IMF World Bank 2006: Going loc
From their position as supporter of local liquidity after the financial crisis that hit Asia at the end of the 1990s, domestic bond markets are now an established funding base for most of the region's active corporates, banks and other financial institutions. Joseph Radford reports.
Local currency-denominated corporate fixed-income security volumes in Asia are close to their highest levels and issuers are becoming increasingly sophisticated. But while the pace of development has been impressive, there is still some way to go before markets reach their full potential.
"The trend is clearly for the further development of bond markets," said Joseph Tan, an economist at Standard Chartered in Singapore. "There are generally huge amounts of trade surpluses [in Asia], which could be reinvested in local assets."
A number of countries in Asia started working to develop local bond markets in the wake of the 1997 Asian financial crisis, providing funds alongside the money that was passed down the form of intercompany credits from subsidiaries outside the region. Governments want to avoid potential future economic disasters by providing an alternative to short-term local currency financing and by slashing borrowers' reliance on banks.
Singapore has been something of a trailblazer, developing a roaring local currency bond market in the wake of a 1998 policy change that allowed foreign companies to issue Singapore dollar-denominated paper. Around US$3.7bn equivalent of deals have been printed so far this year and followed annual volumes for 2004 and 2005 were around US$5bn, according to Thomson Financial.
This development was underpinned by local financial watchdog, the Monetary Authority of Singapore (MAS), which has consistently trumpeted the importance of a thriving domestic bond market. Moves such as abolishing withholding tax, developing liquid government benchmarks and nurturing interest rate swaps have been crucial to the development.
The regulator's changes have helped support a market increasingly exploited by opportunistic offshore issuers tempted by cheap funding that is sometimes available in Singapore and by the chance to diversify their borrowing. Indeed, just over half the local currency paper launched in 2006 has come from overseas issuers. For example, Emirates Airline in June issued its maiden Singapore dollar bond through Citigroup, DBS and Standard Chartered. That long-anticipated S$400m multi-tranche was placed with a total of 30 local and foreign investors, said a local banker.
Other first time Singapore dollar bond issuers include Kazkommertsbank, which launched the first Singapore domestic bond from a Kazakh borrower in early February. That S$100m three-year came through sole bookrunner Standard Bank and was placed with Asian, European and North America-based investors.
Singapore's local bond market is now rivaling Hong Kong's in attracting and retaining international borrowers. Hong Kong's bond market typically ranks in the world top 10 and it is a specific part of many borrowers' annual funding programmes: local currency issuance levels have been largely stable since 2001 – an average of around US$6bn from domestic borrowers and US$9.7bn from foreigners.
One of the most notable Hong Kong dollar transaction of the last few months was a HK$1.1bn (US$141m) five-year FRN from Citigroup. That issue was the largest ever five-year from a non-Asian financial institution in Hong Kong's bond market.
And other countries in the region have been looking to Singapore and Hong Kong as models as they work to develop their own domestic bond markets. For instance, Thailand now has a healthy baht-denominated fixed-income market with volumes reaching US$2.9bn and US$4.5bn in 2004 and 2005 respectively. The government earlier this year relaxed laws prohibiting baht fixed-income issues from foreigners and regulators are also keen to encourage securitisation markets in the country.
Gearing up for securitisation
Local market participants have recently been gearing up for an RMBS from Government Housing Bank (GHB) that could be up to Bt50bn (US$13.4bn). At that size – and assuming as is likely that the deal comes in one tranche rather than as a series – the transaction would be the largest securitisation in the region. It will also be Thailand's maiden RMBS and the first cross-border securitisation from the country for about 10 years.
Elsewhere, the Philippines' domestic bond market has been making great progress. Over the last few months there has been a raft of peso-denominated bonds from local corporates on the back of favourable market conditions. Notably, Ayala Corp in mid-July priced Asia's first corporate hybrid deal. The holding company printed Ps5.8bn (US$111.1m) of preference shares via joint leads BPI Capital, HSBC and First Metro Investment.
