Ahead of the opening of Citi's seventh annual Asia Pacific Investor Conference in Hong Kong today, FinanceAsia spoke with the bank's co-heads of markets for Asia, Rodrigo Zorrilla and David Ratliff. They discussed their outlook for capital markets and the bank's plans for its Asian markets business.
What is your outlook for capital markets issuance in 2010?
Ratliff: We've already seen a significant pick up in issuance of equity and bonds, with over $53 billion raised in just the first month of the year from Asia-Pacific issuers, up more than 50% from last year, making it the second biggest January for issuance on record. Transaction volumes have also doubled to over 200 issues in January.
You are already seeing themes that will dominate in some of the transactions that have priced or are currently in the market -- active issuance in the financial institutions space. Financial issuance will continue throughout the year across the debt and equity markets, notably out of China. Other countries that will we busy will be Australia, Korea and India. You are also seeing strong issuance out of Japan, including the $9 billion equity offering from Sumitomo Mitsui Financial Group.
Zorrilla: We would also expect to see a pick-up in M&A related financings throughout the year. There is appetite there to support M&A transactions that need financing as liquidity improves and market conditions continue to stabilise.
On the bond side, sovereigns have dominated issuance so far. Issuers such as the Republic of Philippines, Republic of Indonesia and the Socialist Republic of Vietnam have raised important capital from the international bond markets.
We would expect to see a pick-up in corporate and high-yield issuance as the year progresses and you are already starting to see issuance and a healthy pipeline develop in the corporate and bank sector.
In equities we've seen active issuance across the region, particularly out of India. Issuance will continue at a steady pace and there is a busy pipeline for IPOs across the region. It will be another healthy year. One month though does not make a year -- we are all aware how fast markets can turn.
And risks do remain, clearly on the US economic front mainly. But Asia underlined its resilience last year when it bounced back quickly and there is an argument to make that while economies have not de-coupled, the liquidity in Asia means you could make a case that Asian capital markets have de-coupled to some degree.
In Asia, what areas will you be hiring and investing in?
Zorrilla: We already have a team of over 1,000 that covers 18 countries in our markets business in Asia-Pacific so we have the platform already. What we are focused on now is to build out our team further across certain areas and countries to support our clients, investing further in key talent.
Our competitive advantage is that we operate in over 100 countries in the world and have an emerging market franchise than is second to none. With this platform we can offer our Asian clients access to our global platform and our global clients access to Asia. We willl be hiring in our hubs in Singapore, Hong Kong, Tokyo and Sydney as well as in the local markets -- we recently added people in Vietnam and Bangladesh for example.
Ratliff: We are also hiring in some of our established markets. For example, in India, we've added seven new hires to the equities sales desk since October, including Keshav Sanghi, who joined in January as deputy head of equities, and Vandana Luthra as a senior equities salesperson.
In many markets we benchmark ourselves against the local banks and we want to be even more local. We are playing an increasingly active role in the local markets -- it is where our clients want and need us to be. We are expanding our Asean capabilities by establishing a brokerage presence in Malaysia and other local markets across the region. Thus we will be hiring locally as we grow further.
We also continue to hire in the commodities space as we launch new products and services for our clients. Our flow business also remains strong, notably FX, where we are seeing a big increase in client flows via our FX platforms, including Velocity, and we will be hiring more support staff in the FX area and the G10 rates business.
With the recent IPO of Russian aluminium producer Rusal in Hong Kong, do you expect more international equity deals in Hong Kong; and for debt, are global issuers still being sold heavily into Asia?
Ratliff: Hong Kong is now firmly established as one of the world's leading IPO centres. In 2009 it was the largest IPO market in the world. We recently led the IPO for South Gobi [a Canadian coal company with mining operations in Mongolia] in Hong Kong that also underlined the attractions of listing in Hong Kong.
We are having several discussions with some of our global clients about listing or spinning off some assets in Hong Kong to tap into the deep pockets of liquidity in the region, so yes, we expect it to be the start of an increased trend.
With this liquidity, global issuers are still seeing a good chunk of their debt deals being sold into Asia -- it varies from 10% to as much as 50% on any given trade. Roadshows from global debt issuers are a regular occurrence in Asia and in many cases it is Asian orders that can sometimes anchor the order book and give momentum to a transaction.
What is the prospect for high-yield issuance in Asia?
Zorrilla: You have already seen a number of high-yield issues across the region in the past few months and we would expect this to continue if markets remain stable. Repeat issuers will return to raise capital for investment plans and some first time issuers are also likely.
A lot will depend on underlying US Treasury rates which due to low yields are helping issuers raise cost-effective capital. But we are confident issuance in the high-yield space could top $10 billion in Asia in 2010 [versus $6.8 billion in 2009, according to Dealogic].
In terms of issuance, it will likely be issuers from China, Indonesia and the Philippines that will provide the bulk of supply, as in previous years.
Bond markets have got off to an explosive start in 2010. What are the risks related to such high volume of activity early on in the year?
Ratliff: It has been one of the busiest starts to a year on record in the debt markets with close to $30 billion of issuance. All the supply has largely met with a good response and has traded well in the secondary market. This underlines the growing investor appetite for Asian credit products and many of these issues have sold globally. Oversupply is always a risk in any market but we do not see signs of this yet.