Bond issuers should move away from Reg-S reliance

Repeat borrowers should also access the Rule 144A market as it offers a much broader investor base and competitive price points, says BofA Merrill.

Bond issuers’ bargaining power will improve if they expand their investor base beyond the Reg-S market, which essentially is the market for debt offerings outside the US by both US and foreign issuers, says Bank of America Merrill Lynch. This is notably true for repeat borrowers.

Fixed-income issuers that register under both Reg-S and Rule 144A – which allows them to tap the US investor base – will benefit, potentially leading to much tighter bond pricings, note debt bankers. This is because there is only so much that the Reg-S market can handle in terms of DCM volumes, which have been growing extensively in Asia.

“For many borrowers, accessing the 144A market makes a lot more sense from a distribution perspective as a means of expanding their footprint and building relationships with investors,” said Hital Desai, director for Asia DCM Syndicate at BofA Merrill at a media briefing on March 14.

Reg-S and Rule 144A transactions do not need to be registered under the Securities Act. However the fact that latter ruling allows issuers access to the US investor base means that Asian companies will need to also file in the US. This translates to more work for debt borrowers that wish to include Rule 144A in their transactions, says BofA Merrill. 

Despite the additional work required, including the Rule 144A investor base into bond sales has several benefits, adds the US bank.

In the past, the pricing disparity between Reg-S and Rule 144A-registered transactions was not very prominent. This was due to the fact that the Asian G3 DCM market was pretty flushed with liquidity, supported by strong risk-on sentiment for emerging market assets.

However, this has changed in recent months. The tapering by the Federal Reserve – which began in December – has triggered a risk-off sentiment, causing investors to be very selective towards their investments in emerging Asia debt.

“Now there are both price breaks and size breaks,” said Devesh Ashra, head of debt syndicate, Asia at BofA Merrill. “Not only is the incremental benchmark size – going above $500 million – beneficial for Reg-S issuers to consider using the 144A market, but there are price breaks as well. So we are seeing much more competitive pricing for issuers focusing on the 144A.”

Expectations of higher US rates have led to bets that hot money flows to emerging market debt would reverse after building up due to quantitative easing.

Money has flowed out of emerging markets with little interruption as foreign investors have withdrawn $45 billion this year from funds that invest in bonds and equities, outpacing $28 billion of outflows for 2013, according to EPFR.

China major driver

China is going to contribute to the majority of the new joint Reg-S and 144A issuance that will come to market, highlights BofA Merrill. This is because the country accounts for a large portion of Asia ex-Japan G3 issuance – accounting for 38% of total volume year-to-date – and has largely dominated the Reg-S market.

For example, Beijing-based Pactera – an IT consulting and outsourcing company – is currently considering a high-yield offering in both Reg-S and Rule 144A. It will have a size of $275 million and a tenor of seven years that will be callable in year three.

The proceeds will be used to finance the Blackstone Group consortium’s proposed acquisition of Pactera Technology, which will be a subsidiary of the issuer after the acquisition or merger, according to a terms sheet seen by FinanceAsia.

“Ultimately, the message for companies looking to raise debt and launch an IPO, is to think global,” said Hital. “We’re advising our clients to consider both 144A and Reg-S to ensure best execution.”

On the other hand, South Korea has been very active in the Rule 144A market, and will continue to be, add the bankers. The country accounts for approximately 31.7% of total Reg-S and Rule 144A type of issuance year-to-date and this is largely due to refinancing needs, note the bankers.

As a result of the deeper reliance on a more diversified investor base, Korea’s Rule 144A transactions have been very well absorbed and they’re trading well inside reoffer rate right now, says Hital.

The volume of Reg-S-only registered transactions in Asia ex-Japan has more than doubled from to $92.9 billion in 2013 from $41.4 billion in 2011, according to Dealogic data. Both Rule 144A- and Reg-S-registered transactions have also blossomed to $55.1 billion in 2013 from $34.4 billion in 2011.


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