Asian debt capital markets flourish

Augusto King, head of debt capital markets Asia for Royal Bank of Scotland, talks about market development and the bank's China business.
Augusto King

We have seen another year of record debt issuance in Asia. Why?
Debt issuance has already exceeded $100 billion, compared to $73 billion in 2011. There are several reasons for this record volume. First, the European debt crisis reduced banking exposure to Asian corporates. Corporates therefore need to borrow from regional and local banks, or issue bonds in the capital markets. Local borrowers have asked for US dollar funding from their local banks; as a result, their banks must issue international bonds to obtain such funding.

This is augmented by strong general market conditions where global investors are looking to increase exposure in Asia. The interest rate environment also remains low, making it attractive to issuers to lock up relatively cheap long term funding.

Asia high-yield volume is down; is there a lack of interest from international investors?
That’s correct, Asian high-yield volume is down. In this context, we are referring to issuance by non-investment grade sovereign and quasi-sovereign emerging markets frequent issuers and also the issuance by mid-cap corporates. On the whole, the volume has been around $20 billion per annum over the years. This class of issuance is down this year.

We don’t see a lack of interest here. While investors tend to be biased towards investment grade names, they are prepared to turn to the non-investment grade space for better returns. An example would be the Chinese property companies who have paid up to do their deals and obviously created a certain level of expectation for investors. However, some of the stronger issuers may find the yield requirement by investors too high and seek alternatives in the bank market and their respective local markets.

Where do you see the supply of Asia high yield coming from?
Hong Kong, China and Indonesia historically constitute the largest supply of corporate high yield. There have only been a handful of deals from other Southeast Asian countries and Korea. On the whole, I don’t see the dynamic changing and volume should remain flat or slightly down.

What will the Asian bond market look like in the next five years? Is the current volume sustainable?
In the next five years, there is about $50 billion of international debt maturing per annum by Asian companies in the international debt capital markets. If the interest rate environment remains attractive and liquidity stays abundant, this debt would likely be refinanced in the international debt market. Together with the overseas activities of Asian corporates, the international issuance volume should remain strong.

Apart from that, the local markets would continue to grow as there would continue to be regional and local funding requirement. The big theme is renminbi internationalisation which will drive Asian bond market development to a new stage; China is expected to play a very important role.

Although we have seen good issuance volume, is it still relatively small by international standards?
Well, some say that Asia’s $100 billion annual volume is equal to one good month in the US. Bear in mind, however, the US volume accounts for everything in the domestic market whereas the $100 billion in Asia encompasses only the international deals. If you consider our local markets, the Asian capital markets are quite significant. Our domestic debt capital markets are about 10 times larger than the Asian international debt capital markets — the problem is that not many international banks are active in the domestic markets.

We have recently seen a growth in Singapore dollar bond issuance. How important are the regional debt markets?
Since the 1997 Asian financial crisis, the governments of major Asian economies have made a conscious effort to develop their own domestic debt capital markets as a means of diversifying from external borrowing. Well-known local corporates and financial institutions can now fund their local currency needs in their respective local markets in size and tenor.

These local markets are tailored to serving their own issuers. For example, China is the world’s second largest corporate bond market and yet foreigners can’t issue directly in the country. On the other hand, Singapore and Hong Kong have always been open to foreign issuers. This year, we have seen a very active Singapore dollar bond market for international issuers. This has been largely driven by the abundance of liquidity in the Singapore market — investors are chasing foreign issuers for yield and diversification. The swap market also works to the advantage of the issuers; many issuers issued in Singapore dollar and arbitraged into competitive US dollar rates. Other local Southeast Asian markets, such as Thailand and Malaysia, are also opening up for foreign issuers. They have their own specific restrictions that make them less flamboyant than the Sing market, however.

What about the offshore renminbi? We have not seen significant growth in the offshore renminbi market for large MNCs.
The offshore renminbi market is the only forum for foreign issuers to raise renminbi from the capital markets at the moment. The market for non-Hong Kong/China names constitutes less than 20% of the issuance volume. There is no lack of issuance interest as the offshore market is still friendlier than the onshore market. However, the channels to send the proceeds back onshore are still rather limited, tempering issuance interest somewhat.

Should people pay attention to China’s onshore market?
Absolutely. This is the world’s second largest corporate bond market, with a massive pool of liquidity. Unfortunately, it is not open to foreign issuers at this juncture. Change is on the horizon, however, as Chinese regulators have openly expressed that they are investigating the rules required for Panda bonds issuance. And as part of the blueprint for developing Shanghai into China’s financial centre, the domestic market will have to open up to foreigners.

Isn’t the market there quite messy? And won’t international issuers have to wait a long time?
Well, the overall market is fragmented, as there are three markets where corporates can currently issue bonds. Each market is regulated by different supervisory authorities; hence, rules and regulations can get confusing. RBS has an advantage here — we have a licence to operate in two out of the three markets for corporate issuers and this gives us good local insights. The Chinese regulators know the challenges they face in their home country, and in order to fulfil their overall ambitions for China, they would certainly have to implement changes to the overall platform. Time will tell, but the overall direction encompasses the internationalisation of the renminbi, and the removal of inflow and outflow restrictions.

Since we are on the subject of China, what is RBS’s debt business like there?
RBS’s franchise in China is very comprehensive. We have a fully licensed bank subsidiary in China. We also have a wholly owned leasing company. We have formed a joint venture in the domestic securities market for both debt and equities, and are engaged in two other joint ventures in the domestic trust market and futures business. Taken together, we actually have an established platform in the country where we can do different types of transactions. It is a very interesting and exciting time.

Can you make money in securities joint ventures in China?
My thoughts are that the cost of running a securities business in China is very much biased towards equities. You would need to retain a group of sponsors and their cost is very high. There is also a long approval process for new equity deals.

So far, we have kept a good balance between equity and debt. I actually sit on our securities JV’s board and have been focusing on developing it into a stronger debt franchise. Since our establishment a year ago, we have closed a couple of good debt deals and we have already built a strong pipeline. I am very optimistic with the business there.

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