Asian dollar bond issuance reached historic levels in 2012. Can we expect the same in 2013?
When we first started talking about 2013, I was very much of the view we would not see a year where volumes would be greater than 2012. I am increasingly of the view that it might challenge 2012 in terms of volumes, simply because of how strong the markets are and how busy we will be in the first quarter of this year. I think we will see a surge of issuance in January and that it could be the busiest month we have ever seen. I would expect rates to stay low for the foreseeable future and the credit environment to remain constructive for the best part of 2013. There is a lot of interest globally in Asia and a huge desire among global funds to allocate more capital to the emerging markets.
I think there will be more debut borrowers in 2013 and a continued focus by borrowers on broadening their financing sources beyond the loan markets. Volume-wise, the syndicated loan market was significantly down in 2012 versus the previous year. At the moment, fixed income capital markets offer such attractive yields that a lot of our customers think this is something they simply cannot ignore.
One of the challenges for us when the bond market is strong is that a lot of our clients who we would be happy lending to have gone to the bond market instead. It is good for the bond business but the bank also wants to have a loan book with three to five year assets that give us interest income. If you are arranging a bond, you are earning fees upfront but you are not getting recurrent income. Fortunately, I think there will be a rebalancing back towards the loan market this year. Concerns about the withdrawal of liquidity by some international banks have eased and I think corporates will be inclined to draw more heavily on loans, which are in many ways a more flexible form of financing.
What is your ability to lend this year? Is it more or less than last year?
The bank has a large, diversified balance sheet which we extend to support our clients as necessary. We’re a disciplined lender but this is a key part of the solution HSBC offers clients and that won’t change.
There was some concern about European banks withdrawing from Asia in 2012, but that has not happened. And for every bank that was thinking of withdrawing, there have been two or three banks — including Chinese, Japanese and Australian banks — looking to grow their balance sheet in the region and use that to win other business.
Liquidity in the loan market this year will be good. The question is whether borrowers will want to go to the loan market or take advantage of what look like some of the best deals in people’s lifetimes in the bond market. That is something that will continue to be on people’s minds especially in the first part of the year, but I do believe there will be a tilt back towards loan financing in 2013. A lot of corporates completed their bond funding plans in 2012 and the loan market is a familiar, flexible source of short term capital for them.
Do you think high-yield volumes will pick up in 2013?
I think this year we will see a lot more high-yield supply from Southeast Asia, particularly Indonesia, as well as continued supply from China. As Indonesia made investment-grade last year, a lot of the Indonesian state-owned enterprises that were considered high-yield in 2011, such as Pertamina and PLN, were not considered high-yield in 2012. So the volumes were down, but that was a technical factor with some of the names going out of the high-yield sector and into the high-grade sector. Strong underlying growth in these economies means corporates are still in expansion mode and we would expect this to translate into improved corporate high-yield issuance in 2013.
UBS cut the size of its fixed-income business last year. Do you expect more banks to do the same in Asia?
Overall, the Asian debt capital markets (DCM) are in very good health and I would be surprised if any bank willingly withdraws from the market. If anything, I think many banks are trying to do the opposite. There is significantly more competition now than there was a year ago, let alone two to three years ago. Competition isn’t just coming from other global banks, but from the super-regional Asian players. It’s clear there are a lot more banks attracted to the debt capital markets, which is not surprising given the explosive growth in volumes we have seen in the last few years.
Is Asia’s debt capital markets business overbanked?
It’s obvious that there are often too many banks on deals. One of the comments I often make to clients is that, in order to have a successful deal, they need fewer banks on a deal rather than more banks. This is probably counter-intuitive, but it’s true. An issuer needs clear lines of communication and accountability. You don’t have that when you have 10 bookrunners, but you do have it when you have two to three bookrunners. If you look at some of the most successful deals of 2012, they were done with very tight bookrunner groups.
But is there still money to be made in debt?
The overall fee pool for debt capital markets in 2012 was bigger than the feel pool for equity capital markets. I can’t remember a time when that has happened before. In the early and mid 2000s, a lot of the ECM [equity capital markets] business was the big China IPOs where the fees for underwriters were pretty substantial because of the very large issue sizes. Banks don’t earn anywhere near that for a single deal on the bonds side and never will.
