Chasing the heat

The pace of deals has slowed in recent months, but South-East Asia continues to provide a tantalising opportunity for capital markets professionals. As with any region, South-East Asia’s markets remain susceptible to shifts in global sentiment and the rout in commodity prices last year has rocked the confidence of many of the region’s issuers. Interest rates are also a threat and continued uncertainty over the timing of the US Federal Reserve’s first rate hike has contributed to a slowdown in fixed-income financings in the early part of 2015. There are local pressures, too. Already facing lower revenues from oil exports, Malaysia has been struggling with the controversy around investment vehicle 1MDB, where a heavy debt burden and unclear relationship with the government have given foreign investors more reason to be wary. Thailand’s economic growth has slowed enough to trigger a surprise cut in interest rates in early March. Singapore’s central bank is concerned that its currency is rising too fast. Rule changes have stemmed the flow of offshore Indonesian loans. Some global banks have retrenched staff back towards North Asia, shifting resources towards a Chinese market that is opening up to foreign capital more than ever before. Standard Chartered has pulled out of equities after struggling to make ends meet in the sluggish and competitive South-East Asian markets. CIMB has reversed part of its investment banking expansion, shedding many of the staff, who joined in its acquisition of RBS’s Asian and Australian investment banking teams in 2012. Talk of an end to South-East Asia’s promise, however, is clearly premature. Across the region, there are many bright spots to whet dealmakers’ appetites. Singapore is poised for the imminent arrival of covered bonds – a tool that will strengthen the city state’s already solid banking sector. Thailand is vying to host equity offerings from South-East Asia’s frontier markets, building on a growing track record of cross-border bond issues and advancing efforts to build a pan-ASEAN capital market. The Philippines has revamped its equity market with tougher free-float rules to boost liquidity, and is pushing for a rewrite of REIT laws to open a new asset class. Political crises have been averted in Thailand and Indonesia, and Vietnam’s government is pressing ahead with plans to reform and privatise state enterprises. At the same time, global high-yield bond investors are actively seeking alternatives to China’s property sector after the near-collapse of Kaisa Group, a former market favourite. Japanese funds are beginning to flow in earnest beyond the country, after two years of inflation-generating stimulus policies at home, and South-East Asia’s manufacturing connections to Tokyo are well known. The region offers a diverse mix of economies, from Triple A rated Singapore to newcomer Myanmar – all with their own individual appeals and, with so many encouraging steps for the future already taken, South-East Asia surely can offer something for everyone. To view all special report articles please click here and to see the digital version of this report please click here. To purchase printed copies or a PDF of this report, please email gloria.balbastro@thomsonreuters.com .

Two and a half months into 2015, there is underlying nervousness about how South-East Asia’s credit markets will fare this year. A debt restructuring from Chinese developer Kaisa Group has soured the tone and, already this year, several new issues have been pulled. However, despite these wobbles, DCM bankers are upbeat about this year’s prospects for the regional debt markets. “It’s going to be a very interesting year for South-East Asian credit markets. Supply has been relatively constrained, but we expect a decent tally for the year overall,” said Alexi Chan, HSBC’s head of debt capital markets, Asia-Pacific. “Jurisdictions I expect to be busy include Indonesia and Malaysia, with greater stability in commodity prices providing a helpful backdrop.” As a credit proposition, South-East Asia ticks the “challenging” box, featuring, as it does, a range of less-developed countries. Singapore, with its implied Triple A credit rating, bestrides the top of South-East Asia’s credit curve, with Malaysia, Indonesia, Thailand and the Philippines in the middle and Cambodia, Laos, Myanmar and Vietnam at the bottom. That range of countries, however, offers unique diversification opportunities. Against the backdrop of the “Sinofication” of Asia’s offshore bond markets, where China has come to dominate issuance, South-East Asia offers an opportunity for investors to spread their geographical risks and participate in a dynamic economic growth story – especially at the lower reaches of the regional credit curve. While issuance from the middle of that curve has become a staple product for asset managers both in the region, as well as in the US and Europe, increasingly, interest is being shown in paper from the frontier markets at the bottom of the curve, where pent-up demand is building because almost nothing has been brought to market. Despite the idiosyncratic appeal of the South-East Asian credit proposition, question marks hang over the region about the performance of emerging-market debt in the face of an eventual normalisation of US interest rates. Undoubtedly, a “hard landing” for the EM asset class globally would rule out the lower reaches of South-East Asia’s credit curve from coming to market, as well as anything other than the highest-quality names. Malaysia in focus South-East Asia’s offshore debt markets have no doubt progressed in leaps and bounds since the Asian financial crisis forced a rethink of currency mismatches the late 1990s. In recent years, issuers in the region have benefited from increased allocations of funds into debt as investors have come to see the region as a relatively safe credit bet, bringing robust inflows and lower beta on South-East Asian investments relative to many other emerging markets. According to data from Thomson Reuters, since 2008 some US$629bn of G3 deals from South-East Asia have been printed. Malaysia has dominated the issuance tally since the financial crisis, with US$170bn of deals. Next come Singapore, with US$137bn, and the Philippines, with US$132bn. Indeed, numerous banks have singled out Malaysia as likely to be a rich source of supply in the offshore G3 markets this year, in both conventional and sukuk formats. The next big test of demand for Malaysian credit will be a jumbo offering from Malaysia’s Petronas, which was marketing a multi-billion dollar global bond and sukuk package in early March. With last year’s slump in energy prices putting Malaysia’s export revenues and, as such, its sovereign credit under pressure, the jumbo deal is emerging as a signal trade for 2015. Export-Import Bank of Malaysia is rumoured to be considering a big sukuk issue before June, while Telecom Malaysia has also been mentioned. Interestingly, debt-laden investment vehicle 1MDB is about to be broken up, something that will stymie rumours that the company was hoping to raise additional funds in the offshore markets. The company actively considered the Samurai bond market in 2013, potentially with the backi

