Stephen Williams: China bond market a game changer

The development of domestic debt markets have been the key to preventing a second financial crisis in the region says HSBC’s head of global banking for South East Asia.
Stephen Williams
Stephen Williams

The development of domestic debt markets has been the key to preventing a second financial crisis in the region says Stephen Williams, HSBC’s head of global banking for South East Asia.

As part of its 20th anniversary celebrations, FinanceAsia has been interviewing a series of figures that have helped play a leading role shaping Asian financial markets over the past two decades.

Where the debt capital markets are concerned, no one has more experience than Williams.

He is currently HSBC’s head of global banking for Southeast Asia, having recently moving to Singapore from Hong Kong where he has spent most of his career. In that time he has witnessed the Asian debt markets pass through the trauma of the Asian Financial Crisis and come out on the other side with stronger domestic capital markets.

Here he reflects on a world, which has changed from one where US fund managers did not know where half the region’s countries were on a map to one where machines may increasingly dispense with them all together. 

You’re pretty much the last man standing in Asian debt capital markets since FinanceAsia first published in 1996. What’s been your highlight over the past 20 years?

It would easily be Hutch’s $5 billion blockbuster deal of November 2003. It ranked as Asia’s largest deal for a very long time and it’s the one, which demonstrated how the region had come of age.

It also firmly established Hutch as Asia’s blue chip name, but the deal was never a slam-dunk. Hutch had already completed three deals that year raising $3.5 billion, which was a huge amount at the time.

Then they said they needed to raise further funding for their 3G roll out. Our proposal was to make it a must-have transaction and to do that it needed to be big.

This was the coming of age of the mega bond deal and the strategy worked. They ended up with an order book topping $12 billion and didn’t need to return to the dollar market for a good few years.   

What do you think a borrower as experienced as Hutch could teach many of the debut Chinese borrowers we see in the bond markets these days?

Quite a bit.  Their approach is to be market ready at all times and to maintain good dialogue with their investor base. The have a very good Investor Relations website and see a lot of investors one-on-one.

They also work with strong banks, which are committed to secondary market trading and can deliver global investors for them. They listen very carefully to the advice banks give them, but in return they push their banks very hard.

On each deal, they come up with their “definitions of success” so there’s a very clear understanding about what they expect banks to deliver with each deal.

The KS Li group has a phenomenal brand name.

I remember when I joined HSBC in early 2000 and I’d been on gardening leave for a couple of months. I was in a taxi passing through Central and I saw a long queue of people outside our Asian HQ and half wondered whether there had been some kind of run on the bank.  Actually, they were queuing to buy Tom.com’s IPO.

Another deal you’re very heavily associated with is the world’s first sukuk bond deal for Malaysia in 2002. How did that deal come about?

Malaysia wanted to establish itself as an Islamic hub and it also wanted to come up with a transaction which would be sharia-compliant across the world. Before that, there’d only been short-dated Murabaha transactions from the Middle East.

We already had a strong Islamic practice and a scholar, Rafe Haneef, who worked for us. Right from the beginning it was very clear we needed to come up with a structure, which would meet the requirements of Islamic scholars and work for conventional investors as well.

We came up with a lease-backed structure and I still remember sitting there as Rafe spent about one-and-a-half hours convincing the Islamic scholars in Jeddah it met their standards.

I think we all agreed the structure had some shortcomings. However, the scholars took a pragmatic view and saw it as a step in the right direction.

This was also the first time Malaysia had roadshowed in the Middle East: a region, which hadn’t really diversified elsewhere at that point. One of our chief selling points was rarity value and stability

Then imagine how we felt the day before pricing, when the prime minister who had ruled for 20 years got up at an UMNO conference and out of the blue announced that he was standing down. We managed to print a few days later without altering the pricing, which was a very satisfying achievement.

What direction is the Islamic bond market moving in now?

It continues to evolve and innovate. We’re at a stage now where there’s broad acceptance of Islamic structures.

We’re also moving away from hard assets to more intangible assets such as cash flows. The most recent deal, for example, had tourism receipts backing it.

I think there’ll be other sovereign issuers too. It’s a bit like green bonds. Governments like to be seen to be doing the right thing for their countries.

If you’re a Muslim country why borrow in conventional debt if it’s just as efficient in Islamic format?

I also think we will end up with more equity related issues such as convertibles in Islamic format where issuers and investors share the upside and the downside. These will be much more aligned to the sharia concept of risk sharing.

Most of FinanceAsia’s anniversary contributors have understandably focused on China. But from a G3 DCM perspective the Philippines has arguably transformed the most?

Yes that’s right. The sovereign used to be a serial issuer of small deals that were not well placed or traded.

Now they not only execute very well received benchmark deals, but also complete thorough liability management exercises as well. The process happened gradually and the country’s overall economic performance obviously helped.

