What's going on in the local debt markets?

Standard Chartered debt head, Brad Levitt explains why some companies are issuing offshore rather than onshore.

Which local debt markets have been the greatest successes so far for Standard Chartered?

Standard Chartered's greatest successes are in the countries where we first started and had time to develop. So our three biggest success stories so far have been Singapore, Thailand and India.

Singapore and Thailand were the first two countries where we established teams. Subsequent to that, we started the process of building our teams in Malaysia, Hong Kong and the Philippines, and in other countries at varying stages. In India, we were very fortunate to acquire the fixed income team from Grindlays through our acquisition of the bank group. The team has been ranked as one of the top three underwriters for private sector issues in the last few years.

Singapore has been very quiet so far this year.

Yes, it has. Obviously, all of us in the business hope this changes. Key factors are the potential for M&A, privatisation, statutory bond issuance and any refinancing. Last year, there was a large amount of issuance relating to M&A activity.

We think, depending on where rates are, that there'll be an increase in offshore issuers tapping the Singapore market this year. In the first quarter of 2002, we have already completed deals for Pacific Life, Cadbury Schweppes and The Walt Disney Company.

How big was the Disney issue?

The issue for Disney was launched concurrently in Singapore and Hong Kong. Amounts raised were S$100 million and HK$600 million respectively, and maturities were three years in Singapore and five years in Hong Kong.

Were the deals for Cadbury Schweppes and Pacific Life also done in the last month? Because up until March there had only been a couple of private placements done in Singapore.

Yes. In the last month or so there has been a little pick-up in activity. Swap spreads have improved from the issuance side, and also perhaps because of the lack of issuance from the Singapore market itself, there will always be a need for investment alternatives, especially as the institutional investor base continues to grow.

How much of a threat to Singapore's debt markets are these new regulations that allow insurance companies to buy lots of offshore paper and swap it back into Singapore dollars, and treat it as a domestic asset?

I wouldn't really call it a threat. It brings a certain amount of market equilibrium. If institutional investors are able to do that, then they are not able to arbitrage the markets, and it keeps the markets relatively accurate vis-a-vis one another. It's not costless to do, however, and this will result in a certain amount of spread between the onshore and offshore markets. When you do one of these trades, liquidity is somewhat reduced because you have to execute a cross-currency swap with a counterparty, and to unwind that trade it is obviously a little more difficult. So there is a cost in terms of the liquidity quotient.

I think it is good that investors are now able to access both markets, depending on levels of sophistication. In markets across Asia, investors are at different stages in the development of their investment capabilities and a lot of it is improving their back and middle office and being able to account for different types of instruments, do record-keeping and marking to market.

How much less issuance will there be in Singapore this year versus last?

We haven't predicted that it will be substantially down. I believe there will be an increase in issuance in the second half of this year, although maybe that is wishful thinking on my part.

We will probably be down on last year, but not significantly.

Will issuance be up or down in Thailand?

In Thailand, we believe that there will be a similar number of issues this year, but it really depends on some of the larger issuances that come out. There is potential for deals of up to Bt20-40 billion. All you need is a couple of those and then you have a relatively large year for Thailand.

We do see continued development in that market. There are more players now. We have seen both domestic issuers that are the top tier local names. We have also seen some restructured companies, that in their better shape, are coming out with issues. Foreign issuers are also accessing the market via their subsidiaries. For example, we brought an issue out for Primus Leasing, a wholly-owned subsidiary of Ford, last year.

Is there much potential for bank sub-debt deals in the local market?

There is a large potential. Once again, we have to look at the onshore supply-demand quotient, as well as what the local regulations are - ie whether the sub-debt deals are for new capital, or the replacement of an old transaction. We do see this growing.

In the past month or so, we've also seen the potential for both a dollar and onshore convertible bond market. The local market is definitely seeing an increase in the types of instruments.

The issuer and instrument base is growing, but that can't happen without the investor base growing. The key is what investors want, and what their investment capabilities are. Many have strict investment guidelines and parameters.

So can investors in Thailand buy convertibles, or do they have problems doing so?

In Thailand a more popular instrument would be bonds with warrants. If we look at where the equity markets are and the fact that rates are notionally low, there is potential for a quasi-equity market.

After the Asian crisis, there was a real shift to onshore issuance, and the growth of local bond markets. Do you sense in the last six months, that there has been a shift back to offshore dollar issuance?

