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30 Years in the Capital Markets

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Debt Capital Markets

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Loans Global Structured Finance

Inaugural Public US$ RegSBenchmark

Australia Sep 2017

Santos

US$800mmSenior Notes

Joint Bookrunner

Oct / Jan 2017

Largest Bond for a MalaysianCorporate Issuer since 2016

US$500mmReopening of

Offering

GlobalCoordinator

US$1,000mmFixed Rate

Notes

GlobalCoordinator

Largest Asian Corporate BondOffering since Alibaba’s Debut

China Nov 2017

Alibaba Group HoldingLimited

US$7,000mmSenior Notes

Joint Bookrunner

Malaysia Oct 2017


Joint Bookrunner

Inaugural USD HY BondOffering in Malaysia

Korea Jul 2017

Kyobo Life Insurance Co Ltd

US$500mmSubordinated Capital

Securities

Joint Bookrunner

First ever International Offeringby Life Insurer in Korea

India Nov 2017

Reliance Industries

US$800mmFixed rate seniorunsecured notes

Joint Global Coordinator andJoint Bookrunning Manager

Lowest Coupon ever Achievedby an Indian Corporate for a

10 Year Issuance

Thailand Jul 2017

PTTEP

Tender Offer,Consent Solicitation and

Hybrid New Issue

Joint Global Coordinator

Asia’s First Like-kind LiabilityManagement Transaction

India Jan 2017

Vedanta Resources

US$1,000mmTender Offer and New Issue

One of the Largest ever AsianCorporate Liability Management

Transactions


US$1,000mmHybrid

Securities

Joint GlobalCoordinator


Joint GlobalCoordinator

China Feb 2017

Asia’s First Indirect “TrustPreferred” Structure and Rare

Senior-Hybrid Offering

Lenovo

China Apr 2017

Bank of China



Multi-tranche and Multi-currencyBond Offering

Australia Sep 2017

Westpac BankingCorporation

US$1,250mmPerpetual Non-Call 10 Year

Securities

Inaugural Offshore Basel 3Compliant AT1 Transaction

Joint Bookrunner

India Apr 2017

HPCL-Mittal Energy Ltd



Lowest 10 Year Coupon everAchieved by an Indian HY Issuer

China Apr 2017

State Grid Corp of China



Largest USD DenominatedOffering from Chinese SOE

Hong Kong Nov 2017

WTT Investment Limited



First Hong Kong Telecom HY Offering in Over a Decade

Hong Kong Sep / Mar 2017

CK HutchisonHoldings Limited

New Record in terms of NominalSpreads and Curves for CKHH


JointBookrunner


Joint Bookrunner

Equity Capital Markets

Australia Nov 2016

Boral

A$2,058mmFollow-On Offering

Joint Lead ManagerJoint BookrunnerJoint Underwriter

Largest Australia Equity Dealin 2016

Vietnam Nov 2017

Vincom Retail

US$741mmInitial Equity Offering

Joint Global CoordinatorJoint Bookrunner

Largest Ever VietnamInitial Equity Offering

Singapore Sep 2017

Mapletree Logistics Trust

S$640mmFollow- On Offering

Joint Global CoordinatorJoint BookrunnerJoint Underwriter

One of The Largest S-REITsEquity Fund Raising

in 2017YTD

China’s Largest OnlineAutomobile Retail

Transaction Platform

China Nov 2017

Yixin Group

US$867mmInitial Public Offering

Joint SponsorJoint Global Coordinator

Joint Bookrunner

Largest ever GamingIPO Globally

Korea Apr 2017

Netmarble

US$2,336mmInitial Public Offering

Joint Bookrunner

Taiwan Oct 2017

Hon Hai Precision

US$500mmConvertible Bond

Joint Bookrunner

Highest Conversion PremiumTaiwan CB since 2012

Taiwan Apr 2017

GlobalWafers

US$469mmFollow-On Offering

Joint Global CoordinatorJoint Bookrunner

Largest International EquityIssuance from Taiwan Tech

Issuer since 2012

China Jul 2017

Sunac China

US$517mmTop-up Placement

Joint Bookrunner

Largest Primary SharePlacement in Hong Kong

since 2016

India Sep / Apr / Feb 2017

Max Financial Services

US$358mm3 Consecutive Block Trades

Sole Bookrunner

Consecutive Block TradeExecutions in 2017YTD

India Sep 2017

SBI Life Insurance

US$1,286mmInitial Public Offering

Book Running Lead Manager

Largest FIG IPOin India ever

Australia / Israel Sep 2017

Aristocrat Leisure Ltd./Plarium Global Ltd.

US$425mm (Incremental)US$950mm (Re-price)Acquisition Financing

Sole Lead Arranger andSole Bookrunner

Sole Underwrite of AustraliaUS$ TLB Acquisition Financing

India / UK & Ireland Feb 2017

Intas Pharmaceuticals Ltd.

c.US$750mm equiv.Acquisition Facilities

Mandated Lead Arranger,Underwriter and Bookrunner

Rare Indian OutboundAcquisition Financing

China Mar 2017

Tencent

US$4,650mmTerm Loan and Revolving

Credit Facilities

Sole Coordinator MandatedLead Arranger and Bookrunner

Significant Liquidity Raisedwithin a Short Timeframe

Balance Sheet Support forHeadline Acquisition Followed byLandmark Inaugural Syndication

China May / Jan 2017

Ant Financial Services Group

US$3,500mmSenior Credit Facilities

Acquisition Facility Lead Underwriter, Facility Agent

and Security Agent

Australia Apr 2017

Bain Capital Private Equity /Camp Australia

A$167.5mmLBO Facility

Joint Mandated Lead Arranger,Underwriter and Bookrunner

Leveraged Financing DrivingSuccess in a Highly

Competitive Auction

Australia / USA Mar 2017

Pepper ResidentialSecurities No. 18

US$271.8mm / A$548.2mmNon-Conforming RMBS

Joint Lead Manager

Cross BorderNon-Conforming RMBS

China Apr 2017

Largest Corporate Loan in AsiaPacific for Chinese Tech Giant

Australia Nov 2017

A$651mmPersonal Loans ABS

Joint Lead Manager

Largest AustralianPersonal Loans ABS

Latitude Financial Services

India Jan 2017 / Dec 2016

Reliance Industries

US$2,300mm equiv.Syndicated Term

Loan Facilities

Mandated Lead ArrangerBookrunner and Facility Agent

Stewarding India’s LargestRefinancing in 2017

Groundbreaking Asian Bridge-to-High Yield for Headline

Acquisition

Indonesia Nov 2017

PT Indika Energy Tbk

US$565mmBridge-to-High Yield Facility

Joint Lead Arranger, Bookrunner,Syndication Agent

and Administrative Agent

China Sep 2017 / May 2016

US$226mmRefinancing and Recap Facility

US$126mmLBO Facility

Sole Coordinator, Facility Agent,Security Agent and Hedging Bank

Repeat Sole CoordinatorMandate for LBO / Dividend

Recap

L Catterton / GXG

Indonesia Aug 2017

US$2.0bn SecuredNotes due 2030/37

Largest IG Bond from anIPP in Asia for a Decade

Joint Bookrunner

US$750mm Term Loan

Mandated Lead Arranger andBookrunner

China Apr 2017

7th Auto Loan Secruritizationby Ford in China

Alibaba Group HoldingLimited

US$5,150mmSenior Credit Facilities

Mandated Lead ArrangerBookrunner and Facility Agent

Fuyuan 2017-1

RMB3bn (US$436mm)Auto Loans ABS

Co Manager

Aug

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CM

MY

CY

CMY

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1629643_MUM_IFR_Tombstone_01k.pdf 1 12/7/2017 4:04:09 PM

2 | March 2018 | GlobalCapital Asia: 30 Years in the Capital Markets

GlobalCapital Asia: 30 Years in the Capital Markets

30 YEARS IN THE CAPITAL MARKETS

4 EDITOR’S FOREWORDChina steals the show but all of Asia should take a bow

6 ASIA DEBT CAPITAL MARKETSBeating expectations: Asia DCM is growing by leaps and bounds

12 ASIA LOAN MARKETAsia’s loan market proves resilience but cries out for innovation

16 LOCAL CURRENCY MARKETSAsian local currency debt bonds: work in progress

19 ASIA ECONOMICSMore resilient, more self-reliant, Asia is better prepared for the next crisis

24 ANECDOTESAWOL investors and 26-hour conference calls

27 ASIA BOND ROUNDTABLEThriving investor base changes game but is yet to go green

GlobalCapital Hong Kong(Euromoney Institutional Investor Jersey Ltd), 38/F, Hopewell Centre183 Queens Road East, Wanchai, Hong Kong

Managing director, GlobalCapital group: John Orchard Managing editor: Toby FildesEditor: Ralph SinclairContributing editors: Nick Jacob, Philip Moore

Director: Ruth BeddowsHead of sponsored reports: Annabel Nason

Asia bureau chief: Matthew [email protected]: +852 2912 8075

Editor, GlobalCapital Asia: Rashmi [email protected] Tel: +852 2912 8036

LOANSReporter: Pan [email protected] Tel: +852 2912 8060

BONDSReporter: Addison [email protected]: +852 2912 8076

Reporter: Morgan M [email protected]: +852 2912 6977

EQUITYEditor: John Loh

[email protected] Tel: +852 2912 8073

Reporter: Jonathan [email protected] Tel: +852 2912 8082

GlobalRMB Editor: Paolo [email protected] Tel: +852 2912 8078

Reporter: Noah [email protected]: +852 2842 6979

Publisher: Oliver Hawkins [email protected] Tel: +44 20 7779 7304

Subscriptions: Mark Goodes [email protected]: +44 20 7779 8605

Design and production manager: Gerald Hayes Deputy design and production manager: Kaela BlehoNight editor: Julian Marshall

Directors: David Pritchard (Acting Chairman), Andrew Rashbass (CEO), Sir Patrick Sergeant,, Andrew Ballingal, Tristan Hillgarth, Imogen Joss, Jan Babiak, Lorna Tilbian, Tim Collier, Kevin Beatty

All rights reserved. No part of this publication may be reproduced without the prior consent of the publisher. While every care is taken in the preparation of this newspaper, no responsibility can be accepted for any errors, however caused.

002 Contents.indd 2 3/13/18 12:31 PM

MOBILISING ASEAN’S SAVINGS

“This issuance is a milestone not only for us, but for the entire microfinance industry as well, as it allows us to now access the funds we need to offer more of the financing that people at bottom of our socioeconomic pyramid need.” Mr. Kamrul Tarafder, President and CEO of ASA Philippines Foundation

CGIF connects companies and investors in the ASEAN Bond Markets through the provision of credit guarantees.

www.cgif-abmi.org

“We are excited to collaborate with CGIF on our first bond issue. This transaction demonstrates the positive development of the local bond market, with

participation from reputable and well-recognised investors at an attractive fixed interest rate. This enables us to finance our M&A activities.”

Mr. Nguyen Duc Tai, Chairman of Mobile World


Editor’s foreword

China steals the show but all of Asia should take a bow

It is hard to describe the enormous changes that have taken place in Asia over the last three decades. The startling transformation of China, the rise of a regional trading bloc in Southeast Asia and a series of local, regional and global financial

crises have completely altered Asia’s economic landscape.The capital market landscape has been almost equally transformed. Asia’s local

debt markets undoubtedly have taken on a greater importance, but offshore issuance from the region has been pre-eminent, as GlobalCapital Asia reports in two feature stories on the following pages — on the dollar and local currency debt markets.

What is truly remarkable is how sophisticated the region has become. In 2013, when the then US Federal Reserve chairman Ben Bernanke mentioned reducing quantitative easing, the ‘taper tantrum’ that followed shut Asia’s bond markets for months. In mid-2015, when Greece’s financial crisis rocked the industry, Asian firms held off from issuing for about three weeks.

Fast forward to June 2016, issuers jumped into the bond market within days after the UK voted for Brexit in a referendum. It was the same in November 2016, when Donald Trump was elected US president.

Asia’s economies have learnt from the past and have taken measures over the years to make their markets more resilient — whether by relying more on the regional dollar investor base rather than the international buy-side, or by giving a boost to the local currency debt markets to curtail exposure to foreign exchange risks.

But this doesn’t mean that they have shied away from opening themselves up to the world. China, the focus of so much global attention, has implemented reforms that have made its onshore bond and equity markets accessible to global investors. It has also pushed for the renminbi’s internationalisation, culminating in the currency being included in the International Monetary Fund’s special drawing rights basket on October 1, 2016.

China has certainly stolen the show, but across all of Asia there has been noteworthy progress. India has put in place key reforms to tackle corruption while further opening up to foreign investment, Myanmar launched its stock exchange in Yangon in December 2015 and has since hosted a number of IPOs. Vietnam is still divesting the state’s holdings in some of its biggest conglomerates, while countries such as Indonesia, the Philippines and Malaysia are making strides towards infrastructure development.

There is still a lot more work to be done, particularly to improve transparency and governance in some of the countries and their corporations. But it is worth taking a moment to reflect on the last 30 years and quite how far the region has come in that time.

Rashmi Kumar,

Editor, GlobalCapital Asia

004 Editor's foreword.indd 4 3/13/18 12:24 PM

Size: 297mm x 210mm (3mm bleed)

US$ Reg S MAKING WAVES IN ASIA PACIFICIn today’s shifting financial landscape, factors such as increased global liquidity, Asia’s growing

wealth and the rise of the regional investor base have made the US$ Reg S market an

important source of funding for Asia Pacific issuers.

We anticipate that the Asia Pacific US$ Reg S market will continue to grow by % annually

over the next - years as more issuers recognise the pricing and diversification benefits which

can be achieved in the market.

Backing bold thinkers with big ideas

At NAB, we’re proud to be part of the growth story. We believe in backing our customers with

big ideas, offering our expert advice, funding support, structuring capabilities and global

distribution to bold thinkers that want to have an impact.

Want to know more?

Visit nab.com.au/corporateinsights or speak with Lorna Greene, NAB Director of Debt

Syndicate and Origination Asia at [email protected]

This advertisement has been prepared by National Australia Bank Limited (“NAB”) for information purposes and does not constitute financial product advice.

The information does not constitute, in any jurisdiction, a recommendation, invitation, offer, or solicitation or inducement to buy or sell any financial instrument

or product, or to engage in or refrain from engaging in any transaction. Not all securities, products or services offered by NAB are available in all countries.