South-East Asia’s largest domestic corporate bond markets have taken a long time to get going in 2015, with new issues in Singapore and Malaysia running at the slowest pace in years. It is not for want of trying as bankers in Singapore have been busy bringing potential issuers to meet fixed-income investors, but a wide gap in pricing expectations and growing concerns over high-yield, energy-related credits have kept new deals at bay. Issuance volume in the first two months of this year for both countries were only around 32% of what was sold in the same period last year. Market participants have blamed the unimpressive start on rising global volatility, with interest rate hikes looming in the US, China’s growth slowing and commodity prices under pressure. “This slowdown is seen in many of the local markets in Asia, not just in Singapore,” said one debt banker. “Just look at the offshore renminbi market, which is far bigger and more liquid than that in Singapore and is just as sluggish. The more open the local market, the more affected it is on the global volatility.” Dim Sum bond sales slumped almost 70% year on year in January and February was the slowest month for new issues since August 2013. More Asian issuers are tapping the US dollar markets before rates go up, while lower euro funding costs have also been tempting. However, signs in the last couple of weeks have given South-East Asian bankers reason to be optimistic. A handful of deals are getting done in Singapore. “The general tone is firming,” said Clifford Lee, head of fixed income at DBS Bank. “Issuers and investors are coming to terms with pricing expectations and that gap is narrowing. This is reflected in the number of issues that have been sold in the market in recent weeks and have traded up in the secondary markets.” Resilient ringgit Falling oil prices have dragged Malaysia’s currency down against the US dollar, but bankers say the local market has held steady. “We expect the ringgit debt market to remain resilient despite a more volatile global environment,” said Chu Kok Wei, group head, treasury & markets at CIMB Group. “The high savings rate and relatively high yield of ringgit securities will provide a good cushion against the backdrop of a possible US Fed-led rate hike cycle.” The ringgit market has also weathered the storm around Malaysia’s exposure to falling oil prices, as well as the uncertain future of cash-strapped sovereign wealth fund 1MDB. The government has broached the possibility of dismantling 1MDB and selling its assets to resolve its debt issue – a bold step that can restore confidence in Malaysia’s finances. Initial fears that 1MDB’s delayed repayment of a bank loan of M$2bn (US$541.8m) would badly hurt Malayan Banking and RHB dissipated after the facility was repaid on February 13. The two banks’ combined exposure to the company now stands at M$3.5bn, only around 0.6% of their aggregate total loans. Malaysia’s ringgit has lost 17% against the US dollar in the past six months, but overseas demand for local investments has remained steady. Foreign holdings of Malaysian Government securities edged slightly higher to M$145.3bn in December, and bankers expect the country’s relatively high yields to maintain its international appeal. “Foreign holdings of Malaysian government bonds have been stable during this whole period of declining ringgit value, which is primarily due to the strengthening US dollar. As central banks in the developed world turn to quantitative easing, Malaysian yields are becoming more attractive,” said Chu at CIMB. “Volatility is expected to be higher in 2015, but we expect Malaysia’s strong financial infrastructure to absorb this well. The country’s economic fundamentals are strong, with its high savings rate, good FX reserve cover and plenty of domestic uninvested money.” Down the credit curve As such, bankers and analysts believe corporate bond issuance volume in 2015 will increase from last year’s M$67bn. Hong Leo

