IFR DCM Report 2012

To view the digital version of this report, please click here.The renminbi market remains the local currency market for Asia. Issuance volumes in the renminbi fixed-income market in the year-to-date already stand at Rmb125bn (US$19.7bn) versus a whole year of Rmb150bn in 2011, according to Barclays.“This year renminbi issuance is going to exceed last year’s level. The second quarter was a record quarter in the market,” said Jon Pratt, head of Asia-Pacific DCM for Barclays in Hong Kong.But there is a slight sense that Dim Sum issuance is yesterday’s news.It is not just that bankers have become ardent neophiles. There are some solid reasons behind it. With a renminbi appreciating about 4% a year against the US dollar last year, even low yields were an investment no-brainer thanks to the currency pick-up. That all changed in mid-March when China’s Premier Wen Jiabao pointed out that the renminbi was close to its “equilibrium value” against the US dollar.Weak economic data have also plagued the China story this year. Industrial companies’ profits in the first seven months of the year dropped 2.7% to Rmb2.7trn, according to the National Bureau of Statistics. That adds to the 2.2% drop in the first half versus a hefty 28.3% gain in the same period last year. The Shanghai Composite hit a 41-month low at the end of August.Is the gloom overblown? Probably. “The lack of appreciation in the renminbi is temporary – there is no permanent structural change,” said Ashley Davies, Asia senior economist/FX strategist at Commerzbank in Singapore. “And it would be a mistake to extrapolate that for years on end.”Belle of the ballNonetheless, if the excitement surrounding the Dim Sum market has waned slightly, the Singapore dollar bond market is keen to step up to the plate. Bond issuance this year has been remarkable. Last year saw bond sales of S$19.7bn (US$15.7bn). This year’s volumes already stand at S$23.1bn. James Fielder, head of local currency syndicate, Asia, global markets, for HSBC said: “The Singapore dollar market is on fire this year.”Why is the Singapore dollar market the current belle of the ball? First is its safe-haven status. Singapore’s coveted Triple A rating is only one of three in Asia. Second are the low benchmark rates. The five-year government benchmark rate is currently sitting at 0.41%, while the 10-year is 1.41%, only 7bp above Bunds and 11bp inside Gilts. At the same time as low interest rates, the Singapore dollar remains strong. August saw a low of 1.239 against the US dollar, though it settled around the 1.25 mark – up 3.5% on the year. That makes a basis swap trade incredibly attractive. All of that, combined with the continued growth in private banking in Singapore means there is a great deal of money looking for yield.“There is a lot of capital aggregated in Singapore in the private wealth community. That community is looking at bonds instead of equity,” said one Asian DCM banker.The demand for Singaporean paper has continued consistently through the year and the story of the year has been the massive oversubscription for paper. In mid-August, Singapore’s National Trades Union Congress and the only insurance co-operative in Singapore, sold a S$600m 15-year non-call 10 via DBS, Citigroup and Standard Chartered. The 3.65% notes saw orders of more than S$9bn.A couple of weeks later, property developer GuocoLand saw a S$2.35bn order book for its S$105m five-year deal. Both beat Genting Singapore, which owns one of Singapore’s two multibillion-dollar casino complexes, which in March sold a jaw-dropping S$1.8bn 5.125% perpetual issue, the largest ever single-tranche issue in the Singapore dollar market, with S$6bn orders.Also spurred on by a deliberately low interest rate environment that is likely to remain in place for the foreseeable future thanks to the threats of inflation (although figures from the Singapore Department of Statistics show that inflation stood at 4% in July, that is the lowest level for 20 months)

To view the digital version of this report, please click here.Despite declining sentiment around the eurozone and the difficulty of selling paper, some financials have seen the advantages of the Samurai market. For the right names, the Japanese market has been open.The year certainly started well for European names. January saw DNB Bank sell its debut Samurai offering, a ¥65bn (US$837m) five-year bond fixed at Libor plus 140bp via Daiwa Capital Markets, Mizuho and Nomura. In June, Nordea Bank sold the largest debut Samurai offering since the collapse of Lehman Brothers. It beat expectations of a ¥100bn debut and in the end sold an impressive ¥120.2bn multi-tranche deal.The Samurai came out split into a ¥15.9bn 0.96% three-year tranche priced at yen offer-side swaps plus 55bp (85bp over JGBs); a ¥8.5bn four-year floater at 70bp over three-month Libor; ¥85.3bn 1.2% five-year note at plus 72bp (96.5bp over); a ¥4.9bn five-year FRN paying 87bp over; and ¥5.6bn 1.75% 10-year tranche printed at plus 82bp (86bp over).“Appetite for the right European FIG names is most definitely there and in large size, but investors are becoming more selective on a credit by credit basis. There is a level of sophistication not seen 10 years ago,” said Vince Purton, head of DCM at Daiwa Capital Markets Europe.Hybrid marketWhat has helped is that the Japanese market has been going out of its way to court new issuance. Japan’s new professionals-only bond market, the Pro-Bond market, was created to emulate the 144a and EMTN markets in the US and Europe.