©2017 National Australia Bank Limited ABN 12 004 044 937 AFSL and Australian Credit Licence 230686


Asia debt capital markets

sizes were typically in the range of $100m to $300m, with $300m considered large. Most of the time if you wanted to do a high yield deal, you had to go to the US, in the 144A format. But now, in the high yield market, $300m is the base case size for Reg S-only transactions.”

Issuance has certainly exploded, with borrowers from across the region, spanning China, India, Indonesia, Singapore, Malaysia, Thailand and the Philippines, eager to play in the international bond market.

Di�erent tack Perhaps the biggest change has been to the investor base. Asian issuers have gone from pitching their wares to often-cautious global investors to increasingly relying on home-grown demand, particularly the huge demand available from China.

US investors no longer take

up huge chunks of transactions, and neither is a US roadshow a necessity for large deals. Now, liquidity in Asia is more than enough for small and large deals, with some issuers doing away with US accounts altogether.

They are instead putting emphasis on tapping the liquidity in the regional Reg S-only investor base.

This has led to a big shift in the execution strategy for transactions, reducing the time it takes for a borrower to come to the market.

Singapore-based Stephen Williams, head of global banking for Southeast Asia at HSBC, has worked in Asia since 1994, when he moved to the region to head JP Morgan’s credit research group. He executed his first bond transaction in 1994 for a Chinese corporate client.

“The mandate to launch was in hand for four to five months,” he says. “We had in-depth documentation and diligence

There was a time when Asia’s dollar bond market was just a sideshow to the global market, offering little in the way of excitement, sophistication or innovation. How times change, as Rashmi Kumar finds out.

Beating expectations: Asia DCM is growing by leaps and bounds

Few markets have changed as much over the last three decades than Asia’s offshore

bond market. The issuer base has morphed from a handful of sovereigns, a smattering of Korean policy banks and a very rare high yield issuer, to a wall of Chinese property companies, local government financing vehicles and state-owned banks, as well as high yield and investment grade credits from across the region. Structures have become increasingly complex. Covenants have become flexible as ratings have improved.

“The market has grown significantly over the last few years in terms of total volume and deal size,” says Terence Chia, head of Asia Pacific debt syndicate at Credit Suisse. “The pace of growth has surpassed expectations.”

In 1980, G3 bond issuers from Asia ex-Japan sold $55m of debt through two deals, Dealogic data shows. This jumped to about $2.5bn in 1990, before rising to $17bn in 2000. Last year, issuance volumes stood at $348.5bn, the highest on record.

That’s not all. In 1990, the largest deal outside of Japan raised $300m. Last year, Postal Savings Bank of China bagged the largest dollar bond from Asia, netting $7.25bn from a Reg S-only transaction. To date, the biggest issuance is from Chinese e-commerce giant Alibaba Group Holdings, which added $8bn to its coffers in 2014 from a six-tranche transaction.

“When I first became a syndicate banker around 10 years ago, the new issuance market was small,” says Chia, who spent almost 10 years with Citi from 2003 before moving to Credit Suisse. “Deal

Postal Savings Bank of China issued Asia’s largest dollar bond in 2017

006,7,8 Asia dcm.indd 6 3/13/18 12:23 PM

GlobalCapital Asia: 30 Years in the Capital Markets | March 2018 | 7


sessions followed by a very, very long roadshow in the US. Roadshow presentations back then started off with a map of the world showing where the country was that the issuer was from. It’s inconceivable now to think that we needed to include a ‘this is China’ map. But we did!”

He adds: “Presentations also included a few slides delivered by the bank’s economist to set the scene for sovereign risk assessment.”

That was often not the end of it. US investors, who took a long time to get comfortable with the sovereign risk inherent from this part of the world, also often travelled to Asia to meet with borrowers.

That approach has undergone a complete makeover. “The most satisfying thing is that now if you want to do a big bond deal in Asia, you can pick up the phone and call two or three banks and you can be in the market, in some cases, within a few hours,” says Williams.

“You can place the bonds within a few hours and the investors — if they are in Hong Kong — are probably within a mile of your office. You go back 10 years or 20 years and that process would be weeks long and typically involve a series of roadshows or conference calls and be far less efficient and

challenging from a market risk perspective.”

China’s dominance In Asia, as the issuer and investor base has grown, so has the bookrunning group. In the 1990s, deals typically featured one bookrunner and a couple of co-managers.

Even if a firm held the latter role, the economics were reasonably juicy, making that role worth having. If a bank was a lead manager, the share of the fees was vastly bigger given full visibility on the bookbuilding.

That has now changed. An almost $3.4bn senior unsecured bond for China Huarong Asset Management Co, sold at the end of last year, had 25 bookrunners at the helm. Of them, nine banks were the global co-ordinators.

Bloating syndicates have been a feature typical of many Chinese transactions.

For instance, Bank of Zhengzhou’s $1.191bn additional tier one note printed in October 2017 had 24 bookrunners, while China Cinda Asset Management Co hired 23 banks for its $3.2bn issuance in September 2016.

In many cases, the bookrunners and lead managers — mainly Chinese — place chunky orders for the bond in advance, driving pricing talks. This move has come

in for criticism time and again by market watchers, who reckon that market forces are not determining the final sale price.

But indications of interest ahead of launch, and orders from Chinese investors, are not all that bad. Borrowers can hardly be blamed for taking the demand that is available to them. Nor is it just the Chinese lead managers that are putting in bids, bankers argue.

“Global and Asian real money investors have grown in size in Asia over the past few years and this has helped create significant anchor demand for the regional DCM deals,” says Hong Kong-based Amit Sheopuri, managing director and co-head of Asia debt origination at Citi. “We have seen key investors show interest for anything between 10% and 50% of deal sizes, which is a win-win for both issuers and us banks.”

“In addition, even for non-China deals in the region, we are seeing various Chinese investors show interest, thereby adding to the overall liquidity pool.”

Innovation push Mainland borrowers have been front and centre in recent years, stealing much of the limelight. Where the country’s borrowers and investors were minnows in the Asian debt market 10 or 20 years ago, they account for the majority of the issuer and investor base now.

China high yield issuance alone, for example, reached a record high of $35.4bn last year, more than triple the $10bn printed in 2016, shows Dealogic. Issuance has come from every type of credit, such as financial groups, corporations, local government financing vehicles and bad debt managers.

As borrowers from the country flock to the debt market, the sell-side has been forced to adapt to capitalise on the opportunities.

“As the Chinese market has grown, naturally more resources are needed to service that market,” says Credit Suisse’s Chia. “And

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(lhs) Deal value $bn (proceeds) (rhs) Number of deals

Asia ex-Japan G3 DCM volume: from zero to hero

Source: Dealogic

Asia ex-Japan G3 DCM volume: from zero to hero

Source: Dealogic

006,7,8 Asia dcm.indd 7 3/13/18 12:23 PM



markets in the West that is not done here — liability management, switch and intermediated offerings, hybrids and perpetual transactions, including fixed for life structures, among others,” says Citi’s Sheopuri.

“We also had equity-accounted perps for some of our clients which, as you may appreciate, are more aggressive than some of the debt-accounted ones. While these structures have been driven more by Asian investors, even when it comes to marketing deals for some of our global clients, we find that Asian investors including private banks play a key role in the overall distribution of the deals.”

But along with the market’s development over the past three decades, there has been some disappointment — mainly from the fact that the market is so concentrated, say bankers. Dealflow is predominantly driven by China, although there is some issuance from borrowers in Indonesia, Singapore, India and South Korea.

Thai and Malaysian trades are few and far between, meaning bankers and investors have little opportunity for diversification.

Digital disruption? One thing DCM bankers are keeping a close eye on is the potential impact of digitalisation on their businesses.

In January 2017, Commonwealth Bank of Australia sold a sterling-denominated covered bond in which investors and banks, for the first time, used financial services technology provider Ipreo’s Investor Access channel to deliver orders and communicate final allocations.

Whether that will trickle into the Asian debt capital markets, and what impact that will have, however, is still a big question. But the consensus is that DCM bankers and advisers will continue to have a key role in transactions.

“Some things can be automated and some cannot,” says Chia. “Automation makes our life easier. But what can’t be automated is providing advice to clients, both the issuer and the buyside, which is hard for a computer to give. Clients prefer to talk to a human than to a computer. People still appreciate the human touch, especially if they are making important decisions.”

HSBC’s Williams adds that there has been a flurry of interest in the past few years around using technology to allow companies to go out and issue debt on an auction basis, without a bank acting as intermediary.

“It’s fair to say that the jury is still out on the success of these transactions,” he says.

Issuers and investors still want the buffer of a bank to provide the necessary due diligence and handle the documentation. In addition, as regulators become more active in overseeing the market in terms of distribution, intermediaries will be critical in ensuring market dynamics are fair and appropriate, say bankers.

The debt market has changed significantly over the past three decades, and is likely to shift again over the next few years as technology becomes a useful tool for speeding up the time to market. But automation is unlikely to replace syndicate desks in Asia in the foreseeable future. z

one of the main shifts has been in terms of hiring bankers with the right capabilities — Mandarin language skills and local knowledge — to serve Chinese clients.”

As Chinese issuers become more confident in tapping the international buyer base, they have not shied away from testing appetite with aggressive transactions. Almost every week, new and relatively unknown credits have tapped Asia’s liquidity base with a range of trades – perpetual notes, subordinated deals, fixed for life bonds, longer and longer tenors, and ambitious bank capital trades.

Asian corporations, banks and other financial institutions have issued some $103.5bn of subordinated and senior perps since 2010, over $44bn of which came last year alone, according to Dealogic.

Of the 63 corporate perpetual deals priced in 2017, many came from investment grade credits such as China National Chemical Corp, China Jinmao Holdings Group and Power Construction Corporation of China. But high yield names were also in the mix, including Cifi Holdings, Overseas Chinese Town, Yuzhou Properties and Malaysia’s Yinson Holdings.

Bull market tradesFirms such as Li Ka-shing’s Cheung Kong Infrastructure Holdings and Cheung Kong Property Holdings, Nan Fung International Holdings, Regal Hotels International Holdings and Road King Infrastructure have opted for a more aggressive fixed-for-life structure for their perpetual transactions, meaning no step-up margins will be applied to the coupons if the issuer decides not to redeem the notes on the call dates.

Many bankers privately admit these are bull market trades. But more often than not, investors have lapped them up.

“There’s not a single product that’s done in the developed

Terence Chia, Credit Suisse

006,7,8 Asia dcm.indd 8 3/13/18 12:23 PM

3G 4:08 PM

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GlobalRMB is the most authoritative voice on the opening of China’s capital markets to global investors, issuers, and service providers.

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RMB Asia ad A4 2018 v1.indd 1 3/12/18 9:36 AM

The growth in dollar-denominated debt from Asia Pacific ex-Japan over the past few decades has mirrored the region’s development and dynamism. Growth has accelerated in recent years, culminating in a 44% year-on-year increase in issuance in 2017, when volumes hit a new record of $397bn, according to Dealogic.

Over the past couple of years, within this broader trajectory, a new trend has emerged — a shift towards the dollar Reg S format. In 2017, total regional dollar Reg S issuance exceeded $228bn, up 75% from 2016, and we expect the market to expand a further 20%-plus this year.

This shift is a clear sign of a rapidly evolving market. In the past, higher-grade

As the region develops, the dollar Reg S bond market is emerging as the funding vehicle of choice for Asia Pacific corporations, and a key opportunity for regional investors. Its evolution is set to continue.

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

US$

bn

THE REG SDOLLAR BOND MARKETEXPANDING WITH ASIA PACIFIC’S AMBITIONS

SPONSORED STATEMENT

Lorna Greene, Director Origination and Debt Syndication, Asia NAB

Source: NAB

BOND MARKET SCALES NEW HEIGHTSMonthly issuance of Reg S USD bonds in Asia Pacific

GLOBALCAPITAL ASIA: 30 YEARS IN THE CAPITAL MARKETS

issuers from markets like Singapore, South Korea and Australia were active in 144A/Reg S. However, issuers in emerging Asia generally preferred to raise funds in their domestic currency markets, due to lower costs, a smaller regional investment base and limited international investor appetite. In dollar issuance, the 144A market was often prioritised despite its more complex requirements, as US institutional investor participation was seen as critical to demand and deal sizes. The Reg S market was viewed mainly as a source of supplementary funding.

The rising wealth and growing appetite of investors within Asia Pacific means this is no longer the case.

The pool of assets under management in Southeast Asia alone is expected to reach up to $4tr by 2025, according to Deloitte. Asian investors are flocking to the Reg S market as a source of dollar-denominated, high-potential assets in a low-yield global environment. Insurers and pension funds in particular are actively seeking diversification and better returns to support the region’s ageing populations and satisfy their investors’ return expectations.

Greater Asian participation means issuers no longer need to depend on the 144A market for positive pricing or benchmark-sized volumes. Dollar Reg S now provides a relatively straightforward route to a significant pool of liquidity, and more issuers are seizing the opportunity. In India, for example, dollar Reg S-only issuance soared 122% in 2017, versus an 80% rise in 144A issuance.

This trend highlights the growth and

NAB Sponsored Statement.indd 10 3/12/18 9:29 AM

Important Notice

This document has been prepared by National Australia Bank Limited (“NAB”) for information purposes and does not constitute financial product advice. The information does not constitute, in any jurisdiction, a recommendation, invitation, offer, or solicitation or inducement to buy or sell any financial instrument or product, or to engage in or refrain from engaging in any transaction. So far as laws and regulatory requirements permit, NAB, its related companies, associated entities and any officer, employee, agent, adviser or contractor thereof (the “NAB Group”) does not warrant or represent that the information, recommendations, opinions or conclusions contained in this document (“Information”) is accurate, reliable, complete or current. The Information may contain “forward-looking statements”. These forward-looking statements may be based upon certain assumptions. Actual events may differ from those assumed. There can be no assurance that any forward-looking statements will materialise or will not be materially lower than those presented. Except where otherwise indicated herein, the information (including forward-looking statements) is based on information available as of the date of the creation of the relevant document and not as of any future date. All statements as to future matters are not guaranteed to be accurate and any statements as to past performance do not represent future performance. Not all securities, products or services offered by NAB are available in all countries ©2018 National Australia Bank Limited ABN 12 004 044 937 AFSL and Australian Credit Licence 230686.