But there is a fundamental difference between ECM and DCM: There are fewer deals in the ECM market but they often have a higher value, whereas there are a lot more DCM deals — around 900 including local currencies in Asia ex-Japan last year. Asian DCM has become more of a flow business, but you need to have strength across the product range.
If you have to survive purely on G3 and you are not particularly strong in high-yield, then it is not a very lucrative business to be at the moment. But if you can do local currency, high-yield and have the ability to be involved in hedging and swaps, and if you can lend money and distribute that risk, then this is a golden age for DCM in Asia.
What was the revenue breakdown between high-yield and investment-grade for HSBC last year?
Our debt capital markets fee income is quite balanced between high-grade and high-yield. More broadly, revenues from our debt business are well diversified across G3 bonds, local currency bonds and syndicated loans.
You reorganised your team last year. What drove that change?
An important element of our strategy was to improve the connectivity between our debt capital markets business and HSBC’s commercial banking customer base — increasing collaboration across businesses and the revenue we earn from that is a strategic priority for the bank as a whole.
So Rod Sykes, who was head of the debt origination team for Asia, moved on to a commercial banking coverage role and we promoted Wallace Lam to run high-yield capital markets and commercial banking debt origination.
Bringing commercial banking clients to the high yield market is probably an area where we have not been effective enough in the past. In 2011, we did one high yield bond for a commercial banking client. But this investment in collaboration with commercial banking really paid off in 2012: we did nine high yield bonds for commercial banking clients, helping us reach number one in the high yield league tables for the year.
Rod’s move also created an opportunity for Alexi Chan to step up, which means we now have a senior resource in Singapore. This strengthened our management team and helped enhance our focus on Singapore and South East Asia, which has been an increasingly important source of business for us.
Swap costs are expected to rise this year. Will that affect dollar issuance?
The credit valuation adjustment charges are certainly becoming an issue. Banks are now living more and more under Basel III rules. The cost of providing a currency swap will need to be factored into the pricing given to an issuer more than it has before. That could potentially increase the cost of cross-border issuance and mean that some customers will prefer to stay in their local currency rather than going to the overseas market.
Do you expect any other changes in light of Basel III?
I think it will be quite an exciting year for bank capital issuance. We have not seen a lot of Basel III compliant issuance globally yet, although the ICBC deal we did at the end of 2011 was Basel III compliant, as was a trade we did earlier last year for Macquarie.
Over 2012, a lot of borrowers received approval to issue old style Basel II capital securities. This is not going to be possible from this year onwards. While this asset class remains something of an unknown quantity at present, there are a lot of discussions going on behind the scenes between regulators and issuers about what will be possible. It’s clear, though, that bank capital will become more expensive next year as these new-style instruments will have to have loss-absorption features, making them more equity-like.
The question is how quickly these new structures will come to the market and nobody knows the answer to that yet. Ultimately, it is going to be a question of need and most Asian banks are well capitalised. They do not have this urgent need to go to the market to raise tier 1 or subordinated debt.
To the extent they do issue new-style bank capital, I think the national champion banks will issue in their own currency first and try and establish their own structure and premiums in those currencies before using those benchmarks to drive down their premium when they go into the dollar market.
What is your outlook on local currency bonds?
Asian local currency bond issuance will continue to grow strongly. Last year, there was a lot of focus on G3. We went from $70-odd billion to $130 billion, which was a dramatic year-on-year increase. But we shouldn’t lose sight of the fact that the local currency market has been growing 30% a year for the past 10 years and will continue to do that. Local currency volumes will continue to rise dramatically and there will be more growth in Singapore dollars and onshore and offshore renminbi. Just as we saw large companies diversify from dollar loans to dollar bonds, we will also see local companies diversify from local currency loans to local currency bonds.
We expect more cross border local currency issuance to the extent that there is an arbitrage opportunity for issuers. The Singapore dollar bond market offered it last year and we will see if that continues this year. Singapore dollars was a very strong market in 2012, helped by the private banking funds that drove demand. That is not going to change any time soon. Singapore will remain a major private banking hub and a lot of those funds are available in Singapore dollars.