“It was designed as a hybrid Samurai from the euro end, but adopting Japanese law and Japanese settlement,” said Kenji Setogawa, head of debt syndicate at Barclays in Tokyo.It was opened in April this year by ING, which sold a ¥50.7bn 1.4% two-year deal at yen offer-side swaps plus 100bp, equivalent to 128.5bp over JGBs. Although the bank paid a premium to euro funding, it came both flat to where a Samurai would have priced and, significantly, inside a US dollar deal.Although there have been some complaints about the format, mostly in terms of liquidity and distribution, they are outweighed by the advantages. Chief among those is that unlike Samurais, the Pro-Bond does not require borrowers to translate documents, or indeed ongoing disclosure, into Japanese, which makes for quick execution. The hope is that the format will attract regional investors which are limited as to where they could place their money.While the market is always going to be niche, interest was piqued again in August when Nomura indicated its intention to look at the market when it registered two of its subsidiaries. Both programmes are US dollar-denominated, with Nomura Europe Finance listing a US$40bn programme and Nomura Bank International a US$12.5bn one. And a further couple of names are rumoured to be looking at the format.Korean festivalWhat has dominated the Samurai market so far this year is South Korea. So much so that the country is likely to take second place to Australia in overall Samurai bond issuance this year.The drive to print in Samurai format is not just coming from the issuers. “For historical reasons, Japanese investors are familiar with Korean names. We are also seeing issuance with tenors of 18 months to two years. Domestic banks don’t go that short. So from an investor perspective we often don’t have any other alternatives than Korean names,” said Takaomi Tahara, head of international debt syndicate at Nomura in Japan.In May, for example, Export-Import Bank of Korea sold a ¥100bn three-part Samurai, the largest Asian ex-Australia yen offering. By July, participants hailed the month as a Korean festival, and supply hit ¥259.7bn from 17 issues. To give an idea of scale, that month boosted 2012 volumes to almost 70% of the amount raised in the whole of 2011, according to Thomson Reuters data.The month opened with Shinhan Bank which sold ¥35bn dual-tranche paper, a two-year tenor at yen offer-side swaps plus 93bp a

To view the digital version of this report, please click here.The diminished supply of cross-border credit in the aftermath of the financial crisis has led Asian corporates to rely more and more on domestic capital markets financing for their funding needs. In the past year, an increasing number of Asian issuers have been raising debt in either their own local markets, or in markets like Singapore, which is increasingly becoming a regional hub.To the extent that regulatory changes in the West will continue to impede the availability of external financing – bank loans in particular – this is a positive development and one that Asian experts believe has great long-term potential.“For an Asian company that’s funding its domestic operations, local currency bonds can be cheaper and safer,” says Rajeev De Mello, head of Asian fixed income for Schroders in Singapore, which in July, launched a new fund specifically to invest in Asian local currency bonds. “Yield curves in Asian countries are very low and investors increasingly have an appetite for local currency bonds. From the issuers’ perspective, there is no currency risk in raising money in their own unit of account.”Clearly, Asian companies can benefit greatly by reducing their dependence on bank loans, cross-border as well as domestic. But every Asian country is at a different point in the development of lending and credit cultures and the pace of regulation and sovereign support at the country level will determine the extent to which local currency bond market financing will or will not pick up steam going forward.The balance between bank loans and capital markets instruments at the local level varies greatly from country to country in Asia, said Ousmene Mandeng, co-head of the public sector group at UBS in London.“In general, I’d say that Asia is starting from a relatively low point on average compared with other countries, including other emerging markets, with respect to the use of the securities markets by companies, and even though domestic securities are increasing again in number, they remain small as a percentage of GDP,” Mandeng said.Too shortDomestic corporate debt outstanding in emerging Asia represents on average about 24% of GDP compared with 58% in advanced economies, he says, not least because corporates in Asia and other emerging markets can issue longer tenors in foreign currency instruments, “so many are still tempted by that market”.There is no denying that the international market still has great appeal for many Asia issuers, largely because the domestic markets are much smaller and have less depth. Issuers with larger needs, such as banks that finance the international businesses of multinational companies based in Asia, would definitely prefer the international markets, De Mello says. And although some of the more sophisticated issuers do hedge their currency risk, hedging products have become more expensive because of new regulation on derivatives, he says, which is another reason why the US dollar market may be more attractive to many issuers.Furthermore, “local bond markets in Asia are still not very liquid and investors have to pay a significant bid-offer spread to trade a bond, which forces them to take an investment horizon closer to the remaining maturity of a bond issue to minimize trading costs,” De Mello said. “In many countries, taxes on corporate coupons are a disincentive for investors to participate in the local corporate bond markets as it reduces their after-tax returns. Many countries also offer favorable tax treatment to government bond investors, thereby making corporate bonds relatively less attractive.”Nevertheless, the local markets in Asia are certainly developing and growing, aided by the weakness in the US dollar and the deterioration in US government finances, both of which are pushing investors to look for bond diversification across the globe.Sovereign helpExperts like Mandeng believe that Asian sovereigns can help a great deal