But the Philippines has also done a lot to develop its domestic debt market to take the pressure off foreign currency borrowing. In the early noughties it was standard to see Ps3 billion to Ps4 billion deals.

Now you have corporates like San Miguel raising Ps50 billion through perpetual structures.

How important have the development of domestic debt markets been to ensure Asia doesn’t repeat the financial crisis of 1997/8?

It’s been absolutely crucial. The Asian Development Bank deserves a lot of credit for this. Banks like Citi, Deutsche and HSBC have also been at the forefront since we’ve been based in local Asian markets for over a century in some cases.

Our current group chief executive, Stuart Gulliver, ran HSBC’S Asia markets business back then. We had a treasury platform in all of these countries so it seemed logical to bolt on a domestic debt capital markets business onto it.

It took local banks a bit longer to set up primary market platforms up because so many of them were dealing with the fallout of the crisis.

HSBC also had something of an advantage because we were strong in the Hong Kong dollar market and this was right at the forefront of development. This market started becoming more active pre-crisis, then Singapore started to build out a domestic market at the turn of the century.

In retrospect it seems so obvious Asia was heading for a major crisis in the late 1990s. Do you think more people should have realised so at the time?

No one saw it coming. In Indonesia, borrowing in the US dollar bond market cost companies half as much as rupiah bank loans even after factoring in a mild and at that point predictable depreciation.

It seemed an obvious choice to make. But the problem was they hadn’t hedged and when foreign investors exited their currencies fell through the floor.  

How else have the markets changed for the better?

One big change is market velocity. The time between decision, mandate and pricing has dramatically compressed.

It used to take three to four months. Now the more experienced issuers can be in and out in a day.

The broadening of the investor base has also very positive as well. In the 1990s issuers here had to get on a plane to the US to sell their deals.

The presentations always needed to be very simple too. It used to amaze me that a fund manager might be in charge of say $40 billion in funds and yet not even know where some of these countries were on the map, let alone anything about them.

Now there has been a big buildup of US dollar reserves in this region and issuers don’t need US investors so much any more. They can do very large Reg S deals underpinned by Asian investors. That’s a very positive move.

When I first started out we were lucky to lead a dozen deals a year totaling $2 billion. Now there are banks doing $20 billion to $25 billion.

We’ve all become very blasé about $1 billion deals. Five years ago that would have been considered a huge amount to raise. Now they are commonplace.

There’s a lot of debt, but it’s not very actively traded these days.

Yes, although Asia has never been a font of liquidity, in the past banks were more able to deploy capital to support their secondary market operations. Without these buffers we are seeing more dramatic swings in pricing.

What’s your view on Rmb internationalisation? Where will the currency be in 20 years?

It will be bigger than the euro but not as big as dollars by then. Internationalisation is in its early stages and a lot depends on how quickly it achieves full convertibility.

We believe it will happen relatively soon and when the onshore/offshore differential disappears the dim sum market will really take off. It also won’t be long before multinationals are simultaneously issuing in dollars, euros and the Rmb.

Where will those deals be syndicated from – London, Hong Kong, Shanghai?

From a time zone perspective London has huge advantages. But Hong Kong has been playing the leading role.

The development of China’s domestic bond market is going to be the game changer in our lifetimes. Chinese banks will be very powerful players just like US banks have always dominated the US bond market.

But China wants to bring the market up to international standards and so bodies like NAFMII are heavily focused on market development.

International banks can help to do this. Will they ever be a top five bookrunner? Not in the short-to-medium term, but the pie will be so large that it won’t matter.

A large pie, but low fees?

It’s become a fact of life in Asia these days. There’s a lot of undercutting and an increasingly large number of banks on the syndicate for each deal.

It’s critical to secure a joint global coordinator or lead left role in order to earn respectable economics.

Will those traders who’re still left get replaced by machines over the next 20 years?

There’ll be a lot more electronic trading.  But I believe there’ll still be red jackets draped over chairs on HSBC’s trading floor.  

I just don’t think the regulators will be comfortable with machines replacing humans. There’ll still be a role for intermediaries.

Investors like talking to a real person and if there’s one thing a humans want it’s someone else to blame if things go wrong. You can’t blame a computer.

Even if it has been programmed to think freely?

Yes even then.

What about investment bankers? Where will you all be in 20 years?

There’ll still be a role for intermediaries. Big investors like Fidelity or Blackrock and big issuers like Hutch may increasingly deal with each other on a bilateral basis.

But further down the ladder, there’ll be plenty of issuers and investors, which need banks to do the work for them whether that’s preparing documentation or educating them on the risks.

You’ve seen a lot happen over the last 20 years. Will you still be here by the end of the next 20?

I hope not. Mind you, I remember when I was at UBS joining some meetings at the IMF with one of our vice-chairmen. He was in his 90s and still going strong. 

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