European borrowers bond with Asia

Asian investors are embracing more lower rated European borrowers as the hunt for yield continues.

Marquee European corporates such as Spain’s Telefónica, Britain’s Vodafone and Electricite de France have joined the fundraising rush in Asia, but also lower-rated firms are able to raise capital in the region.

As financial turmoil roiled the West almost a decade ago, banker Alain Gallois could only look on as Asian debt capital markets boomed. Now, having relocated to Hong Kong from Paris a year ago, he is among those looking to broker more deals between potential European borrowers and increasingly cash-rich Asian investors.

Since he was appointed Natixis’s chief executive for the Asia-Pacific region in July 2016, Gallois and his bankers are preparing to bring at least 40 single or double B-rated European companies to Asia. “Investors are being offered a greater selection of credits,” Gallois told FinanceAsia in an interview at the French bank’s harbour-facing office in Hong Kong’s International Commerce Centre, the city’s tallest building.

“We see huge demand for both European high-grade and even BB names as the search for yield remains intact,” Gallois said. “We think the prolonged low interest rate environment will continue in the period ahead, prompting Asian investors to look for yield outside their traditional universe.”

Asian capital markets have changed hugely since the 2008 global financial crisis. Dollar-denominated bond issuance, notably, is booming. Companies in Asia ex-Japan, mainly Chinese issuers, have collectively sold $155 billion-worth of US dollar bonds so far this year.

The wealth effect

Underpinning it all is the explosion in Asian affluence. The total wealth of high net worth individuals in the Asia-Pacific region surpassed that in North America for the first time in 2015, according to a June 2016 report published by consultancy firm Cap Gemini. About 5.1 million wealthy individuals in the Asia-Pacific region held $17.4 trillion worth of assets in 2015, compared with the $16.6 trillion owned by 4.8 million wealthy North Americans, the report said.

This wealth effect is helping to shape how deals are syndicated and banks run their business. UBS, for example, has shifted its focus away from the capital-intensive investment banking and put more emphasis on expanding its wealth management operations after restructuring its business model in 2012.

Meanwhile, regional investor demand for bonds remains robust, despite the supply deluge. Initially, higher-rated European credits tapped into this by placing more of their global Reg S/144a deals into the region. But Gallois said lower rated European borrowers are increasingly following suit. 

One striking example of this trend in action was a $600 million 6.875% perpetual bond for commodities trading and logistics group Trafigura, which came to market in March. Asian private banking demand was a big driver for the unrated deal and ended up accounting for 40% of the final distribution, with Europe take the remaining 60%.

Formosa bound

One of the most well known pockets of Asian demand lies with Taiwanese life insurers. Since 2014, they have been lapping up so-called Formosa bonds – bonds sold in Taiwan by foreign companies, but denominated in major currencies such as the US dollar.

“[The] Formosa market offers an attractive window for European companies, including French and Spanish utility companies, to lock in long-term funding in Asia,” Gallois told FinanceAsia.

The Taiwanese market has been an important adjunct for global borrowers since the country’s Financial Supervisory Commission redefined Formosa bonds as domestic debt in 2014. This freed up local life insurers to buy more foreign debt and has provided foreign borrowers with an alternative source of long-term capital.

Taiwanese life insurers have been keen on Formosa bonds as a counterpoint to the low local yields on offer in the domestic market and the high liabilities they face from legacy products. Most issues they purchase have a minimum credit rating of single A or higher.

Historically, large global financial institutions such as UBS and Deutsche Bank have been the biggest Formosa bond issuers, raising more than $80 billion over the past three-years.

But in the past 12 months, big European corporates such as Spain’s Telefónica, Britain’s Vodafone and Electricite de France have joined the fundraising rush. Big American names such as Apple and Verizon have also issued benchmark deals too. 

European borrowers in China's domestic bond market
Issuer Total Value $ (m) Nationality Bookrunner
Volkswagen Finance China Co Ltd 582 Germany China Construction Bank Corp - CCB;
CITIC Securities
Daimler AG 145 Germany Industrial & Commercial Bank of China - ICBC;
Bank of China
United Co Rusal plc 145 China China International Capital Corp Ltd
Credit Suisse (London) 73 Luxembourg Credit Suisse
Svensk Exportkredit AB (Swedish Export Credit Corp-SEK) 58 Luxembourg Barclays
Total: 1,002    

In sum, global corporates raised $24 billion of Formosa bonds in the first five months this year, accounting for nearly half of the $48.3 billion raised in all of last year according to Dealogic figures. Formosa bonds, overall, are now estimated to account for a third of Taiwan’s NT$12 trillion ($396 billion) bond market.

That said, the market faces a probable pause in supply thanks to a rule change, which took effect in mid-June. The Financial Supervisory Commission’s Insurance Bureau announced that future deals have to be callable or redeemable after five-years.

The Taiwanese regulator adjusted the rules to provide a better asset-liability match for the insurance industry. For while Formosa bonds generally have long-dated 30-year maturities, most have non-call three structures, which means they get called away early, leaving insurers with a mismatch.

“What it does mean is that…there will be less chance of having bonds called as frequently, so flow will be smaller,” said Rick Chan, a portfolio manager at Pimco, told FinanceAsia.

But Mark Liu, head of global markets for Taiwan at Societe Generale, said he expects to see more foreign financial institutions sell subordinated debt to meet their capital requirements. He estimated financial issuers could end up with equal amounts outstanding in senior and subordinated Formosa bonds over the coming few years.

Yet the Taipei-based banker also added: “The Formosa market will continue to grow, but investors’ appetite has started to wane because they’ve reached their portfolio limits.”

However, as one door closes (or is at least ajar) another one typically opens. And most bankers, issuers and investors are looking to Taiwan’s next door neighbour, China, which houses the world’s third largest bond market. 

So far this year, issuance has been limited. As Dealogic figures show, there have been just a handful of deals raising a shade over $1 billion.

But it is not likely to stay that way for long, with Asia set to become a true third leg for the world’s global borrowers.

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