To view the digital version of this report, please click here.The European high-yield debt market is still only a fraction of the size of its US counterpart, but it is evolving into an independent, standalone asset class that plays to the increasing need for diversity in European corporate finance.“If you’re looking at figures post the last financial crisis, the European high-yield market has actually had a faster growth rate than the US market,” said Michael Moravec, head of European high-yield syndicate and co-head of leveraged finance origination at Barclays in London. “Historically, the European high-yield market hasn’t grown as quickly as some might have wanted, largely because bank lending has always been much more important in Europe. But today, high yield is playing a bigger role and we expect that more and more corporate issuers, even some that have never used the high-yield bond market before, will be looking to make use of it.” The evolution of the European high-yield market since its inception in the late 1990s to where it stands today has happened in several stages.“Yes, at the outset we imported technology from the US to build up the market and we relied a great deal on US investors, who saw good opportunity in European high-yield debt after the downfall of the market in 2001-02,” said Tanneguy de Carne, head of high-yield at Societe Generale in London.But as early as 2004, the market began to acquire an identity that was purely European, he added, thanks to increased European investor interest in high-yield debt and the creation of new European funds devoted to the asset class. More importantly, high-yield bond documentation took on a true European flavour by doing away with the cumbersome SEC registration process that US investors had insisted on, he said. Also the debate over bondholder rights built momentum, finally culminating with bondholders now having equal voting rights as bank lenders.Crisis boostOf course the financial crisis also greatly enhanced both the role and the appeal of high-yield debt in Europe.“In 2008 and 2009, mezzanine – which had always been extremely popular in Europe – got completely wiped out, and as the collateralised loan obligation bid for bank loans also went down in Europe, everyone starting looking toward high yield for liquidity,” de Carne said. “Senior bank debt also welcomed high yield to the table, honouring bondholders’ requests for the pari passu status, saying ‘if we don’t get let them come in, we’re not going to get anything done.’”In the past couple of years, more and more companies have been issuing high-yield bonds, and today, it has become a market that none can afford to ignore. Generally speaking, only 30% to 35% of European companies currently access the capital markets for their funding needs (compared to 70% to 75% in the US), and of these probably less than 5% of European high yield corporates have accessed the European high yield bond market, de Carne said, so the growth potential is huge.“Because of the pace of regulation in Europe and the capital constraints that banks are facing, we’re going to see acceleration in the change from corporates relying on banks to a much more balanced funding between banks and the capital markets, so this is really a big chance for high yield,” he said.“Now that we have passed the debate on equal voting rights, now that we have greater transparency and standardisation in high yield documentation, the next step is to see how deep high yield is going to go into the mid-cap corporate market to build up the future flow of new issuance.”Sovereign slowdownTraditionally in Europe, banks have strictly catered to the mid-market corporate arena. But there is little doubt that the regulatory pressure of Basel III, the higher lending costs – as well as the post financial crisis capital crunch that banks are still dealing with – has already started to change things, Moravec says. In Europe, high-yield bonds have mainly been used to finance

To view the digital version of this report, please click here.A picture may tell a thousand words, but sometimes just a few words can sell a thousand bonds.European Central Bank President Mario Draghi’s vow to do “whatever it takes” to save the single currency, up to and including purchasing all eurozone countries’ short-term bonds – the latter pledge made on September 6 – may be the best thing the ECB president ever does.Overnight it lifted all boats, giving the markets a much-needed late summer fillip, boosting equities and putting the spring back in the bond market. But perhaps nowhere were the effects of Draghi’s magic more keenly and immediately felt than in the Yankee bond market.France’s BNP Paribas was the first to test the waters. After seeing spreads on its 2016 bonds tighten, it launched a US$1.25bn five-year issuance, its first Yankee bond in 16 months. Nor was France’s largest lender by assets inclined to give investors a free lunch after such a long absence. It broke out of the gate with initial guidance of 185bp–190bp before tightening to guidance of 180bp and issuing at 178bp.Returning the loveInvestors, as if recognising the return of an old flame from war, returned the love. The self-led deal garnered more than US$4bn of demand: a remarkable turnround in fortunes proving, if nothing else, that European lawmakers were sometimes capable of doing the simple things (saying and then doing things the market likes) quite well.Yet despite its success, BNP Paribas’ deal at first appeared to float alone, making investors question whether it was a marker, or a one-hit ’eurowonder’. Rather than presaging an expected American stampede, many European lenders seemed to hold back, or pursue alternative capital-raising routes. Danske Bank and ABN AMRO both opted to turn to the Asian Reg S dollar market in search of fresh funding.Eventually, though, others were tempted. Nordea, a favourite among American investors, who consider it the cream of the