WHEN IT COMES to countries allowing bond issuance in international format in their local currency it’s probably best not to believe the hype. At least that’s been my experience over the past decade or so in Asia.
The latest country to climb on to the bandwagon is India, where bankers are talking up the prospect of an issuance bonanza in so-called Masala bonds, or bonds denominated in rupees but with coupons paid and principal settled overseas in US dollars. A group of familiar Indian issuers, including the country’s largest mortgage lender HDFC, power giant NTPC and Indian Railways are planning imminent Masala issuance.
This reminds me of the hype from a couple of years ago surrounding global issuance in Philippine pesos. That was going to be the next big thing from the Philippines capital markets, but just a handful of issues were brought and despite the paper settling via Euroclear and offering what appeared to be an investor-friendly route to peso yields, the global peso deals that were brought quickly became deeply illiquid.
But what was clear from the Philippine government’s first global peso deal, which emerged in 2012, is that the issuer was well served by tapping into the international investor pool versus relying on domestic buyers of its debt. Execution was swift, with books closing on its debut deal in around eight hours, while the sovereign was able to price well through its blended domestic yield curve, when withholding tax was factored in.
Of course, it helped that at the time, the country was experiencing heady GDP growth, which in turn had prompted a surge in the value of the peso. Because the reality is that in the eyes of most international investors, these offshore bonds denominated in local currency – be they Dim Sum, global peso, Panda or Masala bonds – are basically a call on the future direction of the underlying currency.
In the eyes of most international investors, these offshore bonds are basically a call on the future direction of the underlying currency
TO MY MIND this makes them quintessentially opportunistic instruments, at least in terms of the opening of the issuance window and how long that window can remain open.
So it would have been unthinkable for India to have opened the Masala bond market a few years ago when the rupee crashed almost 25% in he midst of the “taper tantrum”. And when Philippine economic growth returned to a more moribund level and the shine went off the currency, so the issuance window for global peso issuance slammed shut.
Another way of looking at these products is as an indirect critique of the domestic markets of their host countries. Apart from the currency call that underpins the appeal of the issuance to investors, it means they can get exposure without having to dip their toes into the quagmire of Asia’s local bond markets.
Many global investors are not qualified to play in the local markets, scared off by the volatility of the regulatory backdrop and trading and settlement mechanisms. Many also regard Asia’s domestic bond markets as being run by a cabal of insiders and highly vulnerable to manipulation. Alright, I know that the same can be said about the mighty London Interbank Offered Rate, but I think you get the picture.
The point is that there should be no need for these instruments at all if Asia had got down to the task of unifying its clearance mechanism and if all quota restrictions on qualified foreign investors were to be lifted.
In India’s case, while in 2013 the Securities and Exchange Board of India eased the restrictions on foreign buyers investing in listed Indian domestic corporate debt, the ceiling of investment stands at a lickspittle US$1bn equivalent. At least China gets the joke on that issue and has spent the months since the summer meltdown on its equities market in opening up its domestic bond markets to foreign investors.
I RECALL WRITING back in 2008 about the Asean +3 Asian Bond Market Initiative under which the members of Asean – Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam – would set up a common bond settlement mechanism that would comprise an international securities depository and a special purpose “Asian payments bank” in a bid to eliminate settlement risk and increase the liquidity of South East Asia’s domestic bond markets.
Well, seven years later and that remains just a grand aspiration, having got no further than the setting up of a panel of experts. The reason to my mind is that no one could agree on where to headquarter that Asian payments bank. Singapore thought it was a natural choice, and the South Koreans (one of the +3, the others being China and Japan) were pushing hard for Seoul.
They were probably mindful of the fact that JP Morgan made vast sums from running Euroclear, which it set up in the late 1960s in Brussels, helping to seed the Eurobond extravaganza of the next 30 years.
But there should be an Asiaclear, just as there should be a streamlining of QFI guidelines and the abolition of withholding tax on domestic bond investments made by international investors. A sort of Trans-Pacific Partnership for the Asian bond markets if you will. If this were to be initiated we could consign the fancy names Panda, Masala and Dim Sum to the dustbin of capital markets history.