And Philippine National Bank (PNB) priced its eagerly anticipated Tier 2 bonds in early August, with ING leading the 10-year, non-call five paper. "We've seen a flurry of bank issuing with local debt for capital expenditure as we approach Basle II," said Jose Mario Cuyegkeng, Manila-based senior economist at ING.
But perhaps the most definitive confirmation that the Philippines domestic market is on a roll came from local oil company Petron, which placed Ps5.5bn of five-year paper via BPI and ING in late July. That deal was executed quickly as a private placement to 12 investors – indicating that decent size deals can be easily printed via a powerful onshore liquidity-driven bid.
Although this upturn has largely been driven by declining yields, the government has also taken steps to try and boost peso bond market liquidity. In mid-August the Philippines National Treasury launched a new phase of the debt consolidation programme that it originally held in the first quarter of 2006. National treasurer Omar Cruz announced plans for an exchange of eligible outstanding bonds into new 10-year benchmark paper to follow in the wake of the earlier creation of new three, five and seven-year benchmark bonds. The government hopes the benchmark issues will act as clear reference points for other transactions based on government bond yields.
However, local market participants said that 20% withholding tax in the Philippines is still a major disincentive to foreign investment. One banker said that withholding tax is likely to remain at current levels for a long time because any reduction would need strong political backing.
The Islamic connection
Meanwhile, Malaysia has developed thriving domestic currency bond markets with issuance hitting a high of US$5.5bn in 2005, according to Thomson Financial (See table). This has largely been driven by the country's Sharia-compliant bond markets, which have gone from strength to strength over the last two years with Islamic paper making up around two-thirds of private ringgit debt issued last year.
The Malaysian government's campaign to promote the country as a regional centre for Islamic finance has been instrumental in this growth. Bank Negara Malaysia in mid-February this year made its inaugural issue of Sharia compliant bonds with a maturity of one-year or longer in the hope of setting a benchmark for other Islamic bond issues in Malaysia. The M$400m of 12-month Sukuk Ijarah paper priced at around 3.163% and was favourably greeted by market participants.
The growth of the country's blossoming Islamic insurance industry has also increased demand for Islamic debt. Islamic insurance – commonly referred to as Takaful – operators are estimated to hold around 50% of their assets in corporate bonds.
The Malaysian government has also encouraged multilaterals to make Islamic issues in the country. International Finance Corp (IFC) in December 2004 priced a M$500m due 2007 Islamic bond – the maiden Islamic issue by a supranational institution in any domestic capital market. The transaction, which was led by CIMB and HSBC, was designed to draw attention to Malaysia's Islamic debt capital markets.
Supranationals have made significant contributions to a number of local fixed-income securities markets in Asia. And while it could be tempting to dismiss such bonds as little more than PR stunts, there is a strong case in favour of the contribution they make to emerging capital markets. "We're glad to get the PR because that helps the rest of our business – but that is not the primary intention," said Nina Shapiro, IFC vice-president, finance and treasurer in Washington. "This kind of commitment is only worthwhile if it facilitates the development of domestic markets."
Development bank officials argue that the spotlight such deals shine on local markets is vital. "There are some issuers that launch bonds in international markets but are hesitating to be active in [domestic markets]," Horst Seissinger, KfW's first vice-president and head of capital markets in Frankfurt, said earlier this year. "That's where our local currency bonds can act as an example."
And supranationals believe they can also set a good example to local issuers. "We bring international practice in terms of transparency, the information memo, bookbuilding and roadshows," said Shapiro. "Then we work with regulators on key elements of the bond issuance process to help make it more efficient."
Supras are also increasingly helping issuers in emerging markets through methods such as offering guarantees to local bond issues. For example, Netherlands Development Finance (FMO), a government-owned organisation focused on the economic enhancement of emerging markets last October offered a 50% principal guarantee on bills of exchange from Thailand's Finansa Public. Although FMO has been active in Asia for over 25 years, the deal marked the first time it had provided this kind of financial guarantee in Thailand.