Nordic crop, tapped the US dollar market on September 17 for the first time since January, just when the swap currency environment was improving. Its 10-year bullet trade, raising US$1bn on triple that amount of orders, was the first of its kind issued since May 2011.Questions do still hang over European Yankee deals. Lower-end lenders, particularly those from peripheral European markets, may still struggle to gain traction in the US.But for the continent’s blue-chip names, the money is there if it is needed, syndicates said. Gordon Taylor, managing director, financial institutions DCM at RBS in London, describes the US market as a “very exciting market for European borrowers” now that the worst of the European crisis appears – for now at least – to be consigned to the past.Tom Criqui, head of FIG syndicate at Deutsche Bank in New York, credits the BNPP trade with opening up the market again to European issuers, while boosting liquidity.“That trade [was] good, and my sense is that you might see some follow-up with other banks looking at the market now,” he said. “The last major deal was Handelsbanken in March, so to see a French bank of a considerable size [tapping the market] was a very good sign.”Europe’s banks, many still humbled and hobbled by the continent’s sovereign debt crisis, which, lest we forget, is still a going concern, are hardly top dog in the Yankee world, for all of Draghi’s soothing words.Top billing this year goes to Britain’s hungry banks, which together issued US$60bn worth of new paper to US investors in the year to September 14, according to Thomson Reuters.Royal Bank of Scotland, piggybacking on BNPP’s momentum, was beaming broadly after announcing tenders for nine of its dollar-denominated bonds worth US$13.25bn – part of a larger £16.6bn liability management buyback scheme. That marked the British bank’s first Yankee issuance in more than 18 months.Two more Anglo-Saxon markets followed the UK in quick succession. Canada’s expansion-oriented banks issued US$

To view the digital version of this report, please click here.The year started so well. In mid-March, state-owned Development Bank of Mongolia sold a debut US$580m five-year Reg S bond via Deutsche Bank, HSBC and ING. It priced at par to yield 5.75%, comfortably inside initial guidance levels of 6.00%–6.25%; it drew orders totalling US$6.25bn; and attracted more than 300 investors.Even though the bonds carry an unconditional and irrevocable guarantee from the Ministry of Finance on behalf of the Government of Mongolia, which made it a proxy for the sovereign, it was a classy debut by any reckoning (after the break it quickly traded up to 101.20/101.50) and an indication of the demand for exposure to the frontier markets.The ground in the country’s offshore bond market was broken for Development Bank of Mongolia by a couple of previous Mongolian issues, both of them from the Trade and Development Bank of Mongolia, the oldest and one of the largest banks in the country.At the end of January 2007, TDBM dipped its toes in the water with a US$75m three-year 8.625% bond priced at 99.676 to yield 8.75%. It was followed up nearly four years later in October 2010 with a US$150m three-year Reg S that was reoffered at 99.353 with a coupon of 8.5%, again to yield 8.75%.Little wonder then that Development Bank of Mongolia did so well. It had rarity value behind it and, by many people’s reckoning, Mongolia should be a safe bet. The country grew 17.3% last year thanks to the mining industry. No surprise then that Development Bank of Mongolia was followed into the international markets two weeks later by high-quality coking coal producer and exporter Mongolian Mining Corp. It priced a US$600m global at the tight end of final guidance of 8.875%–9.00% (revised down from an initial mid-9% area) via Bank of America Merrill Lynch, ING and JP Morgan.Dear diary momentThe deal was a dear diary moment for a number of reasons. It was the largest bond out of Mongolia to date; it was the country’s first corporate deal; the country’s first 144a issue; and the largest debut issue from a Single B rated Asian corporate credit in the past five years. Like Development Bank of Mongolia, MMC attracted a massive book – in the end US$5.6bn from 330 accounts – and the move to try and attract US investors was a gamble that paid off. Well over half of the accounts that came in were from the US with the rest equally split between Europe and Asia.Moody’s was bullish in its outlook for the country. “The exploitation of the Oyu Tolgoi copper field and other large mineral deposits, such as Tavan Tolgoi’s high-grade coking coal, will lead to significant structural changes in the economy and provide a windfall to government finances from 2013 onwards, based on the current state of developments,” it said in a report.Suspended animationBut since then … nothing. To take advantage of what they saw was clear appetite for all things Mongolian, in early April Ulaanbaatar-based community development bank XacBank planned a three-year Reg S of about US$100m via ING and UBS. There was even price whisper of around 10%, but its debut dollar bond was quietly shelved.The same thing happened to Golomt Bank, the country’s largest privately owned lender. Golomt tried to follow in XacBank’s wake in mid-April. It set up investor meetings for a Reg S/144a deal up to US$200m via Deutsche Bank, Morgan Stanley and UBS. But again it decided against coming to market. “There wasn’t necessarily a deal out there when it was announced it had said there might be one to follow,” said a source close to the borrower at the time.A month later, government-controlled State Bank of Mongolia sent out RFPs for offshore issuance. Thanks to that government control, it had hoped to follow the examples of Development Bank of Mongolia and Mongolian Mining Corp rather than either XacBank and Golomt, but again nothing appeared then or since.And it is not just bonds that are in suspended animation, equities are too. Erde