SPONSORED STATEMENT


increasing sophistication of the market. Regional investors are also becoming more discerning in terms of credit quality, seeking out longer tenors, more stable sectors such as infrastructure, and markets that combine growth and good governance. Nonetheless given the region’s increasing prosperity and thirst for yield, dollar Reg S issuances that are structured and presented in the right way can expect to generate a positive investor response.

Some questions surround the market’s future outlook, in part because its growth has come with challenges. The market is highly concentrated, with China accounting for around three-quarters of annual issuance volume and with Chinese investors being key drivers of demand. But diversity is on the rise, with more borrowers emerging

from countries like India, Japan, Australia and Indonesia. For example, dollar Reg S volume from Australian corporates tripled in the first 10 months of 2017 from 2016, to $2.4bn.

The dollar Reg S market is likely to continue to thrive as it provides an e�icient way to meet both the region’s funding and investment needs. Rapid economic and population growth have left Asia Pacific with a critical infrastructure gap that the Asia Development Bank estimates at $26tr. Market conditions will continue to make debt an attractive means to finance the projects that will address this shortfall. The dollar market will remain unmatched in its ability to o�er liquidity and diversification, as well as relatively attractive returns.

The focus on sustainability will also

provide a new impetus for dollar Reg S issuance. Pressure from governments, builders and users for infrastructure to be developed in a more sustainable way, as well as rising investor appetite for socially responsible assets, has fueled a significant increase in green and social bond issuance, with green bond supply crossing the $100bn mark last year, according to Climate Bonds Initiative.

By meeting investor demands for dollar-denominated, sustainable assets at the same time as issuer’s funding and sustainability targets, green and social Reg S dollar bonds can be an ideal vehicle for Asia Pacific governments and corporates to finance the region’s future needs. This may be just the beginning of the dollar Reg S growth story.

AU %SG %

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JP %

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Source: NAB Source: Dealogic

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Deal value ($m) No. of deals YTD value

THE BIGGEST PIECE OF THE PIEAsia Pacific USD Reg S issuance by country

THE GROWTH OF GREENGreen bond issuance in Asia and the world ($m)

NAB Sponsored Statement.indd 11 3/12/18 9:29 AM


Asia loan market

Asia’s loan market has seen big shifts over the past three decades, with regional banks competing head-on with international lenders and the institutional market gathering pace. But some key ingredients are still missing, writes Rashmi Kumar.

Asia’s loan market proves resilience but cries out for innovation

“Clearly, the regional banks have really stepped up,” says Singapore-based Andrew Ashman, head of Asia Pacific loan syndicate at Barclays. “A few years ago, the league tables were dominated by international banks, but now banks from China, India and Taiwan are regularly featuring in the top positions.”

Musical chairs In 2017, the top five bookrunners in the Asia including Japan region were Mizuho, Sumitomo Mitsui Banking Corp, Mitsubishi UFJ Financial Group, Bank of China and Bank of Taiwan. Standard Chartered ranked sixth, following by State Bank of India, HSBC, Crédit Agricole and Industrial and Commercial Bank of China, shows Dealogic.

Excluding Japan, domestic lenders still dominated the league tables. Bank of China and Bank of Taiwan led the way last year, following by Standard Chartered, SBI and HSBC. Mizuho, ICBC, Korea Development Bank, DBS and ANZ rounded off the top 10.

A quick look at just dollar deals

presents a similar picture. Bank of China was top last year on the bookrunner tables, followed by Mizuho, Standard Chartered, HSBC and ANZ.

Ten years ago, Citi, Barclays and Credit Suisse were among the top five banks. Crédit Agricole, BNP Paribas, SMBC, ING and Bank of America Merrill Lynch featured within the top 10.

This shift is driven by two opposing factors, reckons Ashman. International banks have increased their focus on balance sheet management and returns, which has concentrated their lending activities on core relationships. Asian banks, on the other hand, have increasing levels of liquidity and are in client acquisition mode.

The rising competition has meant more pressure on underwriting fees as an increasing number of firms jostle for mandates.

Falling margins have been a constant complaint among syndicate bankers at least for the past five years. Pricing has compressed across the board, as the combination of weaker

When GlobalCapital Asia asked a senior loans origination banker in Hong

Kong this month about innovation in the syndications market, his immediate reaction was a laugh, describing it as “zilch”.

“One can always bullshit you, but the reality is the market is very limited in terms of innovation,” he says.

He may be exaggerating, but he’s not that far away from the truth. There are many positives in the loan market, but they come more from looking at the numbers rather than the details. In 1980, the earliest year tracked by data provider Dealogic, loan volumes in Asia including Japan totalled $9.6bn. In 2017, loan volumes stood at around $658bn.

“I have worked in banking for 25 years now, so I’ve seen most of the past 30 years,” says loan market veteran Atul Sodhi, who has been with Crédit Agricole since 1997.

He recently took over as global head of debt capital markets for corporates, based in Paris, after having been the bank’s Hong Kong-based head of debt origination and advisory, Asia.

“From a loan syndications point of view, the market has gone from being absent 30 years ago to now being worth around $500bn in volume,” he says. “The headline numbers are huge compared to before.”

Loans bankers in the region have seen some big changes over the years even beyond this rise in volumes. The first is a sharp shift in the banking landscape.

Gone are the days when international banks could expect to always feature heavily on transactions. Now, regional lenders are giving them a run for their money.

Pricing is juicier today. Issuers like MTR paid razor-thin margins in 2001

012,13,14 Asia loan market.indd 12 3/13/18 12:21 PM


Asia loan market

dealflow and flush bank liquidity makes it a borrower’s market. But while bankers like to grumble about margins, they also admit pricing is juicier now than around 15 years ago.

Back then, firms in Hong Kong and Singapore could get away with selling loans at razor-thin levels.

Bankers point to Hong Kong’s railway operator MTR Corp as an example.

When the company raised a Hong Kong-dollar denominated seven year loan in 2001, it offered a margin of 31bp over Hibor. Its last deal from 2016, in comparison, paid 54bp over Hibor for three year money and 64bp for five years.

China’s rise The second big change has been the way Chinese bank lenders are eating into the pie of their international peers.

Bank of China ranked first in the Asia ex-Japan dollar loan bookrunner league table last year, with credit for $8.2bn through 19 transactions, giving it a 8.19% market share, shows Dealogic. In total, three mainland lenders were among the top 20 bookrunners.

In 2016, BOC ranked much lower in ninth place with $3.4bn in credits for a 3.09% market share.

Chinese banks’ rising presence at the table has made the market take

notice, especially as volumes from the country also continue to increase.

“China is such a big market at the moment that there’s plenty of business for everybody,” says Hong Kong-based John Corrin, global head of loan syndications at ANZ, who has been working in the city since 2001. “It will be tougher for foreign banks to compete with Chinese banks as they become more organised and sophisticated, and the Chinese banks are uniquely positioned for their renminbi capabilities.

“The question now is: how will the investment banking and securities development in China play out and will [international banks] get a meaningful share of the market? That’s the key.”

Crédit Agricole’s Sodhi adds: “China is the second largest economy in the world. No way can you have a business strategy that doesn’t tackle it. What it’s meant is that the Chinese component of our business has grown and the focus on growing the China business has become important. But given the competition, at the end of the day it

goes back to the theory of evolution, and the survival of fittest. Banks that find the right niches and adapt will do well. Others will fall by the way side.”

Liquidity from the mainland could also get a further boost if regulations ease up in the country. There are hundreds of Chinese city banks — like Bank of Beijing, Shanghai and Chongqing — which could go international in the future. If they venture offshore, it could unearth a whole host of completely new investors that have never been active before, say bankers.

Development of funds It is not just Chinese and regional lenders that threaten to add pressure to an already over-banked loans market. Institutional liquidity could also be a game-changer.

At this point, that market has not developed much outside of Australia, the most advanced institutional market in the region. There have been Australian leveraged buy-out loans financed by term loan ‘Bs’, as well as by unitranche loans, which blend senior and subordinated risk. But there is growing interest now in Asia — mainly in Hong Kong and Singapore.

“Investors are seeking attractively priced credit in strong jurisdictions, while global sponsors are demanding the documentation flexibilities that are available in the US and European markets,” adds Barclays’ Ashman. “We expect to see a TLB distributed to the Asian market before long.”

Ashman says the emergence of institutional liquidity in the loan market has been the biggest change to come. Insurance companies, pension funds and asset managers have increased allocations to the loan product, seeking the diversification and yield benefits of leveraged loans, he says.

“This development is most advanced in Australia, but we are starting to see the same trend develop in Asia,” he says.

Corrin also reckons there is already some activity from Asian

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Asian loan volumes: growing slowly but steadily

Source: Dealogic

Andrew Ashman, Barclays



Asia loan market

become more sophisticated then we can see improvements or drive towards innovations.”

There are other reasons for the lack of improvements. Banks in the region are driven by completely different motivations as those in most countries, partly because so many of the banks are state-controlled. In India, as an example, State Bank of India will behave differently to ICICI as the latter is privately owned. In China, effectively all the big players are state backed and are, understandably, policy driven and not shareholder driven. In Taiwan, a big chunk of the market is state controlled, as is the case in Indonesia.

In comparison, in places like Hong Kong, Singapore and Australia, shareholder requirements are very significant. “In Europe, aside from the banks that were bailed out in western Europe and became state banks, most of the banks are in the private sector. Most of them have a focus on return on shareholder equity hence distribution, innovation and repackaging is much more important for them,” says ANZ’s Corrin.

It’s hard to say when the tide will turn for Asia but Corrin reckons innovation will come as local banks hire higher calibre international bankers and become more international in time.

“Chinese banks will take time to build out as they are still dominated

by local hires which mirrors Japanese banks some 30 years ago where they started off by hiring Japanese bankers and gradually became more balanced in local and international recruitment,” he says.

Moving with the times There is a good chance that even before that transition happens, loans bankers in Asia will have to tackle another new – and possibly worrying – change: the digitization of the financial industry.

Bankers have already gone through the full gamut of changes in three decades. As Corrin puts it, he was using telex when he first started in the loan syndications market. That quickly moved to fax before emails and transacting through websites emerged. “It has got more sophisticated and the pace of change is going to increase for sure and is going to have an impact on everybody,” he reckons.

The way business is done is certainly going to see an upheaval – all the way from the documentation process to the distribution of deals. Bankers say that lawyers in the loans market are starting to worry about their roles in the future around documentation. Loan sales people will also be in danger if the process can be done electronically.

As is usually the case, the impact on the loan market will be slower than the bond market as the latter is less bespoke and largely rated. On the loans front, improvements in settlement and the use of blockchain will be key.

There will also be a role for technology being used to streamline some of the standardised operational processes such as ‘know your customer’ rules and secondary trading, reckon bankers.

But loans syndications bankers are unlikely to lose their relevance. Ashman says: “The loan market remains a human capital intensive business. We provide advice to our clients; how to raise financing for a large acquisition or how to refinance an upcoming maturity.” z

incorporated funds, as well as some Chinese and Indian funds, with the trend developing “slowly but surely”. But while he thinks the market will see more participation from non-banks, it will not be as active as the European model for many years.

In terms of pricing, loans provided by institutional liquidity are generally priced higher than bank financings. But issuers can reap many benefits that outweigh the costs involved — including doing deals with longer tenors, limited amortisation and more flexible documentation.

What innovation? While this is certainly a step in the right direction for the Asian loan syndications market, and should help deepen the market, bankers say it is not nearly enough to give the asset class a jolt. One big absentee is innovation.

There are admittedly some green shoots. Aluminium company Novelis, part of India’s Aditya Birla Group, in 2017 sealed a $1.8bn refinancing of a US term loan ‘B’ in the Asian market, sticking with a similar structure despite shifting markets.

The deal was the first of its kind and reflected the ability of the region to support trades with thin pricing and US-style covenants.

Bankers also point to Indian data analytics firm Mu Sigma, which completed a $394.3m loan last year — a deal which had originated under unusual circumstances and was from a new sector. It won GlobalCapital Asia’s Best High Yield Syndicated Loan Award for 2017. But with only a handful of examples, there is clear frustration among bankers about the slow pace of growth.

“The whole idea is to distribute paper, so you need simple stuff everyone can understand,” says Sodhi. “It isn’t easy to innovate with the intention to distribute at the same time. There is room to improve, but I don’t see compelling drivers of innovation. If banks continue to

Atul Sodhi, Crédit Agricole


Citi’s towering consumer and institutional businesses in Asia Pacific ensures that the region contributes close to a third of its global profit. But Citi’s management knows that if they do not lead the transition to digital banking, there are plenty of disruptors who

will. Citi’s competition is no longer other banks but also leading fintech and tech companies. This is a big reason why the US bank is forging partnerships with these new competitors.

The mass adoption of smartphones and tablets with their intuitive, touch-enabled experience has redefined the meaning of the term convenient. As a global bank with a predominantly urban and mobile customer base, Citi has to meet and exceed these new expectations and help define what is next — even if that is a world defined less by phones or plastic but wearables and other unforeseen technology.

The bank has undoubtedly made a good start. Citi in Asia draws some 20 million visits to its online Consumer Banking properties every month. Between 90% and 95% of its transactions already happen outside a branch.

In 2017, Citi digitized further — opening up APIs in key markets in Asia and launching video banking in India and a Chatbot in Singapore. These were both world firsts for the bank. In 2017 Mobile Banking became the preferred choice for Citi clients and its introduction of Voice Biometrics means it now saves close to a billion seconds a year verifying who you say you are.

A top priority is ensuring security for Citi’s clients in the cyber space. The bank continues to invest as it aims to be always one step ahead of the bad guys.

On both the consumer and institutional side across the region Citi is working with fintech firms and embracing big data to support its clients across the region. In the Markets business in Asia Pacific, Citi is at the forefront of capturing the accelerating shift to electronic trading. Across Fixed Income and Foreign Exchange, 40-45% of its client volumes are transacted via digital channels. In Cash Equities, the bank is seeing up to 30% of its clients conducting self-execution trades via its digital programmes. In Transaction Services, business digitization and innovation are proving particularly crucial to keep Citi ahead.

Despite these advances, Citi refuses to stand still. The bank is accelerating e�orts to transform its model to be simpler, dramatically faster, more scalable and far more digital across all businesses.

