bank to Y1 billion, leaving ABN AMRO with the rest.
Japan specialists believe that Thailand has made a mistake, despite the price advantages offered by the loan markets. Says one, "The country doesn't need money and the whole point of the issue was for benchmarking purposes."
Another adds, "There is scarcity of supply in the Samurai market at the moment and even though the Kingdom was pushing for longer tenors than the market can usually take, it would have been successful because it was only trying to raise a small amount and there is strong demand for Thai assets at the moment."
Napocor set to choose loan market
Where the Philippines is concerned, on the other hand, bankers believe that Napocor has made a wise choice to lean in favour of a Yen loan. The government-owned group is in the process of selecting banks from a final shortlist of almost exclusively loan players to launch a $350 million to $450 million 10 year deal to finance its Leyte-Mindanao connection project.
Initially the group had been considering both a yen loan and a samurai bond. Indeed, the Japanese government, which has bankrolled the ACCSF through JGB issuance, is hoping that it will become a springboard through which Asian borrowers will make more active use of the Yen bond markets. The ADB-managed fund was established under the New Miyazawa Plan in September1998 with the aim of helping Asian countries afflicted by the regional financial crisis and Napocor is its first prospective client.
But bankers comment that the project financing nature of Napocor's deal makes it far more suitable for the loan markets. "The main problem is that the borrower needs a staggered drawdown to match the funding needs of the project, but were it to do a bond issue, it would receive proceeds up-front and have to pay all the guarantee fees straight away," one banker explains.
"How to minimise the negative carry this would cause is very hard," the banker continues. "From a pure capital management perspective, it makes absolutely no sense to borrow everything on day one and then only invest part of it."
Shortlisted banks have been given the option of bidding on a deal with either a principal guarantee from the ACCSF and an interest guarantee from the Republic of the Philippines, or one where principal and interest for years one to six are guaranteed by the Republic of the Philippines and from years seven to ten by the ACCSF.
As a pricing comparison fellow government-owned utility PNOC-EDC launched a Y22 billion 10 year deal in the middle of June, with a guarantee from the Japan Bank for International Co-operation (JBIC) which covered 87% of interest and principal.
Led by Bank of Tokyo-Mitsubishi and Nomura, the issue was priced at par with a coupon of 2.37% to yield 40bp over yen-libor.