To view the digital version of this report, please click here.For the year to September 10, total international debt capital market issuance out of Latin America amounted to US$67bn against US$92bn for the whole of last year and US$86bn in 2010, according to data from Thomson Reuters. Brazil is the biggest issuer this year at US$29.66bn (44.3% of the total) against Mexico with US$17.56bn (26.2%) and Chile with US$4.9bn (7.4%).Brazil issued a total of US$36.3bn (39.4%) against Mexico with US$20.2bn (20.2%) last year. Venezuela took third place with US$13.68bn of almost exclusively sovereign issuance, but that has dropped significantly this year to US$4.38bn. Chile issued a total of US$4.5bn last year, from US$4.9bn the year before, in the international markets.“Last year, we saw a record level of international issuance out of Latin America,” said Chris Gilfond, co-head of Latin America credit markets at Citigroup. “Currently, we are seeing very strong weekly volumes that have at times exceeded US$5bn in a single week, so we are on track to exceed last year’s record volumes.“The window is very much open for issuers for three reasons: first, there is so much liquidity out there. Second, the developed world has lost its lustre, and people see better returns in Latin America. In 2010, investors started to realise just how favourable the fundamentals of Latin America are compared with developed economies. Third, demand is growing faster than supply – many deals are oversubscribed 10 to 17 times. There are many high calibre issuers from Latin America.”He added that he expected to see more issuance from the high-yield space following the recent US$1.5bn of 8.25% notes due 2020 issue by Digicel Group, the Caribbean telecoms firm, which reopened the high-yield space following a long hiatus.Easing tensions“A large proportion of the issuance this year has been opportunistic,” said Monica Hanson, head of Latin America global finance at Barclays. “During the fourth quarter last year, there was so much international volatility that the markets were essentially shut down; there was no sovereign issuance. But during the first quarter there was a flood into the market, as tensions over the euro eased and everyone decided to tap the markets.“During the third quarter, the markets largely digested first-quarter issuance and sought to manage heightened volatility. In recent weeks, with more positive news out of Europe and incremental quantitative easing out of the US, markets have been demonstrably more positive with record issuance at very attractive levels.“Corporates and sovereigns should continue to take advantage of the low-yield environment and we expect to see incremental infrastructure-related issuance out of Brazil in particular.”The energy and power sector has been the biggest issuer of corporate bonds in Latin America with a total of US$18.2bn this year, according to Thomson Reuters. Brazil accounted for US$8.8bn (43%) of the total, followed by Mexico with US$5.34bn (29%) and Venezuela with US$3bn (16%).Financials were the second-biggest sector with a total issuance of US$15.95bn. Brazil accounted for US$11.5bn (72%) of this issuance. This sector in Peru took second spot with US$1.74bn (11%) of the total issuance. Mexico only accounted for US$1.01bn (6.8%).Local limitationsThis year the telecoms sector has seen total issuance of US$7.1bn, with eight separate transactions. Most of the issuance came out of Mexico – amounting to US$5.6bn (79%) of all issuance. There was one deal out of Brazil, valued at US$1.49bn.Mexico has been the biggest sovereign issuer this year – issuing a total of US$4.97bn against US$2.15bn by Brazil and US$1.76bn by Colombia. Last year, Venezuela was the number one sovereign issuer with a total of US$8.3bn against US$4.9bn by Mexico and US$2bn by Colombia.“In Latin America, very little long-term financing is available in local capital markets,” said Pedro Bianchi, head of DCM in Brazil at Bank of America Merrill Ly

To view the digital version of this report, please click here.Brazil’s financial institutions are forecast to issue between US$15bn and US$20bn during the next 12 months and a great proportion of the issuance is expected to count towards Tier 2, according to Fitch. The Brazilian central bank has not yet decided on the cut-off date for Tier 2 issuance but it is widely expected to be some time next year.This year a number of Brazilian banks have already issued Tier 2 bonds. At the start of August, Itau Unibanco issued a US$1.375bn subordinated 10-year bond. This follows a US$1bn 5.75% 10-year from Bradesco, a US$750m 5.875% 10-year from Banco do Brasil and a US$500m retap by Itau of its 6.2% Tier 2 2021s, which came with a 6% yield.“I think we can expect a number of the bigger and medium-sized banks in Brazil to issue debt that counts towards Tier 2 before Basel III is implemented,” said Mayra Rodriguez Valladares, managing principal at MRV Associates, a New York-based financial regulatory and capital markets consultancy. “Banks will be weighing up whether they want to issue this debt at the moment, as obviously it becomes a contingent liability and must be paid back one day.Emerging sweetheart“If they become too leveraged, ratings agencies could put them on ratings watch. It is also not clear whether there is investor appetite for more issuance from Brazil. Currently, international investors are showing risk aversion towards the emerging markets. Brazil has been the darling of the emerging markets for a long time and investors may feel that they already have enough exposure towards Brazil,” added Valladares.For the year to September 11, financials from Latin America issued US$15.95bn of paper in 29 separate transactions in the international markets, according to Thomson Reuters. Brazil saw US$11.49bn of issuance in 18 separate transactions and made up 72% of the total.Peru was the country with the second-highest amount of issuance among its financials: US$1.74bn in four separate deals.Over the same period, Latin American financials raised a total of US$7.74bn from 36 separate deals in domestic markets. Brazil saw six issuances valued at a total of US$3.82bn, 49% of all domestic financial issuance out of LatAm. Mexico witnessed 15 issuances valued at a total of US$2.9bn.It is not yet clear what the Brazilian central bank will qualify as regulatory capital following the phasing out of Tier 2 issuance and the implementation of Basel III. Banks are rushing to issue debt now because investors will charge higher premiums for new Basel III-compliant structures. Bankers expect the premiums to be between 150bp and 200bp more expensive because of the heightened risk faced by banks under Basel III.