My personal opinion is that there will be cycles. The Asian crisis brought about a third source of debt capital: the loan market, the dollar bond market, and now the local bond market. It's the third leg. But there will be cycles as to which is the most competitive borrowing source.

We have seen banks become flush with liquidity and this has created the Asian dollar bid and made spreads very tight, compared to similarly rated instruments from the West. We have also seen large Asian issuers (primarily sovereign) launch large US dollar issues.

Each of the local markets are also only so large, and if a large issuer has already issued quite a bit onshore, they may have come to certain limits in terms of achieving set spreads. The offshore spread may then look more attractive.

There has also been a rebalancing. Domestic corporates had been moving to get dollar and G3 liabilities off their books, and have since cleaned up their balance sheets. Now they are taking a portfolio management approach to replacing what remains of their dollar debt with either new dollar debt or local currency debt.

In terms of the maturity of these local markets, how does India rank?

India's onshore market is one of the largest in Asia, based on the sheer number of issuers. Rating agencies there are also fairly sophisticated. Many of the building blocks are in place for a mature market. However, I think that an obstacle to achieving full maturity is the country's infrastructural aspects.

On an offshore basis, there just hasn't been much paper. There are currently certain withholding tax issues that would prohibit an onshore issuer from going offshore, as well as the fact that permissions have to be obtained.

So for India, we're really talking about an onshore market.

So if a company like Reliance wanted to do an offshore dollar bond, what would be the withholding tax issues?

With the current legislation, India's withholding tax is 10%, and if you have that on a dollar issue it makes it expensive - issuers have to raise the coupon to compensate offshore investors.

There are different methodologies to consider, but at the end of the day withholding tax issues make the offshore capital raising exercise more complicated. Furthermore, with strong onshore investor demand in India, domestic issuers are less likely to issue bonds offshore.

Do Indian issues trade around their ratings - meaning, if a credit was downgraded, would the spread change?

Relatively speaking, yes. But actually you really only have highly rated issues (by local rating agencies) belonging to the larger corporates. You don't see many below AA. But India's market is so large, there are quite a number of issuers who have AA or AAA ratings.

What are the onshore regulations you feel are holding India's domestic market back?

It's more infrastructural on the government bond side. Things like, repo markets, borrowing and lending securities - all the pieces that make a market more efficient and help build a good benchmark curve, and allowing secondary trading of corporate issues off that curve. These are currently being developed further.

A lot of people are talking about Korea right now. Any interest on Standard Chartered's part [in the local debt market]?

At this time, Korea is not one of the key markets for our domestic fixed income business. However, we will continue to look out for future opportunities.

Why have you chosen not to focus resources there?

We have chosen to grow the business by building on our strengths and growing slowly but steadily. We hope to eventually leverage on our strengths in the Korean syndicated loans market.

So far we've established capabilities in Singapore, Malaysia, Thailand, India, Philippines and Hong Kong. We do have other target markets, but we've tended to build in one or two markets at a time.

Is Malaysia a market where you feel you are growing well?

In Malaysia, we put our debt capital markets and origination team together just over a year ago. We did two issues there last year. There's a lot of potential, but there's also a lot of competition. I see Malaysia as being a market where there are opportunities for more sophisticated products. It is already a fairly large Islamic securities market and there is also a growing potential for securitizations, whether for real assets or synthetic.

Malaysia already has a futures market. Indeed a lot of the tools are already there and we see this as very encouraging.

You are a big bank in Hong Kong. How serious are you about the Hong Kong dollar bond market?

We are very serious about it. The team was one of the last we established , and we brought in a few more people in the last three or four months. You wouldn't have seen us in Hong Kong two years ago, and now you'll see us more and more, as we step up our efforts there.

Given the dominance of that market by HSBC, does that make it difficult for anyone else to break in?

I wouldn't say it makes it difficult, but it definitely makes life interesting. Depending on which numbers you use they have a market share between 40% and 75%, and even at the lower number that is an amazing achievement. I don't know every market in the world, but that is probably one of the highest for any capital market.

How important to your overall approach is research?

Research is very important to us. We recognise that it complements our fixed income business and we have therefore taken steps to enhance our capabilities in this area. Standard Chartered is an emerging markets bank , so our research centres more on local currency issues versus the fixed income research from other banks which have more of an equity or US dollar focus. The fixed income research capability definitely adds strategic value to our business in all our markets in Asia.

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