UBS debt strategy

UBS discusses Asia debt capital markets strategy

Guy Wylie, head of Asia debt capital markets, and Paul Au, head of syndicate for Asia, talk about UBS’s debt strategy as a non-lending bank and what will keep them busy as markets stay volatile.

With European lenders retreating from the region and the cost of capital rising, balance sheet matters more than ever for banks competing in the debt capital markets — as reflected by the dominance of lending institutions in the DCM league tables this year.

But balance sheet is not the only differentiator. We spoke recently to Guy Wylie and Paul Au about UBS’s strategy as a non-lending bank, how it leverages its private banking network and the search for alternative markets as the dollar market shuts off.

Paul Au

How does UBS compete now that balance sheet is so important in winning bond deals?
Paul Au: Our strategy is to use balance sheet selectively and smartly. Being a non-commercial bank, we have to put our capital to work in a way that reaps returns. We are active on a few syndicated and leveraged loan transactions that give us fair economics with potential take-out financing mandates.

When are you willing to use balance sheet?
Guy Wylie: We are keen on financing M&A situations. We want to be involved in transactions that are strategic and support Asian growth, and where there is a large focus on a capital markets take out. PTT Exploration & Production’s original bid for Cove Energy, for which we were asked to provide sole backstop financing, is an example. We are interested in situational financing rather than bilateral or pure balance sheet lending as this gives us a more meaningful return.

How are you leveraging your private banking network?
Au: One of the reasons why we have done so well in the high-yield market year-to-date is because we use our private bank to source mandates and to distribute transactions. Some of our high-yield mandates are originated from our wealth management clients who are also owners and managers of these companies. The private banking distribution channel has been an important one for the entire market this year and it has supported new issues. A lot of wealth is generated in the region and wealthy individuals look for investments that are conservative and less volatile than equity markets. There are products that are semi-tailored for the private bank such as perpetuals, which offer higher coupons but are issued by companies that wealthy individuals are familiar with.

Could you talk a bit more about your debt strategy in Asia?
Wylie: We are not league table driven. What differentiates us from the market place is that we try to choose the right transactions for a team of our size. We are making money on the back of some intellectually structured deals rather than cookie-cutter transactions. We like to be involved in the high-yield deals or transactions with a situational angle, such as the refinancing of an M&A situation.

Second, our China franchise is really important to us. We are one of the few international banks with a licence in China. We’ve done a few significant China debt deals such as Sinopec and Yanzhou Coal, and we are just as proud of China Minsheng Bank’s Rmb20 billion onshore bond, which we led recently.

We believe the China market will become of increasing importance and we are focused on where we can find the best financing for these clients — whether it is an onshore bond or offshore loan or if it is in dollars or renminbi (dim sum). That is what we are always thinking about. There is less demand for capital in China so it is not a loss-making business. We have got long-standing relationships in China through our advisory and IPOs business and we utilise it. That is part of our strategy.

We are very connected between the onshore and offshore market. We sometimes step aside from an offshore issue because we know we have an onshore bond mandate. Our China onshore debt business is miles ahead of other banks — about 50% of our debt business is in G3 and offshore currencies and 50% is from China onshore debt.

We are equally focused on South East Asia, especially Indonesia. We brought first-time issuer Alam Sutera to market this year and we expect continued issuance from the Indonesian high yield market as investors like these credits, given they have tangible asset backing, such as coal deposits or oil and gas fields.

Guy Wylie

What will keep you busy if markets stay volatile during the second half, as they did last year?
Wylie: Our debt business comprises bond origination, strategic loans and derivatives. We also are focused on finding alternative markets to straight US dollars. If we go through a volatile second half in 2012, as we did last year, you will see a need for debt raisings in different products using different currencies. An example is we were the first bank to arrange a Swiss franc bond for a high-rated borrower in Asia and we have quite a few Swiss franc deals now in our pipeline. If the market gets nervous globally, currencies like the Swiss franc and Sing dollars become safe havens and issuance remains open in these markets.

Also we are focused on distribution within Asia. We see the US investor base as being quite volatile. When it shuts down, it tends to shut down all emerging market credits. Having the support of UBS’s private bank in Asia is a key strength. On average, a quarter of the distribution of our deals goes to our private bank. Hence, while not preferable, we are okay with the volatility as when markets turn sour, only a handful of banks can get deals executed whom have knowledge of alternate markets, Asian distribution or a strong private banking franchise.

In terms of activity, we think the flow in the second half will come from China first, mainly from state-owned enterprises, followed by Philippines, Indonesia and Macau. We think Hong Kong will become quieter, as a lot of issuance has already been done.

So if the volatility continues, we have multiple areas to focus on — such as Swiss francs and private placements within our private bank, which is our captive market. We can do pure Asian-focused deals and a good example is the Philippines where the bonds can be placed onshore and into Asia, without relying on Europe or the US. We have a healthy Philippines pipeline for the next three months and we think it will be a major issuer during difficult markets.

Is your balance sheet constrained by the strict regulatory stance in Switzerland?
Wylie: We are constrained to some extent, but our tier-1 capital adequacy ratio is 19% and we probably have the cheapest deposits in the world because there is a strong inflow into Swiss francs. We are well capitalised but there is no point competing on every single bilateral loan. We feel not many people are making a good enough return on capital in the industry. Though we will utilise our balance sheet to support our key clients and our M&A franchise.

Asia dollar bond issuance has chalked up record levels year to date. Will it continue?
Au: We’ve seen close to $60 billion G3 bond issuance year-to-date, which is a record amount. The market has had a strong run. A lot of issuers tapped the market during the first half as they took the view that the second half would be challenging. This was particularly true for the Hong Kong property companies. For the second half, a lot depends on the situation in Europe and whether we get a more constructive backdrop from Europe, in which case issuance will continue.

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