“In the short term it makes sense for banks to issue Tier 2 bonds,” said Maria Rita Goncalves, a senior director at Fitch Ratings. “We expect to see this year’s level of issuance double during the next 12 months. The central bank is expected to make clear what counts as regulatory capital by the end of this year.”Bilateral dealsSome Brazilian bankers predict that the implementation of Basel III will have a huge impact on the country’s banks because of the high volume of corporate debentures that have been underwritten by them. In Brazil, many banks have struck bilateral financing deals with companies using issuance linked to the CDI rate, the average of all interbank overnight transaction rates in Brazil. These are more akin to a private placement with just one buyer and some experts say they should be seen more as loans than securities.“Currently, banks hold this type of debenture to maturity,” said Antonio Oliveira, head of local debt capital markets at HSBC. “They have not been marking to market, but under Basel III rules they will have to do so. As Brazil shifts to global standards during the next few years, the banks will have to dispose of billions of dollars of paper.”Overall, Brazilian banks seem to be in rude health. Under Basel II rule

To view the digital version of this report, please click here.The records have been tumbling since the beginning of August. Semiconductor and computer technology company Texas Instruments priced a US$750m August 2015 with a 0.45% coupon. A few hours before that Unilever priced a US$450m bond of the same tenor at the same coupon. At the same time the British-Dutch multinational priced a US$550m five-year with a record coupon of 0.85%.The volume shows no sign of abating. This year is set to be a record year for US corporate debt issuance. August saw US$42bn corporate issuance, versus US$40.8bn and US$36.8bn in 2011 and 2010, respectively. And year-to-date 2012 is already standing at US$435.1bn versus whole-year figures of US$454.6bn and US$391.4bn for the two previous years, according to RBS.“Until every company has availed itself of funding at these levels we think that issuance will continue,” said Edward Marrinan, head of macro credit strategy and co-head of Americas strategy at RBS Securities.The current environment makes it incredibly attractive both for issuers and for investors. For issuers it is a no-brainer. Investment-grade corporate bonds use Treasuries as a pricing benchmark and they have remained low, thanks to liquidity from the Federal Reserve.Acrophobic levelsAs a result issuers have fallen over themselves to set record-low coupons this year right across the curve. The yield on two-year US Treasuries in mid-September was quoted at 0.26% and 10-year yields were only 1.82%, up from 1.40% in August.Only 18 months ago the yield on 10-year USTs reached an acrophobic 3.652%. Little wonder then that at the beginning of August, IBM sold a 10-year at 1.875% via BNP Paribas, Citigroup, Deutsche Bank and UBS.One banker said: “Of course companies are falling over themselves to issue. Which company wouldn’t want to cut a couple of percentage points off their borrowing costs?”There is a wider perspective to the low interest rates that are driving IG corporate borrowing costs. Key is the RBS high yield bond index ex-financials which hit a low of 5.98% on September 14. A year ago it was almost 150bp higher and the lowest figure before then was 6.614% recorded on May 16 last year. Given that investors are being driven by the need for yield, deliberately low interest rates are, what one banker calls, the “unspoken path of central banking policy”.The knock-on effect of that has been low yields for investment-grade borrowing which in turn has forced investors to look at high-yield investments. Although the transmission mechanisms still need to work their way through, the Fed’s thinking is that this will create more consumption, goods and services.But low yields are not the sole reason why investors are scrabbling over themselves to get their hands on IG corporate issuance. And make no mistake, they certainly are. Oversubscriptions on new IG US corporate paper stood at just under four times a year ago. Now they stand at around six times according to RBS. Hand-in-hand with that, a new issue premium of around 35bp in October last year has slumped to low digit-single figures now. What is it that is making investors so keen to get their hands on IG US corporate paper?Losing patienceBankers said there were several drivers. First is what has become the banking mantra for 2012, the need for yield. Put more bluntly, when 10-year USTs are 1.82%, even a corporate rate of 1.875% can look attractive. An added push has been given by a broader investment trend away from equities. Investors are starting to lose their patience with that roller-coaster.“Equity markets have remained reasonably volatile, certainly with the euro crisis impacting global economic outlook,” said Brendon Moran, global co-head of corporate origination at Societe Generale. “US corporate debt has become a safe harbour asset class. Earnings have been meeting expectations. On the whole, the corporate sector has been very robust through the ups and downs of global economic activi

