I DON’T MEAN to cause offence, but when I think of private bankers I think of harried individuals walking their clients’ poodles, rushing to pick up their spoiled brats from the gates of the overpriced branch of an English public school somewhere in an Asian metropolis and fielding phone calls at all hours of the night from these relentlessly demanding individuals who know their net worth down to the last farthing.
Apparently it’s not like that at all. Nor are private bank clients a bunch of idiot stuffees, willing to book any old bond thrown at them on the flimsiest of credit stories.
According to the head of Asia syndicate at a European bank, just a few weeks ago at an investor dinner, the head of an Asian private bank stood up and told everybody that his clients love the kind of good credit meltdown that we have recently seen in the secondary offshore China property complex on Kaisa’s recent coupon miss.
Buy on dips? You bet. Negotiate a standard deviation or two on the spread to Treasuries to spot a bit of value? It seems Asia’s wealthy individuals are developing those smarts, too. They no longer sit either in the camp that flips a new issue for 10 cents profit or buys and holds to maturity.
This growing sophistication is just as well because, frankly, without the private bank bid the Asian new-issue market would lose a key support that has become something of a necessity.
That bid, which remains supported by generous leverage offered to clients of as much as 40% and handy rebates of up to 50 cents for their advisers, has proved to be crucial for creating price tension and allowing aggressive iterations from initial guidance to be effortlessly pulled off.
But apparently along with growing sophistication has come a burgeoning risk aversion. The juicy coupons which used to propel dodgy China property credits or unrated Singaporeans over the line might just not be enough any more. There is discernment, I am told, and that is no bad thing.
Along with growing sophistication has come a burgeoning risk aversion
ASIA’S PRIVATE BANKS and their clients will have to adapt to some interesting trends this year in Asia as primary G3 kicks off. The Fed and the potential for monetary policy normalisation continue to hang over proceedings, as well as a slowing China, a restructuring-minded Greece and a last-to-the-party European Central Bank. It is the most unsettling start to a year that I can remember.
Trying to predict how the Asia G3 year will pan out is, as always, a fool’s errand – but here goes.
There will be lots of issuance in euros. There was a good crop last year, thanks to a benign basis swap to US dollars. That swap has deteriorated, but euro yields have plummeted, and this is unlikely to stem the flow of euro issuance from Asia. Last year’s tally of around US$12bn equivalent was a more than 25% gain on the previous year. The year before that it was a derisory US$2bn equivalent.
Why will the basis be unimportant as a driver of euro issuance from Asia? Well, because there is a growing need for unhedged euros from Asia Inc, where outbound M&A into Europe is beginning to gather pace. It was going on last year and a lot of the bridge financing used to buy European takeover targets will find its way into the bond markets.
Expect a round of M&A-related consolidation in the oil sector, assuming the oil price remains in the doldrums. I imagine the likes of China state-owned oil major CNOOC will be planning a European shopping spree. Bond issuance will at some point follow any acquisitions.
INFRASTRUCTURE BONDS MAY also come into their own this year. It’s been mooted time and time again over the years, but this year it might well happen. Narendra Modi seems to get the joke in India and has been busy fast-tracking infrastructure projects left, right and centre.
That means a lot of people getting booted off land they believe – often rightfully – is theirs. But no matter as far as Mr. Modi is concerned. India faces a looming energy crisis and something urgently needs to be done. The same is true in Indonesia, where fellow greenhorn Joko Widodo seems equally determined to address the problem.
Project finance bonds often seem like a sexy item, meeting a development economics-driven moral imperative and tapping into investors’ bid for diversification. It doesn’t matter that from a financing perspective they are really not an elegant solution, untailored as they are to project cashflow requirements. The most important thing is that they provide much-needed dosh.
A well-known – let’s call him legendary – Asia-based loan banker once said to me of project finance loans that they either default or get refinanced ad infinitum. That won’t quite do when you’re talking about bonds and an asset class that isn’t driven by a relatively small coterie of bank lenders. Nevertheless, if this does become the year of the project finance bond in Asia, I’m sure the private bank bid will emerge as a key supporter of the product.
And if the private banks now enjoy nothing better than a bit of a meltdown, I can think of no better source than this emerging asset class. It could be Asia’s next big thing in more ways than one