For consumer clients Citi is seeing a significant shift in where its customers are spending time, whether they are communicating or consuming. Citi is intensely focused on understanding this and building partnerships in key ecosystems to ensure as a bank it is present and relevant for clients in their digital world. Using Citi’s own big data to create more personalized experiences for its clients is a priority for 2018.

Thus an important part of Citi’s strategy is also to be forward compatible — relevant in those key digital ecosystems where its clients are active. The bank is working intensively in this space and has already launched a Citi branded interactive experience within a social platform on WeChat in China and Line in Thailand. It has also partnered with Alipay in China.

While everybody has the ability to be a fast follower, Citi has been sure to lead from the front wherever possible. This has partly taken place in Silicon Valley, through the Citi Ventures operations. But the bank has also made investments in innovation in places like Dublin, Tel Aviv and Singapore. Citi has established innovation laboratories in each of those cities, each with a particular focus.

At these innovation labs and across its business, Citi has developed a model to foster innovation.

The implications of the digital revolution in finance are significant for individuals, corporations and governments. In fact, they change the very nature of what we understand as banking today.

Digital finance can reach more people at a lower cost than ever before, enhancing the prospects of financial inclusion across Asia. It also creates new sources of economic growth. Digital transactions, such as digital payments, also enhance e�iciency and transparency contributing to good governance and sustained economic growth.

Finding the most talented individuals and attracting them to Citi is crucial. In today’s context, that may mean the bank is just as likely to hire millennials set for Silicon Valley or the tech hubs across Asia. Citi’s Asia data head, for example, recently joined from eBay.

While there are many unknowns, one thing is sure: the pace of technological change shows no sign of slowing. As a bank, Citi is fully embracing the challenge of driving and leading this significant transformation in the industry.

CITI’S OWN DIGITAL REVOLUTIONIn the last decade the financial industry has ex-perienced dramatic change, driven largely by technology, particularly in Asia. This has important implications for Citi in Asia Pacific — and the bank is well-placed to make the most of this rapid change.

SPONSORED STATEMENT

Citi is accelerating efforts to transform its model to be simpler, dramatically faster, more scalable and far more digital across all businesses.

“

”


Citi sponsored statement.indd 15 3/12/18 9:31 AM


Local currency markets

Asia’s local currency bond markets, which received a big fillip following the region’s financial crisis in 1997, have come a long way as economies work towards insulating themselves from global volatility. But although the region’s economies are now in better shape, there is no room for complacency, writes Rashmi Kumar.

Asian local currency debt bonds: a work in progress

They had jumped to $224.9bn by 2008.

More recently, the region has seen the introduction of new products, such as Masala bonds, a term for offshore Indian rupee bonds, and more recently Komodo notes, the name for a similar, growing list of international Indonesian rupiah offerings.

Hot dim sum These products are following a bigger, more familiar market.

One of the biggest developments over the past 10 years has been the growth of the renminbi-denominated debt market, both onshore and offshore. The first dim sum — that is, offshore renminbi — bond was issued in Hong Kong in July 2007 by China Development Bank, after the Chinese government gave some domestic financial institutions the all clear to sell notes.

Two years later, regulators expanded the pool of issuers to include foreign financial

institutions incorporated in mainland China. But the market did not truly take off until 2010, when the Chinese government boosted issuance to include multinational corporations and international financial institutions. In 2011, it allowed mainland non-financial corporations too.

From that point onwards, the only way was up as the regulators took various measures to streamline rules around remittance of proceeds to further boost the asset class.

The efforts were undoubtedly successful, with global firms such as McDonald’s and Caterpillar jumping on the bandwagon alongside the likes of the ADB. But the momentum came to a grinding halt on August 11, 2015, when China announced a surprise devaluation of the renminbi that effectively shut the dim sum bond market.

While there is some sporadic issuance, the focus has shifted to the development of Panda bonds — renminbi notes sold in onshore

Developing the local bond markets became a priority for many Asian countries

after the Asian financial crisis wreaked havoc in 1997, giving a violent demonstration of the risks inherent in relying too much on foreign capital for funding.

The push since then has been clear. According to figures in an August 2016 report published by Asian Development Bank, total outstanding local currency bonds in emerging Asia stood at $10.23tr in December 2015, up from $2.57tr 10 years earlier. China and South Korea dominated that increase, but countries in the Association of Southeast Asian Nations (Asean) also played a role.

“The Asian financial crisis was the trigger for the development of the local currency market,” says Stephen Williams, head of global banking, southeast Asia, at HSBC. “While I wasn’t at HSBC at the time, I remember the bank winning the Asian bond house award in 1998 or 1999. Few banks had pitched the award that year as the dollar market — at that time seemingly everyone’s focus — was pretty firmly shut.

“What we failed to realise was that behind the scenes HSBC was spearheading the local currency bond markets and building up capital markets capabilities in local markets around the region. I think that was the time that I’d fully appreciated the opportunity afforded by the domestic markets.”

In 2017, Asia ex-Japan issuers raised $950.8bn equivalent in local currency bonds, through just over 5,000 deals, shows Dealogic. That represents a steady increase. In 2000, volumes totalled $42.8bn.

McDonald’s was the first non-financial foreign firm to issue in yuan

016,17 Asia local currency market.indd 16 3/13/18 12:23 PM


Local currency markets

China by non-Chinese borrowers. When the market opened in 2005, only a handful of foreign issuers tapped the market, as approval was largely done on a case-by-case basis by the regulator.

While issuance warmed up a couple of years ago, last year was lacklustre with volumes standing at Rmb71.9bn, a sharp 46.3% fall from 2016, shows data from GlobalRMB, a sister publication of GlobalCapital. But the market consensus is that the 2018 pipeline is robust, and will be given an added boost if guidelines for issuance are published.

Hard at work While China’s story is one mainly of success, not all markets in Asia have grown at a similar pace.

“We’ve seen only sporadic growth in Asian local currency markets,” says Frank Kwong, head of primary markets, Asia Pacific, at BNP Paribas. “We’ve seen the dim sum market coming up from time to time. We also saw the Philippine sovereign do a global peso deal around 2009. We’ve seen various attempts to grow the Asian currency markets, but over the years only CNY and Japanese yen have been attracting a lot more attention.”

He adds that when it comes to yen, the market has become a lot more domestic over the years as ultra-low rates have dimmed the currency’s appeal to international

investors. On the flipside, foreign accounts have gravitated to RMB as the coupons are juicier.

According to Williams, there has been a “dramatic evolution” in the local markets, the most prominent of which has been in the RMB market.

“But you’ve also got extremely vibrant capital markets in Hong Kong, India, Singapore and Malaysia,” he says. “We have seen a rapid broadening of currencies, tenors, structures and of investors, and hand in hand with that we’ve seen an explosion of issuance.”

The investor base for Asian local currency bonds, for instance, has developed from being favoured by domestic banks to seeing local institutional investors, like pension funds and insurance companies, coming in to play.

Push from countries Various bodies have been hard at work to make local currency debt markets stronger, especially in Southeast Asia. In December 2002, the ASEAN countries of Brunei Darussalam, Cambodia, Indonesia, Lao PDR, Malaysia, Myanmar, Philippines, Singapore, Thailand and Vietnam, along with China, Japan and the Republic of Korea — collectively called ASEAN+3 — launched the Asian Bond Markets Initiative to develop the local currency bond markets as an alternative source of funding to foreign currency-denominated bank loans. This was to minimise the currency and maturity mismatches that had in the past made the region susceptible to any unexpected reversal of capital inflows.

In 2010, the Credit Guarantee and Investment Facility (CGIF) started as a trust fund within the ADB to provide guarantees for local currency corporate bonds issued in the region.

In the same year, the Asian Bond Market Forum was established by ASEAN+3 to provide a platform to have standard market practices

for cross-border bond transactions within the region. In 2015, the ABMF released guidelines for the ASEAN+3 multi-currency bond issuance framework to make the issuance and investment process within the region simpler.

The groundwork has been laid, but how much it has paid off, and will pay off, is still a big question.

Ashish Malhotra, Standard Chartered’s Singapore-based global head of bond syndicate, says the local currency bond markets have not changed much when considering opportunities for foreign issuers.

“By local currency, I really mean the domestic markets, not the CNH or Singapore dollar markets that are more open,” he says. “China’s market in particular has evolved in the last few years with the Panda bond market. However, in some of the domestic markets, incoming cross-border activity from western or other Asian issuers was not massive to begin with and we have

seen even lesser activity.”

This is a point GlobalCapital hears time and time again. Although there have been great strides in opening up some markets to foreign issuers, many Asian countries have stood still. Some have even taken a step back; in 2015, Thailand all but shut its market to foreign issuers after the regulator barred the proceeds of bond

sales to be taken offshore.When considering them overall,

Asian bond markets have come far. But market development is now split between the haves and the have-nots.

For those wondering whether there is still plenty more room to grow in Asia’s local currency bond markets, the answer is a resounding yes. z

Frank Kwong, BNP Paribas

Ashish Malhotra,Standard Chartered

016,17 Asia local currency market.indd 17 3/13/18 12:23 PM

CGIF was established by the 10 members of the Association of Southeast Asian Nations (ASEAN), together with the People’s Republic of China, Japan,

Republic of Korea (ASEAN+3) and the Asian Development Bank, back in 2011.

CGIF is a key part of the Asian Bond Markets Initiative, a crucial policy plank of e�orts by the ASEAN+3 to promote capital market development. CGIF’s remit is to provide credit guarantees for local currency denominated bonds issued by creditworthy companies based in its stake-holding countries. Since its inaugural guarantee in April 2013, CGIF has provided 19 guarantees worth $1.1bn to corporate and project bonds in the ASEAN region.

The lessons learnt from the Asian financial crisis have gone a long way towards finessing ABMI’s and CGIF’s core objectives: promoting local currency bonds and regional financial co-operation and integration, all in a bid to strengthen financial stability. This will also reduce the region’s vulnerability to any unexpected reversal of capital flows.

ABMI has implemented measures to promote the issuance of local currency bonds, boost demand for such notes, strengthen the regulatory framework and improve the bond market infrastructure.

The support of the ASEAN+3 nations has also helped, as they have undertaken sweeping reforms to improve macro-economic management and deepen financial market reforms. A vote of confidence came in early December 2017 when the contributors

of CGIF agreed to increase the fund’s capital base from $700m to $1.2bn, which will give the fund an impetus to grow without further capital injections from its shareholders.

CGIF’s history may be short but its future has never been brighter. The domestic investor base in the region has deepened. The impact of rising income levels and a growing middle class population in ASEAN — home to some of the most populous countries in the region — is also being felt. Long-term savings in pensions, insurance funds and asset management are growing incredibly fast in ASEAN, with their size of $2.7tr in 2014 almost matching the banking sector’s $3.1tr.

Of course, CGIF recognises that many corporations in the region still don’t have access to the bond market. The top 30 corporates in each market dominate the majority of local currency debt issuance in ASEAN. There is huge potential in the vast untapped market that still exists.

Frontier markets are also a focus, especially as the development stages of bond markets di�er among the ASEAN countries, which includes the founding members of Indonesia, Malaysia, the Philippines, Singapore and Thailand, as well as Brunei Darussalam, Cambodia, Lao PDR, Myanmar and Vietnam, which joined later.

Cambodia, Laos and Myanmar still don’t have a functioning bond market, but are aiming to create their own. Cambodia, meanwhile, is looking at the country’s first corporate bond issuance this year after introducing bond regulations in 2017. CGIF can help in kick-

starting their debt markets. This is critical. Despite ASEAN’s aim

of regional economic integration and growing cross-border investment and business among corporates, cross-border bond issuance is still rare. But that could yet change, thanks to the ASEAN+3 Multi-Currency Bond Issuance Framework established under ABMI, which aims to mitigate regulatory hurdles to promote the development of the cross-border bond market.

There are challenges, however. The infrastructure investment needs of ASEAN countries between 2016 and 2030 are estimated to be around $3.1tr by the ADB. Needless to say, the bond markets have to play a greater role in filling the gap. More developed markets like Malaysia have already started financing a big part of infrastructure investment with the bond market. Other ASEAN countries can, and should, follow.

ASEAN can also see a spur in growth of green bonds through local currency debt. The ASEAN Capital Markets Forum has already taken a step towards building this market by introducing ASEAN Green Bond Standards — a move that should start to pay o� soon.

When it comes to developing the region’s local currency bond markets, the only way is up. Local currency has already become a major source of funding for ASEAN corporates, with firms slowly shifting from relying on bank lending to the bond market.

So much so that, relative to GDP, the corporate bond market in some ASEAN nations like Malaysia is already comparable to, if not bigger, than many of the developed economies. Available tenors and amounts are also getting larger, while new products are being pushed out.

It’s a sign that ASEAN’s local currency bond markets are pivotal in financing growth — and are here to stay.

LOCAL CURRENCY BOND MARKETS: KEY FOR ASEAN’S GROWTH

It has been a story of a dramatic change for ASEAN’s local currency bond markets, which have gone from being almost non-existent before the Asian financial crisis of 1997 to being worth $1.1tr equivalent now. More growth is expected in the future, thanks to bodies like the Credit Guarantee and Investment Facility (CGIF), which has blazed the trail in giving a fillip to the region’s local currency debt markets.

SPONSORED STATEMENT


CGIF Sponsored Statement.indd 18 3/12/18 9:31 AM


Asia economics

The Asian financial crisis forced countries in the region to become more resilient. The global financial crisis proved they had done just that. But what shape will the next crisis take — and how are Asian economies equipped to deal with it? Matthew Thomas finds out.

More resilient, more self-reliant, Asia is better prepared for the next crisis

the region. Between 2007 and 2008, the financial crisis spread from subprime lenders and securitization vehicles to the entire US banking system, and from there to much of the developing world. As this article was being written in February 2018, Asia appeared likely to escape the curse of a crisis every decade — but few saw the last two disasters coming.

Is Asia, or indeed the world, due another financial crisis? And has the region learned enough from the fall-out of the last two to avoid the worst effects of a financial and economic storm that will offer a real test to just how much progress the region has made over the last 20 years? GlobalCapital Asia attempts to find out.

Blame gameThe old adage that five different economists will give you six different opinions may be a little unfair, but it roughly describes

the situation with research into financial crises. John Maynard Keynes and Hyman Minksy essentially reduced the explanation to “animal spirits”, moments of excessive hope and fear that can fuel bubbles and burst them just as quickly. Ben Bernanke, who made the Great Depression a focus of his studies before becoming chairman of the Federal Reserve, blamed a fall in the money supply, echoing the ideas of Milton Friedman. The most recent global crisis has been blamed on moral hazard, securitization, too much government, not enough government and everything in between.

