Wider horizons

Malaysia’s biggest lender seized an opportunity earlier this year to become the first Asian issuer in Japan’s fledgling Pro-Bond market, and opened the domestic market for Basel III-compliant capital.

Malayan Banking, better known as Maybank, has emerged as one of South-East Asia’s most innovative issuers this year, venturing into new markets and introducing fresh products to its home investor base.

Armed with its stable A3/A–/A– rating, the usually conservative Maybank twice took advantage of a new opportunity to issue debt in Japan, where the central bank’s monetary stimulus has squeezed domestic yields and increased the yen’s appeal to foreign borrowers.

It also helped open the Malaysian market for Basel III-compliant paper, with Asia’s first fully marketed Tier 2 sukuk under the new rules arriving at the end of March, and the country’s first Basel III Additional Tier 1 offering in mid-September.

“The bank has changed the way it looks at capital and liabilities and, this year, we decided to test our name in the market,” said Odie Lee, group corporate treasurer at Maybank. “We wanted to put ourselves in the spotlight and diversify our investor base.”

Maybank’s first outing in Japan’s Pro-Bond market in May brought in ¥31.3bn (US$307m) of three-year funds, using the lender’s existing US$5bn medium-term note programme to target professional Japanese investors.

Unlike Samurai bonds, which allow foreign borrowers to target a broader local investor base, but require them to submit documents in Japanese, Pro-Bond issuers can use English documentation, cutting the time it takes to put a deal together and lowering transaction costs.

A firm that sells a Pro-Bond in Japan only needs to file an annual disclosure statement rather than the mandatory semi-annual statements required of Samurai issuers. Legal fees are also lower for Pro-Bond issues.

After a slow start, with only Dutch bank ING taking advantage of the format before this year, Japan is redoubling its efforts to develop the market.

Last December, the state-backed Development Bank of Japan announced it would buy ¥100bn of Pro-Bonds, doing its part to attract more foreign companies to sell debt in Japan. The Bank of Japan’s quantitative-easing purchases are forcing other investors out of the Japanese Government bond market.

Besides Maybank, Banco Santander Chile has also taken advantage of the additional demand, and bankers say more deals are in the works.

“Maybank has a market cap of over US$25bn and is a very sophisticated issuer. It was an ideal candidate to kick-start the market,” said Benjamin Lamberg, global co-head of MTNs and head of Asian syndicate at Credit Agricole CIB, which arranged the debut offering alongside Maybank Kim Eng Securities.

“After the success of the first deal, we found there was demand for a more public, syndicated issue to take the tenor out to five years, and get more granular with second-tier and third-tier domestic accounts. The Pro-Bond market is definitely getting some momentum.”

“There is still some work to be done with investors establishing limits, but the Pro-Bond format is a lot easier than a full-fledged Samurai for an issuer not familiar with Japanese law.”

The Samurai market remains far larger, with deals in the first month of this Japanese fiscal year alone already surpassing the total size of the Pro-Bond market. Maybank, however, has proven that the concept can work for Asian issuers.

“We decided to look at private placements to target some active investors, and Japan was an obvious choice as investors there really understand the Asian market,” said Lee at Maybank.

“There is still some work to be done with investors establishing limits, but the Pro-Bond format is a lot easier than a full-fledged Samurai for an issuer not familiar with Japanese law.”

Basel benchmarks

While the Japanese financings appeared opportunistic, Maybank’s Basel-compliant issues set an important benchmark for others to follow.

Moody’s estimates that Malaysian banks will need to issue another M$2.5bn of capital securities come 2016 to maintain current capital ratios, rising to M$8.7bn as of 2020.

After AmIslamic opened the T2 sukuk market with a private placement in February, Maybank went one further in March, marketing the loss-absorbing 10-year non-call five Islamic securities to institutional and high-net-worth investors and raising a bigger-than-expected M$1.5bn at a profit rate of 5.07%.

More significantly, Maybank was back in the bank capital arena in September with a landmark AT1 offering, selling M$3.5bn of perpetual non-call five securities in Malaysia’s first Basel III-compliant AT1 deal.

While the loss-absorbing T2 format has already become established in Malaysia, Maybank’s AT1 required regulators and investors to come to terms with a new set of documentation. To qualify as Basel III capital, the notes come with flexible coupon payments and must be written off in whole or in part if the bank becomes no longer viable or its common equity T1 ratio dips below 5.125%.

RAM Ratings scored it AA3, three notches below Maybank’s AAA senior rating, noting that the bank’s CET1 ratio of 11.0% at the end of March gave it a big capital buffer.

The bond was privately placed at a yield of 5.3%, with proceeds going to the redemption of a M$3.4bn non-innovative T1 bond issued under Basel II in June 2008.

“Basel III means we have had to change the way we look at our capital,” said Maybank’s Lee. “As Bank Negara phases in the higher capital requirements, we expect a lot of Basel III issues in 2015 and we were interested in clearing the market first.”

Maybank considered various alternatives before deciding on a local ringgit transaction, structured as an exchange offer to holders of the old-style T1 notes. The vast majority of existing investors rolled into the new paper, despite the lower coupon of 5.3% relative to 6.85% on the old hybrid.

Investors who missed out on the issue said the pricing looked very attractive, despite the loss-absorption features of the bonds.

“Maybank is a very good name, and we would have been very confident that the bank would exercise the call,” said a local insurance investor at the time.

Maybank Investment Bank was sole lead on the issue.

Having centralised its group treasury function, Maybank will continue to explore new funding opportunities in the future.

Maybank updated its US$5bn multi-currency MTN programme and set up a new US$5bn Euro CP programme this year, giving it new flexibility when it comes to tapping sources of funding at short notice.

“Right now, our capital adequacy ratio is good, so the fundraising is sufficient,” said Lee. “Going forward, we will explore other opportunities. There is a relatively wide gap in the market for Malaysian bank paper in general.”

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