Looking back on 2003, what were the key trends in the debt markets?
Williams: 2003 was a strong year for the debt markets in Asia with the low interest rate environment driving G3 bond issuance to very high levels. Although we didn't see a great deal of capital expenditure-driven financing, partly because of the problems in the first half of the year created by geopolitical uncertainties and SARS, there was a significant amount of refinancing and terming out of debt.
In the second half of the year there was a belief that interest rates would not stay at such low levels so we saw a lot of pre-financing of debts coming due this year. Hutchison Whampoa's $5 billion issue is a good example of that.
And what of the local currency bond markets?
In the local currency markets we saw the opposite happening. Local currency markets like Korea, Thailand and Malaysia experienced adverse conditions for the first time since the crisis. While they have performed extremely well in a steadily declining interest rate environment, last year that was challenged. Following Greenspan's Humphrey Hawkins testimony there was a spike in Treasuries that had major knock-on effects in markets like Malaysia and Thailand.
The investor base in these markets have been buying fixed rate products but, with the markets being less developed, investors did not have the ability to hedge their portfolios. This meant that when interest rates went up, all they could do was sell.
This led to swings in supply from one month to another, which will continue as interest rates creep higher. This is going to be a challenge for corporates, for the governments who have been promoting these markets and for the banks, which have to decide the best way to raise money for borrowers locally in an increasing rate environment.
Which product will be the possible beneficiary?
Ultimately, the floating rate and bank loan market will be the beneficiary. Because of their liquidity, banks around the region have been the major driver of the Asian bid over the past few years. Now however they may not invest so heavily in the bond market but instead return to the syndicated loan market. This goes hand in hand with corporates being more positive about the economic outlook and feeling more comfortable about taking investment decisions. A lot of the short-term investments may be funded in the loan market.
So are local bond markets going to be marginalized in a rising interest rate environment?
I wouldn't say marginalized, but a lot of the froth has been taken out. The fact is these local currency bond markets haven't had to face a period of interest rate increases. And that will be a major test for them this year. The trends we saw in 2003 look set to continue. Where in some months, for example in Thailand, there was no supply so borrowers will be forced to look to other markets to raise money and the natural one will be the bank market.
So your prediction would be loan volumes - domestic and international - will be up, and local bond volumes will be down?
Yes, domestic bonds will be flat to down.
And the G3 bond market?
Last year was an exceptional year with $36 billion of supply, which was up 60% year-on-year. While we might not get to $36 billion this year, there are still a lot of borrowers looking at the market. So we'll still have a very strong year in 2004.
However, we believe that because of our views on interest rates as well as the equity markets most of that supply will come in the first half. We are coming off a period when it was a good time to raise debt and entering one where it is a good time to raise equity. So the corporates' main focus is shifting to something more strategic in the equity markets. But at the same time the strength of the US economy has surprised many people and very few borrowers are of the view that rates will be lower in six months time so a lot of financing will be front ended.
HSBC has been building up its equity-linked operation. Does that fit into the trend you cited above?
The bank is investing in the equity-linked area. The debt team works closely with the equity desk. And many of the banks' debt originators around the region are in dialogue with clients about equity-linked instruments.
Will volumes improve for structured products?
Structured products will have a robust year in Asia. A lot of it will be done in the local currency markets rather than cross-border. We believe that HSBC is able to add most value in this area by taking structured transactions you see in the international markets and applying them to the local markets. Our structured product team has increased from two people to six over the last year and will increase to eight within the next couple of months.
Returning to international bonds, you think the trend there will be more capex-related in 2003 and less refinancing?
Yes, this will be the general trend. But there is still a large pipeline of bonds maturing this year that will need refinancing too. In addition there will be more corporates raising money for new investment. So it means there will be more diversification in supply.
There will be challenges however. The high yield side will probably suffer because of the rally in the equity markets. A lot of the high yield transactions of the past few years have been driven by private banking money, which has opted not to invest in equities. But with the equity markets now beginning to perform so well private banking money that was going into high yield may now go elsewhere.
Which countries will dominate issuance?
In 2003 it was Korea and Hong Kong. This year Korea will be the largest based on the pipeline. And Hong Kong Singapore and Malaysia will see slightly more supply this year. Indonesia and the Philippines will have to navigate around domestic elections and that will mean financing is either at the beginning of the year or in the second half. It will be a relatively robust year for Indonesia.
And given how spreads from the Philippines have performed in the last few weeks, the Philippines could be off to a strong start too. Pakistan is rumoured to be doing a deal. And the pipeline from India is looking stronger than it has done over the past five or six years.
Is M&A related debt financing going to be a theme this year?
Yes, a strong equity market will embolden companies to be a lot more aggressive in terms of their strategic plans. And we will see a lot more M&A activity in the region. It will be financed in the equity market and to a lesser extent the debt market. There won't be as high a component from the debt side as there was two or three years ago, simply because the equity markets are looking more healthy and interest rates are creeping up again.
How will the weakening dollar affect the markets?
Asian issuance in the past few years has been a US dollar game. For every euro transaction there were10-15 in US dollars. That was driven by the weakness of the euro. Now that has been turned on its head. The belief is the US dollar will continue to fall for the next six months. Issuers are taking the euro market more seriously and investors from Europe are finally feeling they want to put money to work in Asia. The premium demanded by Euro investors versus dollar investors has pretty much been eradicated, which we saw last year on the KDB and Hutchison transactions.
How has HSBC reorganized its debt platform?
We took a look at our business about 18 months ago. While we had significant strength across the region our product was being delivered in a somewhat fragmented way. When clients look to raise money they don't necessarily care whether they do a bond or a loan, they care about the cost of funds. So to have two teams marketing the same product to them didn't always make sense.
So loans and bonds, G3 and local currency, became one team and we strengthened the securitization team. So in each country there is now one point of contact: the head of debt finance who is empowered to deliver all these products. And by topping the debt league tables last year demonstrates that's exactly what our clients want.