Asia bonds Q&A

Asia's bond fundamentals firm, but fees under pressure

We speak to Mark Leahy, Nomura's head of debt origination and fixed income syndicate for Asia ex-Japan, on what will drive the recovery in Asia's bond markets and the outlook for fees.
Mark Leahy, Nomura

What is your outlook for Asia dollar bonds? There have been signs of life, but what does this mean for the remainder of the year?
I’m probably one of the more optimistic voices out there. A number of market participants have been predicting the market will be closed for the rest of the year. I’ve been more positive than that.

The consensus remains that there will be no high yield issuance this year. However, I’m sure we’ll see high yield offshore renminbi deals, and wouldn’t be surprised to see BB or cross-over credits also coming to market. Meanwhile, the investment grade space looks promising both in US dollar and offshore renminbi as can be seen from the great reception of Korea National Oil’s [KNOC] $1 billion issue and China National Petroleum Corp’s Rmb3 billion bond. We’ve also seen good support for high quality investment grade issuers in Singapore dollars. There’s no reason why Asian credit investors won’t continue to follow the trend we’ve seen in the US and support defensive and established issuers.

New issue premia will continue to be material but that’s something the market is getting used to. It’s no surprise that a high-grade Korean credit like KNOC was the first to bridge the valuation gap. Such borrowers are the most market savvy and generally have a long-term perspective. Hence they are more likely to stomach large new issue concessions and understand that the latter are more a reflection of macro risk than their credit strength.

What might be the trigger for further issuance? Would particular candidates allow for the market to open further?
Sensibly priced, defensive and established borrowers will be able to issue but this will remain a buyer’s market. I think investors will take a sequential approach to new deals — preferring lower beta issuers to print and validate prices first before considering less well-known or riskier credits.

Debt bankers haven’t made a lot of money during the past two months. Will this weed out some of the less desirable industry practices — such as fee cutting?
It’s fair to say fees for issuers from India are unsustainable and there has been too much fee cutting in the offshore renminbi and high yield markets. I think the status quo will remain until the usual business reviews at year-end. After that, we may start to see more sensible fees but I do not really expect any fee adjustment to happen soon.

Are banks losing money? 
It’s a very competitive and challenging environment for banks across the board, nonetheless Asia is where the growth is.

After the 2008 financial crisis, banks realised they had to make money and fees went up. Will that be the case now?
There were a few things that helped that happen in 2008. The Korean issuer and bank community took a view that fees needed to reflect global market norms and this discipline remains largely in place. Elsewhere in the region there was also a drive to work with issuers to bring fees closer to global norms, but the emergence of a greater number of underwriting banks eroded that movement as early as 2009. Right now, I don’t see any leadership around a similar initiative. Today, market share is much more broadly split versus 2008 and new markets such as the offshore renminbi have their own competitive dynamics: there are no incumbents yet. All this suggests fees will remain under pressure for the time being.

Will banks become more cautious about agreeing to underwrite deals in current market conditions?
Yes, I think so. At the same time, I think underwriting might play an important role in transactions over the next three to six months. But decisions to underwrite will likely be much more considered now. By that, I mean more selective in terms of credit and more market-based in terms of pricing and fees.

With the slowdown, do you see banks cutting headcount?
Banks are already addressing the slow-down with cost-reduction plans. As an industry, banking has always maintained cost-flexibility with the cycle.

Do you see any players exiting?
Consolidation would be beneficial for the industry, but these processes take time.

What is the outlook for the dim sum bond market and will Chinese banks play a more active role?
The offshore renminbi market is the only market that has remained consistently open in recent months. The Chinese banks will be more active as bookrunners. They have got balance sheet and a lot of their clients will be issuers. The fundamental demand for offshore renminbi is valid and appreciation of the currency is still a strong theme. Meanwhile, the latest directive by the PBoC provides for a much more fluid remittance process and should lead to a strong increase in supply from both international and domestic issuers. The next step is broader access to global investment-grade borrowers starting with those with Chinese businesses and progressing to more arbitrage-driven issuance.

What is going to drive the recovery of Asia’s fixed income markets?
One of the key things we look at is where global funds are allocating assets, how they are adjusting their exposures, as well as the physical location and decision-making authority of investors.

All this suggests that the Asian credit investor base is becoming more important. Global investors have been shifting allocations to emerging markets generally, but more specifically into Asian credit and fixed income. We are also seeing more global investors opening up local offices with delegated decision-making authority. Some of the regional funds that were previously less active, such as the Australian funds, are now stepping up in Asian credits. All these are structural shifts that will support a recovery in the market.

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