To view the digital version of this report, please click here.The regulatory environment is forcing banks to shrink their balance sheets. But from a price perspective, the impact of regulation has probably been largely factored in already, said one DCM banker. Stocks have been punished for regulatory ambiguity far more than bonds have, he said, because regulation is seen to be more of a threat to profitability than solvency.Having said that, banks have not escaped unscathed in the debt markets. The financial crisis has been transformational in terms of the composition of the crossover sector, with around 15% of such credits now financial institutions. High-yield fund managers have had to learn more about the financial sector, which they could once blithely ignore, if they want to properly analyse the bonds they have to own.With large issuers and banks like Bank of America Merrill Lynch, rated Triple B, hovering one notch above the sub-investment grade universe, managers must be prepared for any ratings action that could affect the index, and therefore their own portfolios.“Investors need to be ready to adjust and react,” said Tanneguy de Carne, head of non-investment grade capital markets at Societe Generale. “Nobody knows what will happen in the financial sector but there has been a transformation and the trend is downwards. Even some well capitalised financial institutions stand on the brink of a downgrade that could see them become non-investment grade.”Case-by-case basisThere are variations even within the US FIG space. Morgan Stanley trades wide relative to its peers and is more volatile. As a whole, investors are more discerning than ever before and are looking more closely at financial institutions on a case-by-case basis, rather than taking a broad, top down view on the FIG sector as a whole.With liquidity being such a major issue for banks, falling out of the investment-grade universe is much more damaging for them than for corporates. A bank’s business model hardly looks workable if a corporate can borrow more cheaply from the bond markets than a bank can. And the experiences of 2008 demonstrate what happens to financial institutions which do not command trust from their peers or their clients.Bank of America has said it would not issue debt again in 2012, following its activity in the first half of the year, and it could be out of the market for longer still, with one banker suggesting it may not make another appearance for up to three years. Citigroup also said it expected to issue at the low end of the forecast range.Clearly this reflects the disappearance of appetite for bank credit, resulting from their loss of safe-haven status. Having said that, US banks may be in better shape than their European counterparts, said Jonny Fine, head of US investment-grade debt syndicate at Goldman Sachs.US banks at least enjoy the luxury of an aggregate loan-to-deposit ratio of approximately 80%, so they have excess liquidity, and therefore have no need to finance their day to day lending activities in the wholesale markets. For US banks therefore, visits to the wholesale markets are to finance their broker dealer activities.Many European banks, by contrast, have loan-to-deposit ratios often at 120% or higher, though these levels are inching down, meaning they rely on the wholesale markets partially to finance the assets they hold, said Fine. This adds a layer of cost on to their lending activities, or erodes the returns they generate, he said.Return to normalityFinancials traded cheaply relative to corporates in the robust, pre-crisis days, when FIG issuance represented around 60%–70% of overall issuance volume in the US. But as the crisis has taken hold, spreads for FIG have widened, though with issuance levels expected to drop considerably over the coming year and beyond there may be a return to something closer to the longer-term normal relationship between the two.“Banks were previously seen as a safe haven but now they ar

To view the digital version of this report, please click here.For much of this year, the leveraged markets in Europe have been filled with gloom. Although the US primary market has remained active, albeit beaten up by concerns about the European debt crisis, in the first half of the year European leveraged loan volume was down a hefty 41%, at €16.3bn, on the same period last year, according to S&P. But there has been one bright spot. What has saved the leveraged market is the openness of US investors to European paper. European issuers pushed €13bn of high-yield debt to the US, or 45% of total 2012 issuance to date.During the second quarter, a record high €10.8bn of loans from European borrowers went across the Atlantic. Loans for newcomers like medical device firm BSN Medical, German plastics company Kloeckner Pentaplast as well as seasoned veterans like German healthcare firm Fresenius were placed in the US. This activity brings the Yankee loan year-to-date total to €21.5bn, almost double the €11.23bn issued during the whole of last year, according to Thomson Reuters LPC.What has helped is that the valuation of European high-yield issues looks pretty tempting to US investors. Although the market might be small – corporate high yield is around €180bn versus four and a half times more in the US, according to figures from Morgan Stanley – the average price of bonds was 94.62 in early June and returns, year-to-date, are 11.54%. Compare that with the US high-yield market with an average price of 101.3 and a total return of 8.574% this year and it is easy to see the attraction.And it is as good for loans. The lower pricing and covenant-lite terms offered by US accounts are attractive both to European borrowers and to underwriting banks faced with a lack of liquidity at home and fearful of a risky outlook that could make a syndication process difficult.German auto parts supplier Schaeffler, Belgian chemical company Taminco and banking software group Misys have all taken advantage. For example, in May, Misys launched a US$1.06bn-equivalent cross-border buyout loan, split between a US$730m, seven-year term loan B, guided to pay 500bp–525bp over Libor; and a €250m, seven-year term loan B, guided to pay 550bp–575bp over Euribor. Both tranches have a 1.25% Libor floor and an OID of 99. There is also a US$125m revolver.Peaks and troughsThis is not to say that US investors have become the get-out-of-jail-free card for European corporates. They will not just buy anything that turns up on a roadshow. There has to be some name recognition for the company, it has to be in a familiar sector and it should have earnings in US dollars.