IFR Asia’s 6th annual Green and Sustainable Financing Roundtable took place on August 20, 2020, amid a period of unprecedented change in the capital markets.
The Covid-19 pandemic has forced businesses everywhere to change the way they operate, and IFR is no different. Originally scheduled as a face-to-face discussion, this year’s Outlook for Asian Credit Roundtable brought together a cross-section of market participants for a live webcast – a first for this publication.
IFR’s ESG webinar took place on June 23, days after the European Parliament had passed the EU Taxonomy Regulation, and soon after the Green and Social Bond Principles Annual General Meeting had unveiled Sustainability-Linked Bond Principles for ESG targets-based general purpose bonds. (Not to be confused with use-of-proceeds sustainability bonds, ICMA was careful to point out).
IFR has conducted its German Corporate Funding Roundtable for around a dozen years now. The conversation that took place in early June as a closed video conference call was clearly and easily the most extraordinary, given what had happened in the previous quarter.The impacts and effects of Covid-19 as a public health issue first and a second-order economic issue need no repeating here. Yet despite the dire macroeconomic data and forecasts, the capital markets have experienced one of the best periods in their recent history. Since the severe collapse in equity and bond prices towards the end of March, markets have staged a remarkable comeback. Bond issuance volumes have hit records and while credit pricing may not have recovered its – arguably overbought – pre-Covid levels, the market is offering issuers tremendous opportunities to lock in keen costs of funds at a highly uncertain time. Both of the issuers on the session – BMW and E.ON – have taken full advantage of the opportunities the market has afforded them. While deals are being executed at a rapid clip, the market isn’t exactly euphoric although it has to be said the central bank and government support packages are acting as a robust backstop and creating a broadly comfortable if nervy tone. Discussion on the IFR call did question whether the government and monetary support generally was perhaps going too far and whether governments had over-reacted, creating into the bargain a strange juxtaposition of rampant inflation in financial asset prices set against a backdrop of dire economic impacts. What came up in discussion was an interesting notion that public authorities have created a series of temporary fixes to an economic problem using financial tools that are not necessarily appropriate. And, in the haste to get something out, not all of the monetary tools and programmes may necessarily have been well thought out. The bigger issue, of course, is how governments and monetary authorities exit their bazooka programmes.Panellists questioned the extent to which fundamentals justify current spreads, but by the same token investors do not have the luxury of putting liquidity aside and waiting for better levels. Neither of the investors on the call have really altered their approach to the bond market. Nor have DCM originators. While the impacts of Covid-19 have been grave and called for caution, the bond market has been through crises before. All of that said, the there was a sense on the call that capital markets participants have been acting at the same time as wondering if it made sense in the long run.In light of developments from March, IFR’s panellists – two issuers, two investors (Union Investment and Ampega Asset Management), and two bankers (HSBC and Commerzbank) – followed similar paths of operationalising risk-mitigation processes, conducting internal stress tests and scenario analyses to try and make sense of emerging developments with a view to keeping the capital markets functioning.
Whenever an asset class sets a new record, people inevitably start to wonder whether a bubble is about to burst. Asian high-yield issuance had its best year on record in 2019, fuelled by the global low interest rate environment and a hunt for yield. So far, however, there are no signs of overheating. One of the main drivers of this year’s huge issuance volume was the massive refinancing requirement for Chinese property companies, and the amount of maturities next year is even higher.
IFR held its US ECM Roundtable on October 24 as stock market indices were nearing historic highs.US equity capital markets have enjoyed a banner year in 2019, at least in terms of volume. Private unicorns have begun their long-awaited transition under the public markets, driving IPO volumes to new levels. Biotechs, a sub-sector of that transition, have found a good reception for their funding needs, and foreign companies are offering US investors a growing array of opportunities.
It is now very clear that UK and US regulators want market participants to transition away from Libor by its phase-out at the end of 2021, predominantly because it is a not based on transactions whereas replacements SOFR and Sonia are. Despite the US being the centre of global finance a surprising amount of action is happening in the UK’s Sonia market. It feels somehow appropriate that new issuance of Sonia-linked bonds has set a blistering pace; an endorsement that the sterling market’s designated new risk-free rate (RFR) is ready to replace Libor in a couple of years’ time.
Green finance may have initially been treated as a niche product or a marketing gimmick, but it is becoming harder to ignore. In Asia, the market for environmental, social and governance investment seems to be at a turning point. Blue-chip companies like Olam International and Frasers Property report overwhelming demand when they seek to borrow in green or sustainable format, but many issuers and investors have yet to begin their journey.
Welcome to the IFR/LPC Samurai Loans Roundtable. The event, held in Tokyo on August 27, drew strong interest from market participants with around 140 people attending. It brought together the three Japanese mega banks, regional banks in the country and foreign borrowers in a discussion covering the trends and outlook for Samurai and Ninja loans.
Green finance has become one of the most important themes driving global finance. It has captured the attention of banks, companies, investors, governments and the general populace. And it continues to gather pace as the notion of a climate emergency demanding urgent action increasingly takes hold.
The skies have cleared, and Asian credit is on a roll. After the end of 2018 produced one of the stormiest periods in years, the retreat of major headwinds has helped cement a solid backdrop for Asian bonds at the start of 2019. The US Federal Reserve has slammed the brakes on monetary tightening, trade tensions have subsided for now, and market stability has become a top priority for China as it wrestles with deleveraging its economy.
Sustainable infrastructure was high on the agenda at this year’s Asian Development Bank annual meetings in Fiji, where climate change and ocean health have a pronounced impact on everyday life. The capital markets are also showing a growing interest in sustainable development, but Asia is still a long way from harnessing the market’s full potential.