Johanna Chua, chief emerging Asia economist at Citi, admits financial and economic crises are almost impossible to predict with any degree of certainty. But, she says, there are clues.

“Every crisis is different but history seems to show that

In June 1999, Norman Chan, then deputy chief executive of the Hong Kong Monetary

Authority, delivered a speech that surveyed the wreckage of the Asian financial crisis. The region’s regulators and central bankers were still reeling from the economic violence that had wiped out years of economic growth, sent currency values plummeting and revealed the deep flaws in Asia’s financial systems.

Chan, who is now chief executive of the HKMA, pointed to the usual suspects: weak domestic banking systems, excessive corporate leverage, and an over-reliance on currency pegs to eliminate foreign exchange risk. But he also argued that not all of the blame for the Asian financial crisis should be laid at the door of those within the region.

“What happened to the very elaborate and sophisticated risk management systems of these international banks?” asked Chan. “And why did they not function to reduce the banks’ exposure to unsound lending?”

These questions would be asked even more loudly within a decade, when the near-collapse of the US financial system caused a global slump, provoked a widespread backlash against investment banks and — most importantly of all — inspired central bankers to experiment with a series of monetary policy manoeuvres that continue to define the global financial landscape.

Those with a superstitious bent could be forgiven for preparing for more calamity. Between 1997 and 1998, the Asian financial crisis caused chaos throughout

Fed up: Ben Bernanke blamed falling money supply for causing crises

019,20,21 Asia Economics.indd 19 3/13/18 12:17 PM

Asia economics


monetary policy normalization in the US can lead to problems, especially when it is in combination with a build-up of leverage,” says Chua.

The Federal Reserve conducted a steady series of hikes from 2004 to 2006, culminating in a 5.25% rate in June 2006. In little over 12 months the first signs of the coming crisis were starting to show. Within two years, the US financial system was on the brink of collapse.

This link is clearly anecdotal but it is far from an outlier. A series of hikes in early 1980s were followed shortly after by the Latin American crisis. When the Fed next went on another hiking spree in 1994, Mexico faced a banking and currency crisis. Some economists point to those same rate hikes as a partial cause of the Asian financial crisis.

There is far from unanimous agreement on the role of rising rates in causing problems down the road. Benjamin Nelson, an economist at the Bank of England, studied the link between US monetary shocks and bank balance sheets in 2015 and found only a “modest” causal relationship. In the same year, Ola Sholarin, an economist teaching at the University of Westminster, looked specifically at the risks for emerging markets and warned that

“even a small percentage increase in interest rates is likely to cause shockwaves across developing countries”.

Disagreement is natural. The relationship between policy moves at the Federal Reserve and the health of emerging market economies is undoubtedly fluid. The impact of interest rate differences on foreign exchange rates is one obvious means of contagion; the heavy offshore financing of many Asian banks, corporations, and even governments is another. But if rising US interest rates are an important determinant of future crises, investors and corporate executives should be worried.

Although the Federal Reserve did not follow its central banking counterparts in Switzerland and Japan by moving into negative interest rates following the global financial crisis that started in 2008, it did move close to zero: its last rate cut, in December 2008, pushed the Fed funds rate to between 0% and 0.25%. That no doubt helped stem the pain banks, corporations and whole economies felt in the wake of the crisis, but there is a risk it has built up problems that could once again leave Asia exposed to a crisis not of its own making.

Jerome Powell, the new chairman of the Federal Reserve,

has made clear he maintains the same rate-hiking bias of his predecessor, Janet Yellen. The Fed raised rates three times in 2017, ending the year with a Fed funds rate of 1.25%-1.5%. Most economists think we are only at the beginning of a long, albeit potentially slow, cycle of rate increases.

There is, however, reason to be optimistic about the likely impact of these rate increases on Asian economies. In large part, this is because of lessons policymakers learned in the late 1990s, when a currency crisis led to widespread economic turmoil — and provoked serious questions about how much Asian economies could rely on foreign capital.

Bye bye bahtThe Asian financial crisis is far enough in the past that many executives and bankers today have no strong memory of it, let alone any experience of working through it. But for those who were there, the crisis will never be forgotten.

The usual starting point of the Asian financial crisis is taken to be July 2, 1997, when Thai authorities backed out of a protracted fight with hedge funds betting against its currency and announced they were ending a decade-long peg against the dollar. The Thai baht collapsed, other Asian currencies became targets, and a wave of revaluations, capital flight and economic woes spread from country to country.

Indonesia’s economy lost 58% of its value in dollar terms between 1996 and 1998, erasing more than a decade of growth, according to World Bank data. That was the most extreme case but countries across the region suffered severe economic contractions over the same period — more than 37% in Thailand and South Korea, 28.5% in Malaysia and 10.3% in the Philippines.

The response of policy bankers to this crisis was

0

200

400

600

800

1,000

1,200

1,400

1,600

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

The Asian financial crisis was cataclysmic for economies in the region. But they did much be�er in the global crisis

Malaysia ThailandPhilippines South Korea Indonesia

$bn

Source: World Bank

The Asian financial crisis was cataclysmic for economies in the region. But they did much better in the global crisis

Source: World Bank


Asia economics


crisis has not been a uniform success across the board, but Asia has become much more self-reliant when it comes to raising money.

China, where domestic funding dominates and foreign investors are only beginning to get access, is a prominent example. Although the country is still making gradual steps to allow more foreign investors into the local bond market, this is happening at a slow pace — and offshore issuance faces an often onerous approval process.

China can handle the pressureChina is certainly no stranger to bubbles. Between 2006 and 2008, the Shanghai Stock Exchange index rose by 485%. In the next 12 months, Chinese stocks lost more than 70% of their value. Nor is this volatility a relic of past administrations. In June 2015, after current supremo Xi Jinping had been in power for more than two years, China’s stock market began an eight-month plunge that wiped out around 50% of its value from peak to trough.

But stock market woes and banking crises are very different things. The animal spirit argument certainly seems to apply to stock

markets, where stocks and whole indices can zig and zag on little more than a whim. China’s wider financial system is arguably too carefully managed to allow these same spirits to cause a bust, despite the mountain of debt the country has stacked up. (All sector debt is worth 260% of GDP, according to the IMF.)

“I used to be seen as the leading bear on China, now I am sometimes called the least optimistic of the bulls,” says Michael Pettis, professor of finance at Peking University’s Guanghua School of Management. “This shows how much attitudes have changed. China has significant problems driven by debt, but it is unlikely to have a crisis. That’s because a crisis is just one way of resolving a debt problem. The other way is the Japanese way, with 20 years of low growth. The option for China is not crisis or rapid growth, but crisis or many years of slow growth.”

Chua agrees with the broad point, although she sounds more optimistic when comparing China to Japan, which is now into its second decade of economic stasis.

“I don’t see China as the trigger for a global or even region-wide crisis,” she says. “Their issues with leverage have a lot of caveats. They’re financing it domestically. They have lot of potential for growth. They can still pull rabbits out of the hat, whether in service sector growth or moving up the value chain in manufacturing.”

It would be foolish to bet against another crisis hitting the global financial system, and Asia along with it. But the lessons learned from the Asia financial crisis made a big difference on the region’s resilience during the global financial crisis. They also suggest that Asia is unlikely to get the blame for the next time those animal spirits are unleashed. z

Additional reporting by Paolo Danese

almost immediate. Thailand, the Philippines, Indonesia and Taiwan allowed their currencies to float. Korea, Thailand and Indonesia shuttered banks. The International Monetary Fund, the World Bank, the Asian Development Bank and a host of bilateral lenders approved $112bn in loans in 1997 alone.

The lasting change, however, may have been a recognition that Asian countries could no longer rely on foreign lenders for capital. Heavy foreign currency funding may not have in itself caused the crisis, but it certainly exacerbated it. Even worse was the fact that this borrowing was often at short maturities, adding a dangerous asset-liability mismatch to the mix.

Since the crisis, there have been widespread attempts across the region to develop domestic funding markets, insulating governments and corporations from the risk of international capital flight. There have even been grand plans for regional financial integration, giving extra weight to the Association of Southeast Asian Nations (Asean) and leading to the establishment of the Asian Bond Markets Initiative, a 2003 agreement between the Asean, China, Japan and Korea that was explicitly designed to help avoid another financial crisis.

The development of Asian bond markets was a key factor in the region’s subsequent impressive resilience to the global financial crisis that started in the US mortgage market in 2008 and quickly spread across the world. China, Indonesia and Singapore continued to grow throughout the crisis, while India, Malaysia, the Philippines and Thailand came roaring back after brief contractions. (South Korea was harder hit, suffering an almost 20% fall in dollar-denominated GDP between 2007 and 2009, according to World Bank data.)

The desperation among Asian governments to bolster their domestic markets after the 1997

George Soros in 1998: a year earlier, he was among those blamed for crashing the Thai baht


Q: Green bonds rose to prominence in 2017, with rising

deal flow across Asia Pacific. How quickly can this market continue to develop and what importance will it take on in Japan?

A: Under the Paris Agreement, the Japanese government has stipulated

a long-term goal to cut greenhouse gas emissions by 80% by 2050 from the level in 2010. In order to achieve this goal, full-scale countermeasures will likely take place in the near future. The flow of investment in energy e�iciency and renewable energy is expected to increase and may lead to the expansion of the domestic green bond market.

The introduction of Japan’s Green Bond Guidelines in March 2017 by the Ministry of Environment has been crucial to strengthening the recognition of socially responsible investment-themed bonds (SRI), including green bonds, in Japan’s capital markets. The guidelines, which mirror the Green Bond Principles announced by ICMA, have made green bond standards clearer for Japanese investors, in turn helping ease the decision process for Japanese issuers.

With the expanding recognition of SRI bonds, we see the growing interest in the format from both institutional investors and issuers in Japan. We expect plenty more deals from Japan the coming years.

Q: One of the questions around green bonds has been when

they will offer a pricing advantage over conventional issues. How important for the growth of the green bond market is this pricing

advantage? When do you see that becoming evident?

A: We need to carefully consider whether or not green bonds really

should have a pricing advantage. The pricing advantage of green bonds will clearly encourage issuers, but it will equally discourage investors. At the moment, issuers value the investor diversification they get by issuing green bonds, so even without the pricing advantage, green bonds are likely to develop. There is a growing investor base focused on SRI bonds and the increased recognition of sustainable development goals (SDG) and ESG.

We believe that the green bonds should be priced purely based on supply and demand. It is true that the green bonds attract demand from a broader investor base, especially from the investors with funds dedicated to SRI bonds, but it is not necessarily true that this gives green bonds a pricing advantage over conventional bonds. In the overseas markets, we have yet to find compelling examples with a clear pricing advantage at this point. We believe that the pricing advantage of green bonds will become evident only when they turn out to have a material economic benefit to investors.

Q: How has Daiwa Securities positioned its business to

make the most out of opportunities in the green bond market? Are you planning to commit more resources to this market in the coming years? How important is more government, local government and agency paper to

develop the domestic green bond market?

A: Daiwa is the pioneer and leading firm managing SRI bonds in Japan’s

capital market. Since our leading role in a ‘vaccine bond’ for IFFIm in 2008, the first ever ‘themed’ transaction in the Japanese retail-targeted Uridashi market, we have regularly communicated with international and domestic issuers and have arranged a broad spectrum of SRI-themed products ranging from green, sustainable and social bonds from both international and domestic issuers.

We have been also active in the public SRI bond market. We have arranged numerous public SRI bonds in the international capital market, such as a vaccine bond for IFFIm (2013), an EYE Bond for IADB (2014), and a green bond for Mexican development bank Nacional Financiera (2015). We also arranged a green bond for Development Bank of Japan in 2014, the inaugural green bond for a Japanese issuer in the international capital market, and followed up this deal with DBJ’s sustainability bonds in 2016 and 2017.

We have further been active in the domestic capital market, arranging JICA’s inaugural social bond (2016) and Japan Railway Construction Transport and Technology Agency (JRTT)’s inaugural green bond (2017). In the coming years,

DEVELOPING JAPAN’S GREEN BOND MARKETGreen bonds have quickly become an important part of the internation-al capital markets, with borrowers across Europe, Asia and the United States increasing their issuance in 2017. Japan was late to the party, but appears to be wasting little time catching up. Daiwa Securities talks about the outlook for the country’s green bond market.

SPONSORED STATEMENT


Hidenobu Shirota, senior managing director, co-head

of global investment banking division, Daiwa Securities, Tokyo

Daiwa Sponsored Statement.indd 22 3/12/18 9:29 AM

we will continuously commit and put more resources to SRI bonds, with our SRI-focused sta� increasing in order to further strengthen our positioning in the developing SRI bond market in Japan.

We believe that government agencies and local governments will play an essential role in developing the SRI bond market, providing model cases for other issues to follow. So far from Japan’s SSA sector, we have seen DBJ, JICA, JRTT, and the Tokyo local government issuing social, green and/or sustainability bonds.

The Japanese central government will also play a major role. In addition to publishing Japan’s green bond guidelines, the MOE has launched the green bond assistance scheme, where model cases are selected by MOE from issuers’ applications and certified as a green bond aligned with the guidelines of the ministry. JRTT is the first model case from this scheme and the MOE expects more to be selected. From the investor point of view, the Government Pension Investment Fund’s joint research with the World Bank on ESG fixed income investing could be another boost.

Japan’s green bond market is now ready for further expansion —and we expect it to grow quickly.

Q: Green bonds are just a wider part of the universe for environmental, social and governance-related

financing (ESG). How much of an impact do you see ESG having on Japan’s domestic capital markets — as well as the funding opportunities for Japanese issuers overseas?

A: In Japan’s capital markets, the recognition of ESG-related finance, especially green bonds, is becoming substantial.

This is partly due to investors’ and issuers’ e�orts, but also due to government support. Domestic fixed income investors mainly focus on the ‘E’ and ‘S’ as use of proceeds at the moment, and less on issuer’s overall ESG ratings. This is in contrast with equity investors.

Globally, we understand there are investors focusing on not just the use of proceeds but also on the ESG ratings of issuers. This is the case even in fixed income markets outside Japan. As a result, ESG as a whole will become more and more important to fixed income investment in Japan’s capital markets in the future.