“Whilst the investor base is much more vocal these days, when there is a dearth of good quality assets, terms can be pushed. We see that peaks and troughs in liquidity are still a big factor in price and terms,” said Scott Boothby, head of transaction group, leveraged finance at Commerzbank.What is clear is that there has been a marked differentiation in the pricing according to names; even more than one might expect. In mid-August, Belgium’s largest cable operator Telenet sold a two-tranche €700m bond: a €450m 6.25% August 2022 bond and a €250m 6.75% August 2024. The paper was oversubscribed – it was this that allowed the 12-year tranche to be added – both tranches were priced at par and both traded up after the break.“Historically, a six handle in high-yield land was unprecedented,” said Peter Higgins, fund manager at BlueBay Asset Management. “But good quality credits now have market access sub 7%.” It should be noted that Telenet is rated BB.Compare that with German plastics firm Kloeckner Pentaplast, which priced a €255m five-year non-call 2.5 senior secured second-lien bond in mid-July. Although it priced inside guidance, it still went for 11.625% thanks to its Caa1/CCC (stable) ratings.As bankers returned from the beach at the end of August, the difference in pricing became more marked. A useful tailwind

To view the digital version of this report, please click here.As UK banks over the recent period looked to improve capital efficiency by shifting financing off balance sheet, and found European investors under punitive levels of regulatory pressure, syndicate desks sought to widen the investor base – first in the US and more recently in Asia.Discreet meetings in Tokyo in mid-2009 were followed by long periods of due diligence, first on the asset class and later individual issuers, with Japanese banks such as Mizuho and Japan Post Bank sending delegations of inspectors to evaluate the credit worthiness of individual institutions.The time between initial contact and first investments was usually somewhere between nine and 12 months, said a few UK bankers. However, once the purchase decision was made, Japanese investors made big commitments, snapping up UK, and to a lesser extent Dutch, securitisations in enormous volumes, in some cases in ticket sizes of over US$1bn.Two-way traffic“Most of the issuers with significant funding plans have made the pilgrimage to Tokyo. The traffic has been two ways, with Japanese investors keen to come to Europe and kick the tyres and do a lot of in-depth analysis of this market, such as visiting various back offices,” said Miray Muminoglu, a director in syndicate at Barclays in London. “Following the investor education programme by UK banks a number of the large Japanese institutions have invested in very large sizes.”Such was the level of demand from Japan that Santander in January opened its 2012 RMBS issuance account with a novel ¥20bn (US$255m) yen-denominated bond, sold as part of its Holmes 2012-1 deal. In February, Lloyds also sold a yen tranche in its Arkle 2012-1 offering (its second under the trust after an initial yen tranche in October 2011). Santander soon followed up with another yen tranche, privately placed off its Fosse Master Trust.“Flush with liquidity and generally risk adverse, the Asian investor base has a natural capacity for high quality collateralised funding. This investor base has been active with programmatic investment as well driving large reverse enquiry”While yen-denominated bonds have novelty value, Japanese investors have bought the vast majority of their European securitisations in dollars, with many choosing to swap out of the dollar exposure. There was some US$24.2bn of dollar-denominated UK RMBS issued last year, according to Standard & Poor’s, compared with just US$10.7bn equivalent in sterling.US dollar-denominated tranches accounted for more than half of 2011 UK RMBS issuance and about one-third of first-half 2012 placements. This year sterling issuance has risen, while dollar and euro issuance has slowed, suggesting Japanese investors may have begun to expand their attentions to the UK currency.“A lot of UK issuers have explicitly focused on developing their Asian secured platforms since the crisis,” said Oldrich Masek, EMEA head of securitisation origination at JP Morgan. “Flush with liquidity and generally risk adverse, the Asian investor base has a natural capacity for high-quality collateralised funding. This investor base has been active with programmatic investment as well driving large reverse enquiries.”Key driversJapanese demand now accounts for around 30% of deals in the UK RMBS market, and sometimes closer to 50%, said one banker.One of the key drivers for the issuer focus on Japan has been the deteriorating investor landscape in Europe in recent years. In the wake of the financial crisis this landscape was based on the evaporation of large parts of the investor base (asset-backed commercial paper conduits, SIVs and CDOs), and subsequent due diligence rules under article 122 (a) of Capital Requirements Directive II. However, investor appetite will be further undermined by CRD IV for banks and Solvency II rules for insurance firms, the implementing pieces of legislation for the Basel III legislative framework.An important provision of CRD IV