Why G3 currency borrowers need to pick their issuance windows carefully

Two of the region’s most experienced borrowers explain how to deal with the FX and interest rate volatility besetting global bond markets.

A toxic brew of supply pressure, rising interest rates, portfolio outflows and investor nervousness are making Asia’s G3 bond markets a far harder place for borrowers to navigate their way around than only as recently as last year when they had a full 12-month clear run.

The days of pricing through secondary market spreads are potentially long gone, but successful deals are still possible for those issuers, which prepare the ground carefully as funding officials from DBS and the Republic Indonesia both attest.

The two borrowers rank among Asia’s most experienced and both have accessed the G3 bond markets in recent weeks. DBS completed Singapore’s first tier-2 deal in euros in early April, while the Republic of Indonesia brought forward its annual benchmark offering in dollars and euros by a few months to get ahead of further interest rate rises.

Many other borrowers are adopting the same tactic and fast-forwarding their issuance. But the resultant heavy supply has put pressure on secondary market spreads at a time when asset managers are also worried about investor redemptions.

And then there is FX volatility to contend with, thanks to the strengthening dollar and its impact across the emerging markets. From a secondary market price perspective at least, the contrasting performance of the DBS and Indonesia sovereign bonds, shows that euros appears to be the far safer place for investors to be.

Yeoh Hong Nam, head of wholesale funding at DBS, told FinanceAsia higher volatility had become the norm and borrowers would have to get used to it as financial markets adjust to a rising rates environment. He said this meant “picking windows is going to be incredibly difficult because the triggers of volatility are so unpredictable".

His advice is for borrowers to “complete roadshows and marketing work early, then wait for a steady market window in which to execute.”

Knowing where to fix, or even understand the concept of a new issue premium, is something many borrowers have been struggling with in recent months as their previous pricing power slips away. Nam acknowledges that is  “always somewhat contentious,” but says issuers should try to strike a balance.

“On the one hand, you want to earn investors’ goodwill,” he explained. “But you also need to balance the interests of your shareholders. I feel the best outcome is a modest tightening and stable price performance. You can’t always get that, but we try.”

DBS appears to have pulled that off with its €600 million non-call five-year transaction, which came at a time when subordinated debt was outperforming senior debt across European financial markets.

The bank priced the A3/A+ rated offering at 120bp over mid-swaps with DBS as global co-ordinator and Soc Gen as structuring advisor. At the beginning of May, it was trading just above its 99.718% issue price at par.

Nam said the deal represented an extension of the bank’s efforts to diversify its investor base across currency and geography and is pleased that Nordic banks were accepted as the main pricing benchmark.

One month earlier, DBS also executed its inaugural Australian dollar-denominated tier-2 offering. Nam says that when it comes to accessing markets for the first time, the best approach is a progressive one over a couple of years.

“The steps seem to be to familiarise the investor base with DBS and Singapore, and then to gradually move lower through the capital structure,” he commented. “That’s the process we took in Australia, starting with covered bonds, senior and then tier-2.

“In Europe, we marketed covered bonds extensively and printed two bonds before addressing tier-2,” he continued. “The transaction was also a response to investors we met during the course of our work on covered bonds. A number of them told us that having looked at the DBS story, they would welcome a capital issue.”

He added that developed market investors are a particular focus for the Aa1/AA-/AA- rated bank because “return hurdles in these portfolios are a better fit for highly rated institutions like ourselves".


The Republic of Indonesia targets a different investor base and it is one, which has been having a difficult year thanks to the resurgent dollar. As of early May, the JP Morgan Emerging Market Bond Index Global was suffering its worst year-to-date returns since 1994.

Hence Indonesia and also Sri Lanka, which came to market in April, were fully conscious that they were dealing an increasingly unfavourable backdrop marked, according to EPFR data, by two months of investor outflows from Asia-Pacific bond funds.

So the Republic took a more opportunistic approach than usual to borrowing and fast-tracked its annual benchmark offering, which has typically come in June or July in recent years. The split €1 billion seven-year and $1 billion 10-year transaction came just a few days after Moody’s upgraded the sovereign and the completion of an inaugural $10 billion US SEC filing.

Luky Alfirman is Indonesia’s new director general of budget financing and risk management. He told FinanceAsia that “the appearance of a clear issuance window after the Easter holidays, combined with our ratings upgrade from Moody’s, provided us with the opportunity to de-risk our funding plans against what has proved to be volatile conditions in the past few months".

In this instance, the sovereign’s timing lived up to the director general’s first name, from the borrower’s perspective at least. The dollar-denominated tranche only offered a single-digit new issue premium and hit the market just a few days before Indonesian financial markets took a pounding as dollar-based investors pulled money from emerging market countries with current account deficits.

By the end of April, foreign portfolio investors had withdrawn $2.554 billion from Indonesia’s cash markets year-to-date, forcing the central bank to intervene and prop up the rupiah, which had fallen to a two-year low.

The sovereign’s dollar tranche was particularly badly hit falling four points within a week of its launch and staying at that level pretty much ever since. The euro-denominated tranche has fared much better and is still trading a fraction above its 99.804% issue price.

Alfirman said the Republic has been consciously including euros in its annual fundraising targets because it is aware that European investors do not feature as prominently in its dollar-denominated deals as the Republic would like.  

“We’ve been diversifying our funding base towards more currencies and a larger investor base since 2014,” he commented.

He added that the Republic has repeatedly issues in euros because it wants to “send a consistent message to the market and the European investor base".

Next on the cards is a Samurai bond, which the Republic would also like to issue before the end of the first half. That will mark the end of its international fundraising for the current financial year, although Alfirman said the sovereign has been studying new currencies and structures to continue diversifying its funding sources.

He acknowledges that rising interest rates, trade-war rhetoric and geopolitical tensions are “causing much anxiety amongst investors and issuers alike” and caused “investors to become much more discerning about the types of credit they buy into and demand higher new issue premiums".

He said: “Ultimately we don’t have a crystal ball in front of us, so as and when we see a conducive issuance window that allows us to meet our funding objectives, we will react appropriately.”

And he believes that spreads will settle down thanks to Indonesia’s positive ratings momentum. “The Moody’s upgrade reflects the country’s prudent policies, which emphasise macro-economic stability and increase our resilience to external shocks,” he stated.

He said the upgrades (Fitch raised the sovereign rating in December) are lowering overall funding costs at a crucial time for the government as it attempts to boost long-term economic growth through infrastructure spending. “We remain confident of Indonesia’s positive upward trajectory to becoming an A-rated country in the near future,” he remarked.

DBS’ Nam also remains fundamentally optimistic about the future prospects for G3 borrowers, which take a sensible and sensitive approach to the financial markets. “The move higher in US Treasuries appears to have made some real-money hurdle rates easier to hit, so those funds are now looking for opportunities to deploy cash,” he concluded.

¬ Haymarket Media Limited. All rights reserved.
Share our publication on social media
Share our publication on social media