From the perspective of issuers, we are aware of the growing needs of foreign currencies from Japanese financials and corporates. Asahi Holdings, Daiwa, Sumitomo Corp and others made their debuts in the international bond market in 2017. Because numerous international investors have dedicated funds for SRI bonds, there is an opportunity in the international capital market for Japanese issuers to exploit the investor demand from these funds. DBJ, Mizuho, MUFG, and SMFG are the good examples of issuers that have exploited the opportunity in the international capital market and successfully diversified their investor base.

Q: How much are socially responsible investments (SRI) funds growing, both in Japan and globally?

Do you expect these funds to become a key source of demand for Japanese yen bonds?

A: Globally, we understand that a wide range of investors have set up SRI funds and have been very keen to develop

SRI bond market. For example, the ‘Paris Green Bond Statement’ was signed and issued in 2015 by numerous large investors. We are confident the investor base will continue to expand as green bonds gains more recognition and break ever more issuance records.

In Japan, life insurance companies are currently the most active SRI investors; some of them have quantitative targets for ESG investment. Some other central and regional investors, although lacking these targets, are also becoming keen on ESG investment, disclosing their investments toward SRI bonds. The partnership between GPIF and the World Bank Group to promote ESG investment in various asset classes is another positive, potentially a game changer in Japan’s green bond market. We believe the development of benchmarks and guidelines through this research may contribute to the increasing number of domestic asset managers focused on SRI, becoming the key source of demand for yen-denominated SRI bonds in the coming years.

SPONSORED STATEMENT


JAPAN’S PUSH FOR SRI BONDS Issuance by Japanese corporations, as well as by foreign issuers in Japan’s market

0

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3,000

4,000

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6,000

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Uridashi

Samurai / Global JPY / Euro JPY Public O�ering

JPY Public O�ering by Japanese Issuers

Non-JPY Public O�ering by Japanese Issuers

$m

Source: Daiwa, Bloomberg

Daiwa Sponsored Statement.indd 23 3/12/18 9:29 AM


Anecdotes

“In the past, roadshows were long, drawn-out events, and we also saw some reverse roadshows with investors coming to Asia. On one investor roadshow we did, it was a US investor’s first trip outside of the US. He turned up in Korea, couldn’t speak Korean, and didn’t have any money with him. He got into a bus to his hotel, but then he disappeared for about seven hours. We tried to find him but it was difficult as we didn’t have mobile phones then. It was the first time he’d set foot in a foreign country and he disappeared.” Senior debt banker

“I remember a long night in the Mandarin hotel in London, where we were negotiating over 3bp-4bp with a Korean bank. We were sitting in the guy’s room, with him smoking cigarettes for over 10 hours. I had to buy the most expensive pack of cigarettes at the time to keep him happy — a £30 pack of cigarettes ordered through room service at 3am. Luckily, when those ran out, he agreed to our terms as he couldn’t stand the idea of negotiating without a cigarette in his hand.”

Senior debt banker

“We had quite a difficult negotiation with a Korean borrower over a few basis points. To break the deadlock, we decided to go on the London Eye. We booked a private pod and took him and his team for the ride. Everything was okay in the beginning but as we got higher and higher, he got more and more queasy because he was afraid of heights. Pricing was agreed very quickly after that.”

Senior debt banker

“There was one 26-hour conference call where the deal actually ended up getting pulled. It was a Hong Kong corporate that completely misjudged market demand for their transaction and insisted on not finishing the conference call until they thought banks would buckle and accept their pricing. But at the end of the 26 hour period, the deal leaked away from them.”

Senior debt banker

“The loans market is special, because you have people who have been working in the same market for 30-odd years. Those bankers are pretty much born in the market and will die in the market.”

Senior loans banker

“The most different company I worked with was one that makes compounds that can alter your taste and smell. So they had a sugar compound that could make less sugar taste like more sugar, or less salt taste like more salt. Imagine selling such a company! But we did it.”

ECM banker

“In 1997/98 when HSBC gave up the sponsorship of the Hong Kong Sevens, Peregrine, which is now long gone, picked up the sponsorship. It was going to be the Peregrine-Cathay Pacific Hong Kong Sevens. But then Peregrine went bankrupt and Credit Suisse stepped in. I still have the rugby shirt from that year — it has the Peregrine logo on it, with the Credit Suisse logo actually just sewn over the top.

Senior debt banker

“It was a lot more fun among the banks three or four years ago, as there was a lot more interaction and engagement, and we went out a lot. Captain’s Bar was our usual haunt. But now a lot of our communication has been cut down. We use chat boxes, so there’s less human interaction. The new generation of bankers have missed out on a lot of the fun in doing the analysis. Before, when we had 300 lines in the order book, we’d spend around two hours on the phone with the other syndicate guys going over the book line by line, and justifying allocations. Now, we do that on chat screens. It’s less time consuming but also less fun.”

DCM head

“December 20, 1999, stands out for me. It was when Macau was returned to China and it was my first trip to Beijing from New York. The reason I went to Beijing on that very cold day was because nobody believed that the oil price could go higher than $24 a barrel. I was in charge of an oil company’s IPO at the time. If you’re selling oil but you can’t convince people that oil could go higher than $24 a barrel, then you won’t be able to sell the deal. I was the only guy available to go as I was the most junior on the deal team. I was single, had no pets and I needed just a small suitcase, so I was sent to Beijing that day and spent a month there. The deal ultimately did not happen.”

ECM banker

AWOL investors and 26-hour conference callsA lot has changed for capital markets bankers in Asia over the last 30 years — and not just their favourite bars. GlobalCapital Asia asks veteran bankers to wander down memory lane and pick their best, and worst, moments.

024 Anecdotes .indd 24 3/13/18 12:10 PM

CCXI can boast an edge over the Big Three credit rating agencies in terms of assisting international investors in the Chinese bond

market. With the launch of Bond Connect, China has made steady progress in opening up its capital market. But the market ambiguity and insufficient understanding of some government-backed issuers, such as local government financing vehicles (LGFVs) and state-owned enterprises (SOEs), has limited the scope of foreign investment. Since it was established in 1992, CCXI has maintained its leading position in the credit rating industry with the largest comprehensive market share across capital markets. A profound understanding of Chinese entities can help CCXI better assist international investors to identify credit risks and investment opportunities in

China effectively.CCXI is also well-known as the

industry benchmark in Panda bond ratings, successfully combining internationally-advanced rating technologies and domestic rating practices. Motivated by the rise of the Chinese economy and renminbi internationalisation, an increasing number of international issuers have turned to the Panda market, pulling it out of the ten-year lull it endured from 2005 to 2015. By the end of 2017, accumulated Panda bond issuance totaled Rmb222.9bn. CCXI has rated 42 out of 54 publicly-issued Pandas with domestic agency ratings, including the sovereign deals of Republic of Korea and Republic of Poland, the financial institution deals of HSBC and National Bank of Canada, the overseas non-financial enterprise deals of China Merchants (Hong Kong) and Veolia Environnement, and the first Panda bond under the Bond Connect, Malayan Banking. In addition, CCXI jointly launched the first special report on Panda bonds: RMB SERIES: Panda Bonds-On the Cusp, with ASFIMA, KING & WOOD MALLESONS and Standard Chartered.

But CCXI is not only deeply rooted in the domestic market. The company is also actively exploring the overseas market. CCXI published its first

sovereign credit rating framework in 2012. In the same year, the China Chengxin (Asia Pacific) (“CCXAP”) was established in Hong Kong, becoming the first Chinese credit rating company from the Mainland operating in the international market to provide bond rating services. CCXAP is the first mainland Chinese rating agency that successfully obtained a rating license in the strictly-regulated Hong Kong market. CCXAP has also accumulated rich experience in overseas markets with the rapid development of

Chinese issuers’ offshore bonds. Bond issuance of Chinese entities in offshore market has experienced enormous growth since 2010. Mainland Chinese

issuers have now dominated the market with a 50% share in outstanding USD bonds in Asia (ex-Japan), up from 10% in 2010.

Hong Kong was just the beginning. CCXI is expanding its overseas business even further along the Belt & Road. In 2017, CCXI reached a strategic cooperation with the VIS Group, an influential Islamic rating agency. Both parties will join hands with the Association of Credit Rating Agencies in Asia (ACRAA) to push forward research and cooperation along the Belt & Road, establishing a task force and committee to promote credit rating support for Belt & Road infrastructure projects.

There is little doubt that China’s domestic market bond market is becoming increasingly more enticing to foreign investors. But those investors still have plenty of questions. CCXI will be there to answer those questions — and take part in the future growth of China’s thriving bond market.

CCXI: THE EMERGING CHINESE VOICEAs a pioneer in China’s domestic credit rating industry, China Chengxin International Credit Rating Company Limited (“CCXI”) has grown right alongside the domestic bond market, which is now the third largest in the world. But by putting an emphasis on quality, the company has also contributed to that growth — CCXI enjoys an enviable reputation as the top credit rating agency in the inter-bank and exchange markets in China.

SPONSORED CONTENT

Opportunities and Risks along the B&R

Source: CCXI

Source: NAB

CCXI has maintained its leading position in the credit rating industry

“

”


CCXI sponsored content.indd 25 3/12/18 9:50 AM

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For more information please contact: Mark Goodes, Email: [email protected] • Tel: +44 (0) 207 779 8605

The voice of the markets

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GlobalCapital Asia: 30 Years in the Capital Markets 27

Asia bond roundtable

THE VOICE OF THE MARKETS

: The starting point for this discussion has to be the credit outlook for Asia, given the bull market over the past year. How strong is the credit environment for debt issuers in the region?

Ricardo Adrogué, Barings: One of the benefits for Asia is that the capacity to lend is higher than in other regions in the world. The impact of the rising rates environment is also less in Asia than other regions, which is a big positive. One issue is however the high leverage in the Chinese economy, which has been talk-ed about a lot in recent years. But as China has started deleveraging, the risks have diminished.

Arthur Lau, PineBridge Investments: Benefiting from healthy global growth and rising domestic consump-tion, we expect the current steady growth momentum in the Asia region to continue in 2018. Against this backdrop, we believe the Asian debt capital market will continue to grow as corporates and banks look for medium-to-long term sources of capital funding to support the business demand and opportunities. A constructive economic environment also bodes well for credit products. At the moment, we expect the Asian G3 bond market to reach $1tr market capitalisation by the end of this year or early next year.

Although it is low at the moment, there is rising con-cern about inflation in the region. In addition, many Asian central banks have also shifted their monetary policy rhetoric to a slightly tightening bias, which may pose medium term risk to the credit market.

: The Asian bond investor base has seen exponential growth over the past couple of years. How important has this been for reducing pricing, allowing a more diverse issuer base to come to the market and for increasing the variety of structures? Perhaps more importantly, can it last?

Amit Sheopuri, Citi: The growth of the investor base in the region is bound to happen. The more the activ-ity grows and volumes grow, we will need analysts to be closer to the credit. To put it differently, the fact

that many international investors have decent-sized operations in Asia helps them contribute more both to primary and secondary deals. This is one of the key factors that has led to the growth of the Reg S markets where, under some circumstances, we are pricing $1bn+ trades in this format, and in some exceptional cases, the sizes have gone up to $2bn+ at very attractive pricing levels. What’s best for our issuers is that the

144A markets — and, in some cases, the SEC registered markets — offer excellent optionality when it comes to specific industries both in terms of size and price. It’s a complete win-win for our clients.

Lorna Greene, National Australia Bank: The strong growth in investable funds here in the Asian region has been the key driver of tighter pricing outcomes for dollar-denominated transactions which accommodate Asian investor participation. This has been evidenced in the strong growth in order books for 144A/Reg S issuances open in the Asian time zone, where the Asian investor bid has accounted for up to $2bn-plus and where the strength of the regional appetite for dollar assets has allowed for a tightening of price guidance at the start of the New York session.

However, this dynamic has been most clearly shown by the strong growth of the dollar Reg S market, which saw close to 75% growth year-on-year in 2017 and with projected further growth of about 20% plus year-on-year for the next three years. The market has gone from being a source of supplemental funding for many global borrowers to being an important source of funds in its own right.

In addition to the new larger volumes and tighter pricing outcomes achievable in the dollar Reg S market,

Participants in the roundtable were:Ricardo Adrogué, head of emerging markets debt, Barings

Lorna Greene, director, origination and debt syndication, Asia, National Australia Bank

Yoshihiro Inoue, executive director, international debt origi-nation, debt capital market, Daiwa Securities

Arthur Lau, co-head of emerging markets fixed income and head of Asia ex-Japan fixed income, PineBridge Investments

Kiyoshi Nishimura, chief executive officer, Credit Guarantee and Investment Facility

Amit Sheopuri, managing director, co-head of Asia debt origination, Citi

Rashmi Kumar, moderator, GlobalCapital Asia

Thriving investor base changes game but is yet to go greenAsian investors’ rise to dominance has caused a repricing across the region’s capital markets, and raised questions about just where US and European deals should price. How much further can regional liquidity rise in importance? GlobalCapital Asia �nds out.

Amit Sheopuri Citi

026-28,30-31 Asia bond roundtable GCA30.indd 27 3/13/18 12:28 PM

Global SRI Expertise:A Decade of Ground-Breaking Deals

Daiwa Securities Group Inc. is listed on The Tokyo Stock Exchange and includes a number of firms as its subsidiaries, including Daiwa Securities Co. Ltd. and is regulated by Japan’s FinancialServices Agency. Its global subsidiaries are authorised to do business within their respective jurisdictions. These include: Daiwa Capital Markets Hong Kong Ltd. (Hong Kong), regulated by the Hong

Kong Securities and Futures Commission, Daiwa Capital Markets Europe Limited (London), authorised and regulated by the Financial Conduct Authority and a member of the London Stock Exchange, and Daiwa Capital Markets America Inc. (New York), a U.S. broker-dealer registered with the U.S. Securities and Exchange Commission, a futures commission merchant regulated by the U.S.

Commodity Futures Trading Commission, and a primary dealer in U.S. government securities. Daiwa Capital Markets America Inc. is a member of the Securities Investor Protection Corporation (SIPC).

2013

Rabobank NederlandAUD, ZAR ‘Agri Bond’

2013

The Export-Import Bank of Korea

AUD, ZAR ‘Water Bond’

2013

International Finance Facility for Immunisation

USD FRN Reg$/144A Bonds

2013

Japan International Cooperation Agency

JPY ‘JICA Bond’

2013

International Finance Corporation

ZAR ‘Microfinance Bond’

2013

International Finance Facility for ImmunisationTRY, ZAR ‘Vaccine Bond’

2013

Rabobank NederlandAUD, ZAR ‘Agri Bond’

2013

Nordic Investment BankBRL ‘Environmental Bond’

2013


AUD TRY ‘Banking on Women Bond’

2014

European Investment BankJPY ‘Climate

Awareness Bond’

2014

Crédit Agricole Corporate & Investment BankTRY ‘Green Bond’

2014

Development Bank of Japan Inc

EUR ‘DBJ Green Bond’

2014

Asian Development BankBRL ‘Water Bond’

2014

Asian Development BankBRL ‘Water Bond’

2012


JPY ‘JICA Bond’

2012

Rabobank NederlandTRY ‘Agri Bond’

2012

The World BankAUD ‘Green Bond’

2011

Nordic Investment BankZAR ‘Environmental Bond’

2011

Inter-American Development Bank

BRL ‘Poverty Reduction Bond’

2012


TRY, ZAR ‘Microfinance Bond’

2012

Asian Development BankTRY ‘Water Bond’

2011


JPY ‘JICA Bond’

2011


BRL ‘Vaccine Bond’

2010


ZAR, AUD ‘Microfinance Bond’

2010

European Investment BankTRY ‘Climate

Awareness Bond’

2010

European Investment BankZAR, AUD ‘Climate Awareness Bond’

2010

European Bank for Reconstruction and Development

ZAR ‘Microfinance Bond’

2010

Asian Development BankZAR, AUD ‘Water Bond’

2015

Crédit Agricole Corporate & Investment BankTRY ‘Green Bond’

2016

Corporación Andina de Fomento

TRY, ZAR ‘Water Bond’

2015

Nacional Financiera SNCUSD ‘Green Bond’

2016

Nederlandse WaterschapsBank N.V.

USD ‘Green Bond’

2016

Crédit Agricole Corporate & Investment Bank

AUD, NZD ‘Green Bond’

2016

Banco Del Estado ChileJPY ‘Women Bond’

2015

Asian Development BankTRY ‘Water Bond’

2014

Rabobank NederlandTRY, MXN ‘Agri Bond’

2014


USD ‘Education, Youth, and Employment (EYE) Bond’

2014

Crédit Agricole Corporate & Investment Bank

AUD, MXN ‘Green Bond’

2014


BRL ‘Inclusive Bond’

2014


BRL ‘Banking on Women Bond’

2014


JPY ‘JICA Bond’

2014

African Development BankUSD ‘Infrastructure for

Africa Bond’

2010


ZAR ‘Vaccine Bond’

2010


BRL ‘Poverty Reduction Bond’

2010

The World BankNZD ‘Green Bond’

2009


AUD ‘Microfinance Bond’

2009


ZAR, AUD, NZD ‘Vaccine Bond’

2008

The World BankUSD ‘CO2-Linked Bond’

2008


ZAR ‘Vaccine Bond’

2010

African Development BankZAR ‘Education Bond’

2016

Japan International Cooperation AgencyJPY ‘JICA Social Bond’

2016

Central American Bank for Economic Integration

ZAR ‘Green Bond’

2017

Asian Development BankAUD, TRY, USD ‘Green Bond’

2016

African Development BankUSD ‘Improve the quality of life for the people of

Africa Bond’

2017

EurofimaUSD “Environmentally Friendly Railway Bond”

Lead Manager

2016


USD ‘DBJ Sustainability

Bond’

2017

Banco Del Estado Chile

AUD ‘Women Bond’

2017


USD ‘DBJ Sustainability

Bond’

2017

African Development Bank

AUD ‘Industrialise Africa Bond’

2017

BPCE S.A.

JPY ‘Social Samurai Bond’

2017

Nederlandse WaterschapsBank N.V.


2017

Hanjin International Corporation


HANJIN INTERNATIONALCORPORATION

2017

Bank Nederlandse Gemeenten

USD ‘Sustainability Bond’

2017

Landwirtschaftliche Rentenbank

SEK ‘Renewable Energy Bond’

Daiwa 2017_GlobalCapital_SRI_Ad-Update v5.indd 1 04/01/2018 09:06

35045SCGBM_Hydro_The Asset Mag_297x210_18 Jan_Inc.ai 1 1/20/16 2:36 PM


28 GlobalCapital Asia: 30 Years in the Capital MarketsTHE VOICE OF THE MARKETS

the flexibility that issuance in this market offers has also been a factor in its attractiveness to debut borrowers. From the lower minimum benchmark size requirements, to the greater willingness to look at a broader range of credits/sectors and consider issuance with lighter covenants, accommodative conditions have been driv-ing an increase in debut deals. China has historically accounted for the lion’s share of the market. However, 2017 saw a significant increase in issuance from a wider group of countries including Japan, India, Indonesia and Australia, which offer investors greater opportunities to diversify their credit investments. Australian corporate borrowers in particular have been recognising the ben-efits of issuing in the dollar Reg S market, with seven debut issues from the jurisdiction seen in 2017 and with a steady pipeline of new issuance expected over the course of 2018.

This increased bid out of Asia is certainly here to stay. The rising liquidity in the region is being driven by a number of macro factors, including the ongoing shift in wealth from West to East and the growing middle class in the region, as historically emerging market countries enjoy strong growth and continue to develop at speed. That said, the current demand for dollar-denominated assets is certainly being bolstered by the decreased attractiveness of some domestic investments, as coun-tries such as Taiwan and South Korea cut rates in 2017, as well as by the increasing dollar rate hike trajectory. Current demand levels could reduce if this dynamic were to reverse. But investors in the region are hold-ing the biggest pool of dollars outside of the US, so we would expect demand would always be robust for dollar assets.

Adrogué, Barings: There has been an impressive growth in the Asian investor base, which has provided a great source of savings for companies. This means a lot of corporations don’t need to go to the US market to raise money anymore. In terms of pricing advantage for issuers, you’ll see that spreads over US Treasuries quot-ed out of Asia offer you much less spread than other parts of the world.

We have seen an improvement in the quality and diversity of issuers coming to the market, with an increasing number of non-banking financing corporates coming to the market too, primarily from Asia. An increasing number of corporates don’t go to the US and Europe — they price their deals during Asia hours and market during Asia hours, despite which we have seen some non-Asian investors participate.

Lau, PineBridge: We have seen a significant change of market dynamic in the Asian markets due to a more diversified investor base, from the region and also glob-ally. Asian credit has shorter duration and higher yields than the more traditional fixed income markets in the US and Europe. As such, the Asian credit market’s high-risk adjusted return has appealed to many medium to long-term investors globally. The strong demand for Asian bonds has caused the so-called Asian risk pre-mium to compress noticeably in recent years.

Moreover, strong local bids from institutional inves-tors, such as pension funds, insurance companies and asset managers, also provides strong support to the market. Given the local knowledge and proximity to the market, the regional investors are able to support a deal that focuses on the region rather than the interna-tional market. This is evident by the surge in securities issued in the format of Reg S, which do not appeal to global investors. We expect this trend to continue as

growth and wealth in the Asian region continue to be strong.

: Japanese investors are arguably the steadiest source of demand for strong international bank or SSA paper. Chinese investors, on the other hand, are hungry for yield, willing to take on risk, and eager to add offshore Chinese bonds to their portfolios. How can the Japanese investor base develop further?

Yoshihiro Inoue, Daiwa: Due to the continuous abso-lute low yield market envi-ronment, we are now seeing investor appetite moving towards lower rated credits and longer tenor bonds denominated in Japanese yen and predominantly sold by non-Japanese issuers. But as Samurai bonds sold by European issuers are trading very tightly in the second-ary market, their appeal as an investment opportunity is getting lower.

While investors are still participating in yen bonds sold by European banks, they are turning their focus to Asian credits as the yield is relatively more attractive in comparison. For instance, the Republic of Indonesia has established its status as a regular sovereign Samurai bond issuer start-ing from 2009, when it came out with a JBIC guaran-teed structure. We expect more names from Asia and Greater China to come to the Japanese market using Samurai bonds, Tokyo Pro-Bonds and private place-ments. But Japanese yen is not the only thing investors are looking for. They are also increasingly keen on non-Japanese yen investments, such as alternative cur-rency products like Australian dollars and US dollars, in their pursuit of absolute yield enhancement in their portfolios.

In addition, Japanese investors are less active in the secondary bonds market as the majority of them prefer to hold to maturity. They are also less flexible with the timing of their investments. Typically, they are required to go through a lengthy process to make investment decisions and add new credits to their portfolios. Some also need to have physical meetings with issuers before their final decisions. We have seen an increasing num-ber of Asian issuers visiting Japan to have face-to-face meetings with investors, to strengthen efforts in making their names familiar to Japanese investors.

Compared to the Asian buy-side, Japanese investors are more flexible about purchasing less liquid paper, such as through private placements. This enables issuers to have flexibility in selecting the tenor, issue amount and timing. By developing long-term relationships with Japanese investors, Asian issuers will be able to create a new funding source in the Japan market.

Greene, NAB: We have already started to see a shift in the types of bond investments that the Japanese investor base is looking at. A wider variety of inves-tors, across a broader range of sectors — including local insurance companies — are considering credits lower down the credit curve within the IG space and are look-ing at a broader range of geographies than before, with an increasing focus on issuance from regional IG-rated

Yoshihiro Inoue Daiwa Securities



GlobalCapital Asia: 30 Years in the Capital Markets 29THE VOICE OF THE MARKETS

borrowers from jurisdictions including India and Indonesia. This increased focus on a broader range of credits is certainly positive for the market, adding to the depth of the investor base for these credits and allow-ing Japanese investors to further diversify their bond holdings.

: What advantages do issuers gain by still approaching US and European investors for their fundraising?

Lau, PineBridge: There are extra costs, such as legal and management time, for Asian issuers to tap European and US investors. The Asian investor base has grown meaningfully and is now large enough to support benchmark size issuances. As such, we have seen debt issuers increasingly focus on Asian investors only. That said, there are always ben-efits for issuers to expand their investor base by reach-ing out to non-Asian inves-tors, especially for sectors such as technology or medical, which are better known in the developed markets.

Greene, NAB: There are a number of advantages for issuers in continuing to approach the European and US investor bases for funding. Investor diversification is one of the key benefits, allowing issuers to source a broader range of funding, and ensuring borrowers always have access to funding, be it in G3 or other niche currency markets. The broader demand also allows for stronger order books providing momentum to the transaction and allowing for better pricing outcomes. Different sector preferences, or levels of familiarity and understanding of particular sectors among different regional investor bases, can also allow for more success-ful transactions when strategically targeted towards the most appropriate region.

: Has the rise of the Asian investor base made it easier for issuers in the region to come to the market with unrated deals? Are European and US investors now more comfortable with unrated bonds than they were a decade ago?

Adrogué, Barings: The dominance of Asian investors will continue based on the current trends. Savings in Asia are still high, and if you look at the data, Asian investors are doing well. But bonds from unrated issu-ers are not bought much by non-Asian investors, and these borrowers also don’t go out to US or European accounts. It’s somewhat short-sighted as having access to a diverse pool of investors is important if one market is closed due to turbulence.

But the experiences of investors in Asia are different to those in other parts of the world. US and European investors have been exposed to situations of defaults and so are more wary of taking on unrated credits. It explains why some Chinese investors and regional investors are more comfortable with Asian unrated credits.

Lau, PineBridge: I don’t think there is conclusive evi-

dence. After all, unrated bonds still represent a smaller number of issuances in this region. It is more of a niche market at the moment.

: Onshore Chinese bonds are typically rated much higher than in the offshore market, with many viewing domestic ratings firms as too gener-ous in their assessments. With foreign ratings agen-cies now given the go-ahead to operate in China without a local partner, how is the ratings environ-ment in the mainland going to change? What will be the key challenges?

Lau, PineBridge: It is encouraging to see international agencies given the go-ahead to be allowed to rate onshore bonds, although it is still a work in progress. Since the rating approaches between international and China’s onshore rating agencies have fundamental dif-ferences, I think the presence of international rating agencies in the onshore market will have a profound impact on both the ratings dynamic and credit spreads. Nevertheless, it remains to be seen whether internation-al rating agencies’ onshore ratings gain the same creden-tials as they have done in the international market and whether they could be insulated from local influence.

: How has the rise of Chinese investors affected the pricing of bonds in Asia? It is clear they have had a major impact. One example is in the bank capital space, where Chinese issuers have been able to price well inside their European peers based on the strong bid from the mainland. Is this sort of pricing advantage likely to last?

Greene, NAB: The very strong support from the Chinese investor base for domestic names that they understand well and feel comfortable with has indeed led to some pricing dislocation when it comes to issuance, most notably from the Chinese banking sector in comparison to similarly rated global peers. Given this strong support and the vast exposure that many Chinese investors now have to these names, we have seen the demand nor-malise to an extent, particularly as more names debut in the market. This is giving investors an opportunity to further diversify their holdings, which is something that is also being encouraged by Chinese regulators.

: Besides taking a leading role in the order books of regional deals, Asian investors have also become more important for European and US issuers. How long will this last? Has the rise of the Asian investor base changed the marketing strategy of issuers in other parts of the world?

Greene, NAB: Dollar-denominated issuance from US and European credits continues to be attractive to Asian investors, particularly as secondary market supply of these credits is limited, therefore boosting demand for these borrowers in primary. To take advantage of this demand, issuers are starting to recognise the benefits of opening 144A/Reg S order books in the Asian time zone, allowing regional investors the opportunity to participate. This is a practise that Australian bank bor-rowers have adopted in recent years, which has resulted in significantly larger order books and tighter pricing outcomes as a result of the strong momentum this increased demand brings to the deal. However, there are still many US and European borrowers who are not yet taking this approach, but that have targeted issuance in the Australian dollar and Formosa bond markets as a

Arthur Lau PineBridge Investments




way to access the strong Asian demand. The appetite of regional investors for Australian dol-

lar issuance has increased over the course of the last few years, adding significant additional depth to the Australian dollar market, resulting in increased issuance from both European and US-based financial institutions and corporate borrowers. Average deal sizes achievable have increased and Australian dollar credit spreads have continued to grind tighter off the back of the increased demand.

Likewise, the Formosa bond market has allowed these borrowers to access regional pools of dollar liquidity without having to open order books for 144A/Reg S publicly offered deals in the Asian time zone. Last year saw borrowers such as Apple tap both of these markets to meet local investor appetite for their credit and raise cost effective funding.

: The Asian green bond market has developed at an explosive pace, but the growth of the green investor base has been slower. What needs to be done to develop the green bond inves-tor base in Asia, and when will we see a pick up?

Kiyoshi Nishimura, Credit Guarantee and Investment Facility: The development of green bond markets in North America and Europe has been done in a bottom-up manner or has been market driven, led by growing demands from responsible investors or green investors. In contrast, the green bond market in China, which has become one of the largest in the world in the last two or three years, has been developed in a top-down manner, or by the government’s policies and regulations, despite the absence of a strong green inves-tor base in the country. We believe we will see similar development patterns of green bond markets in other Asian countries.

An encouraging sign is that other Asian countries have already started to follow suit, setting policies and regulations to develop their green bond markets. This is significant because a lack of clear policies or regula-tions has been a major factor that has been hindering development of green bond markets in other Asian countries.

At the regional level, one notable recent development is the introduction of the Asean Green Bond Standards by Asean countries in November 2017. Asean’s regional standards, which are based on ICMA’s Green Bond Principles, can become the base for more detailed frameworks or guidelines at the national level, and have already spurred the issuance of green bonds in Asean bond markets based on the Asean standards.

At the national level, Singapore is especially keen to promote green bonds and introduced a grant scheme in June 2017 for that purpose. We believe the govern-ment’s push has led to the issuance of a number of green bonds in Singapore last year even though the grant scheme was not directly relevant to these cases.

Malaysia also has its own regulatory framework to promote green bonds. The Sustainable and Responsible Investment sukuk framework covers green sukuk as its major component and a number of green sukuk have already been issued under this framework. As part of its efforts to create a dedicated investor base for green and sustainable bonds, the Securities Commission of Malaysia also introduced new guidelines for SRI dedi-cated funds in December 2017 and is encouraging large institutional funds to allocate a certain percentage of their investment assets to SRI bonds.

We believe that these policy efforts at both regional

and nation levels will lead to the growth of green bonds in Asia. Once the supply of green bonds increases, this will, in turn, help create a dedicated investor base for green bonds in Asia.

Adrogué, Barings: Across emerging markets, we have seen an impressive growth in SRI bond issu-ance, driven by China. But while Chinese, Malaysian and other emerging mar-ket issuers have taken the lead with placing their conventional notes into the domestic savings pool, we haven’t seen that gain much traction in SRI bonds. We have only seen the rise of the domestic green investor base in Japan and Europe.

Countries first need to be comfortable with their savings and development before they can expect more growth in the SRI investor base. But as the Asian bond market develops, this will come too.

: Are there sufficient incentives for green and SRI issuers?

Nishimura, CGIF: Like Singapore or Malaysia, some Asian countries have already introduced a grant scheme or tax incentives to promote green bonds. In addition, governments can consider using state-owed entities to issue green bonds in their domestic bond markets to increase the supply of green bonds there. They can also encourage public funds such as national pension plans or sovereign wealth funds to invest in green bonds to create core green bond investor groups in their debt markets.

While it is necessary to weigh in compliance costs, the introduction of mandatory reporting on companies on their ESG activities such as energy use, carbon emis-sions, water use and waste generation, will encourage companies to focus more on activities with positive environmental and social impacts, encouraging them to issue green bonds. Such reporting requirements also reduce incremental costs for potential issuers of green bonds by making it easier for them to comply with the reporting requirements of bonds. In this connection, it is worth noting that many securities exchanges in Asia — including Malaysia, Singapore, Thailand and Vietnam — already require ESG reporting as part of their listing rules, and the enhancement of such ESG reporting rules can indirectly encourage more companies to consider issuing green bonds.

Promoting green bonds in the Asean local currency bond markets is one of CGIF’s priority areas. We have already supported Asean local currency bonds issued to finance projects with positive environment benefits, including a note issued by AP Renewables’ Tiwi MakBan geothermal plant complexes in the Philippines and also one issued by KNM Group, a Malaysian company, for its bio-fuel project in Thailand. AP Renewables’ bond was the first certified Climate Bond issued in an Asean country and the first green bond issued in the Philippines. We are also working on a number of poten-tial green transactions including the first roof-top securi-tization in the Asean region.

Greene, NAB: A number of governments have been

Ricardo Adrogué Barings



GlobalCapital Asia: 30 Years in the Capital Markets 31THE VOICE OF THE MARKETS

taking steps to put domestic green bond frameworks in place to ensure issuance is not ‘green washed’. Countries such as China, India, Singapore and Taiwan all have local green bond frameworks in place, allowing for greater clarity for SRI investors. China continues to be a leader in the issuance of green bonds, accounting for almost 35% of the global market when taking into account onshore issuance. Local regulators have taken recent steps to standardise the domestic green bond issuance framework to align with that of the Green Bond Principles, which are globally recognised as the highest standards for issuance in the format. This has allowed more global investors to participate in both onshore and offshore green bond transactions from Chinese borrowers. This development of a standardised global green bond framework will further help bolster investor demand for the product.

Some issuers have been reluctant to consider green bond issuance to date due to the additional work and cost involved in establishing the required green bond framework, with many borrowers looking for a pricing advantage as a result. Although demand for the prod-uct is increasing, this has not yet translated to tighter pricing outcomes versus regular senior unsecured issu-ance. While initiatives like MAS’s Green Bond Fund in Singapore, which helps reduce barriers to issuance by subsidising some of the associated costs, could certainly help encourage more borrowers to consider green bond issuance, stronger investor demand will be the key driv-er for more issuers to consider issuing in this format.

Adrogué, Barings: As an investor, I would say the key ingredient to buying an SRI bond is having the institution-al infrastructure in place that gives you confidence that a bond you are buying is a green or a socially responsible investment. Institutions that are selling such deals need to be credible about where the proceeds are finally going to.

: What role could Japan play in the development of this market? Has Japan’s SRI mar-ket already made progress that could be emulated across Asia?

Inoue, Daiwa: Japan is Asia’s pioneer country in SRI bonds, starting with the IFFIm [International Finance Facility for Immunisation] vaccine bond in 2008 tar-geting Japanese retail investors. The uniqueness of Japanese SRI bonds is that the market’s development started from retail investors backed by high savings and deposits ratio as well as a high awareness of envi-ronmental and social issues, and then penetrated into institutional investors in recent years. The retail-targeted SRI bonds mainly focused on general investors’ inter-ests, and familiar social issues related to life and poverty reduction in developing countries. These general inter-ests accommodated not only green bonds, but also a variety of SRI thematic bonds such as water bonds, EYE [Education, Youth and Employment] bonds and woman bonds.

In recent years, Japanese institutional investors, mainly lifers, have become active in SRI Bonds, disclos-ing their investments in the form of both public offer-ings and private placements. Also, the introduction of Japan’s Green Bond Guidelines in March 2017 by the Ministry of Environment has been crucial to strength-ening the recognition of SRI Bonds, including green bonds, in Japan’s capital markets. With the principle kept the same as the Green Bond Principles by ICMA, the guidelines have made green bond standards clearer for Japanese investors.

Thanks to the increased recognition of SRI bonds in Japan, we believe the country’s capital market could provide one of the best places in Asia for other Asian countries to start or test SRI bond offerings. They will certainly be backed by keen demand from both Japan’s institutional and retail investors.

Nishimura, CGIF: We are particularly interested in the growth of solar project bonds in Japan. In view of Asean’s large investment needs in renewable energy and proliferation of solar projects in many ASEAN countries, we believe the format developed in Japan to finance solar projects by project bonds can be replicated in Asean countries too.

Greene, NAB: Investor demand for green/SRI issu-ance has been slower to grow here in the Asian region in comparison to peers in Europe or the US. Typically, demand for this kind of product and a change in cultural focus to favour SRI investment is very much driven by local and regional governments setting the tone. Japan has been a leader in the region, with the government hav-ing introduced a number of initiatives to encourage

investors to focus on the importance of SRI invest-ments, which has already resulted in a number of the largest local insurers and fund managers setting aside a significant portion of funds under management for SRI investments.

Other countries such as Singapore have also put initia-tives in place to boost the regional green bond market. Back in 2016, MAS established the Green Bond Fund, targeted at encouraging more issuers to issue in this format. However, as long as there is no price advantage, investors continue to lack motivation to focus specifical-ly on investing in green/SRI bonds over regular senior unsecured issuance. One positive aspect of green bond issues that is favoured by many investors however is the detailed and ongoing annual reporting that is required. The added transparency that this provides makes green bonds attractive to some investors.

If more governments across the region focus on work-ing together with investors to encourage their partici-pation, we could see a shift in investment culture that would further boost demand for green bonds and SRI investments more broadly.

: Asian regulators have long sought to develop their local currency debt markets, some-times by working together, often by launching their own projects. But there has been little real progress in this area. What is holding back the development of the Asian local currency bond market — and do you see real scope for change in this area over the coming years?

Lau, PineBridge: I am not sure I can agree about little real progress in this area. For instance, China has CIBM and Bond Connect programmes, in addition to RQFII and QFII, to facilitate overseas investors to go onshore. These are big developments. Index providers, such as Citi, have also included China onshore bonds in some

Lorna Greene National Australia Bank




of their indices. Take Indian bonds as another example – the restrictions such as the investment quota have also relaxed markedly to allow foreign participation.

One may argue that hedging tools and the depth of the market for hedging may still need improvement.

Nishimura, CGIF: Aggregate outstanding local cur-rency bonds in emerging East Asian economies, which include Asean, the People’s Republic of China and Korea, increased from $1.3tr at the end of 2003 to $11tr at the end of June 2017. Some of these local currency bond markets have grown to levels comparable to the developed markets in terms of GDP. Already local currency bond markets have become major funding sources for corporations in the region.

According to data compiled by AMRO [Asean+3 Macroeconomic Research Office], while domestic bank loans were still the dominant sources of funding for cor-porates in these countries with the amount of $13.4tr as of September 2015, domestic bonds ranked second at $2.8tr, significantly surpassing cross-border loans ($0.7tr) or international bonds ($0.2tr). This shows that local currency bond markets in the region have already come a long way from their negligible status before the Asian financial crisis in the late 90s to become the main funding sources for corporates in the region. This is thanks to concerted efforts of governments in the region, such as Asian Bond Markets Initiative, to devel-op local currency bond markets.

Despite this remarkable development, local currency bond markets in the region still face many challenges. One of the biggest challenges is that, while the aggregate size has grown, they consist of fragmented national bond markets at different developmental stages and of rela-tively small sizes with different regulations and market practices. Due to a lack of standardisation and harmoni-sation, intra-regional bond investments are still limited. This hampers efficient mobilisation of the region’s vast savings towards the region’s vast investment needs. Instead the region’s excess savings are still invested mainly in financial markets of developed countries.

In order to promote cross-border issuance and invest-ment flows for better mobilisation of savings, the governments of Asean+3 countries have been working together towards the standardisation of bond issuance practices and harmonisation of regulations. One core initiative under this collaboration is the creation of the Asean+3 Multi-Currency Bond Issuance Framework (AMBIF). AMBIF will allow companies to use standard documentation, which is called single submission form, to issue bonds in professional bond markets in AMBIF member countries.

While it was introduced in 2014, there has been only one AMBIF pilot issue, in September 2015 in Thailand, and actual progress has been rather slow. However, as more companies in the region pursue regional expan-sion and are involved in cross-border investments, there is growing interest in AMBIF among corporates as a new funding platform to support their regional business activities. Hong Kong/China, Japan, Malaysia, Philippines, Singapore and Thailand have joined AMBIF

and other countries are also considering joining. CGIF is already working on a number of AMBIF trans-

actions including those targeting new AMBIF member countries to prepare their participation in AMBIF. If these transactions are successful, this can trigger more interest in AMBIF and can be a game changer to accelerate inte-gration of local currency bond markets in the region.

: How comfortable should Asia’s govern-ments be with foreign investment in local currency bond markets? What is the right amount of interna-tional ownership of local currency bonds to stave off a situation like the Asian financial crisis?

Adrogué, Barings: What is more important is how diversified the local currency investor base is. When you broaden out your investor base to include investors from the whole world, it is more difficult to envision a crisis scenario taking place.

Nishimura, CGIF: While it is true that foreign participation in financial markets may become a channel for risk trans-mission, and further tightening of global liquidity condi-tions in the coming years may exacerbate this concern, we should not forget the benefits of foreign participation.

Most of the Asian bond markets still lack depth and liquidity, the main cause of which is still a narrow base of domestic bond investors who tend to adopt a buy-and-hold investment strategy and tend to have homogeneous investment profiles. Increasing participation of foreign investors with different investment strategies and diversi-fied investment profiles in local currency bond markets can improve market liquidity, and hence enhance effi-ciency and lower financing costs for companies.

Generally speaking, we believe current conditions are very different from the time of the Asian financial crisis in 1997-98, the experiences of the global financial crisis in 2008-2009 and the taper tantrum in 2013. They have proved the capacity of Asian countries to weather these crises relatively well. Some empirical researches sug-gest the growth of local currency bonds since the Asian financial crisis has reduced the vulnerability of finan-cial markets of these countries as local currency bond markets act as a ‘spare tire’ to enhance resilience in the event of shocks. Given this, we believe that benefits of foreign participation still outweigh risks caused by for-eign participation.

In addition, while it is true that some Asian countries like Malaysia and Indonesia already have very high foreign investors’ holding of local currency government bonds, if you look at local currency corporate bonds, foreign holding is still very negligible in Asia. It is clear there is more scope to encourage foreign participation in local currency corporate bonds to improve liquidity and depth of these markets.

Furthermore, the composition of foreign investors can be an important issue. Domestic investors can play an anchor role to stabilise the market when external shocks hit the country. When the domestic investor base is not strong, regional foreign investors with a strong understanding of the country and the market can play a supplementary role to domestic investors, unlike non-regional foreign investors whose investment decisions can be more influenced by external factors.

We believe the same phenomenon is also happening in the dollar bond markets where regional investors are bringing more stability to the market. This is the reason we believe further regional financial integration is important to enhance the resilience of financial mar-kets against external shocks. z

Kiyoshi Nishimura Credit Guarantee and Investment Facility


30 Years in the Capital Markets...Netmarble US$2,336mm Initial Public Offering Joint Bookrunner...

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