Attracting cross-border listings has been the dream of many stock exchanges in South-East Asia, as cities vie for position as a regional financial centre. Singapore has found some success with companies from China and India now listed on the Singapore Exchange, but deals have been few and far between. Now, Thailand, ASEAN’s most liquid stock market, has drawn up plans to become a regional listing hub, hoping that its close economic connections will make it a natural destination for fast-growing companies in the region’s frontier markets. “We are closer to the CLMV (Cambodia, Laos, Myanmar and Vietnam) nations and are more familiar with them. We can focus on deals for respectable tier-two companies,” said a banker at Maybank KimEng. Thailand’s Securities Commission and the Stock Exchange of Thailand will first target subsidiaries of existing Thai companies in these countries. “At the same time, foreign issuers will be able to tap funds in Thailand more effectively and will also enjoy the liquidity in the Thai capital market when listing their shares on our local stock exchange.” “We can start with Thai companies’ subsidiaries in CLMV, such as hydro powers in Laos and industrial estates in Vietnam and Myanmar,” the banker said. Thai-owned companies operating in these countries are natural listing candidates for the SET, as in the example of telecom infrastructure firm HyalRoute Communication Group. The company, which is building a telecom network in Myanmar, has selected Hong Kong for its IPO, in part because its owner is Chinese. In an effort broaden its stock market, Thailand has been encouraging listings of infrastructure funds and real estate investment trusts. Sam Kendall, global head of equity capital markets at UBS, puts this down to the fact that Thailand has not yet seen the same extent of privatisation as Singapore. In the early stages, bankers expect the listings to be in the US$50m–$100m range, given the small to medium-sized nature of these economies. Kendall expects the potential listings out of these countries to be small to start with because many of them have regulatory, currency and ownership controls. The Thai regulator is backing the plan to attract foreign listings. Last year, the exchange issued draft rules allowing primary and dual shares offerings from foreign companies and soon plans to put out final regulations. “As we open our market to foreign issuers, Thai investors will be able to diversify their investments with more variety of investment choices,” said Vorapol Socatiyanurak, Secretary-General of the Securities and Exchange Commission, Thailand. “At the same time, foreign issuers will be able to tap funds in Thailand more effectively and will also enjoy the liquidity in the Thai capital market when listing their shares on our local stock exchange.” Liquid hub Data from the SET shows an average daily trading value in 2014 of Bt45.47bn (US$1.38bn), the highest in ASEAN for three consecutive years. Vorapul said CLMV companies offered potential growth and diversification benefits. “We have seen an increase in demand from our local investors, both institutional and retail, seeking investment in CLMV companies,” he said. “By offering and listing their shares on the Thai stock exchange, CLMV issuers will be able to leverage on the Thai capital market to increase their international profiles, competitiveness, as well as visibility, as they enter the ASEAN Economic Community.” Vorapol does not see Thailand’s move to attract more regional listings as a competition to other regional stock exchanges. In fact he sees more cross border listings as helping develop ASEAN as a single market. “With the upcoming ASEAN Economic Community, it will be beneficial for companies, particularly ones with regional presence, to have access to wider pool of capital and facilitate cross-border investments,” he added. Under the draft rules, equity offerings from foreign companies must comply with laws and regulations in home juri

Singapore is moving closer to a long-awaited debut issue of covered bonds as regulators mull key improvements that are expected to help clear the way for the first offering to hit the market this year. The Monetary Authority of Singapore, which first set rules for covered bonds in 2013 to help its banks access cheaper funding, is now assessing the feedback on its latest consultation paper due at the end of February. Covered bonds are senior notes secured against a pool of assets most likely in the form of loans, allowing issuers to sell them at lower interest rates. The assets are kept on the issuer’s balance sheet. The proposed changes stand to unleash a market expected to issue around S$25bn–S$30bn (US$18bn–US$22bn), based on the MAS ruling that allows banks to use up to 4% of their total assets as collateral for covered bonds. “These three points iron out a few structural issues to allow the first few deals to happen in 2015.” Amendments include allowing an issuer to set up a trust over the residential mortgage loans used as collateral for covered bonds, preventing a bank from losing its trustee status when transferring the assets to a special-purpose vehicle. The tweaks also propose to give more flexibility in the loan-to-value limit, as well as the amount of cash and cash equivalents, a bank can hold as a portion of its covered pool assets to make it easier to meet covered bond requirements. “These three points iron out a few structural issues to allow the first few deals to happen in 2015,” said Andy Lai, head of securitisation in Asia for BNP Paribas. “Although the caveat is how long the MAS will need to finalise all this, we hope that this won’t be a long process.” Singapore joins South Korea in building such a market to help banks diversify their funding sources and raise funds at cheaper costs, especially during times of crisis, when borrowing costs typically rise amid tight liquidity. Yet, structural issues have prevented Singapore’s covered bond market from taking its first step, while Korea has yet to see its first issue under the new Covered Bonds Act enacted last April. DBS Bank had mandated Barclays Capital and Deutsche Bank in early 2013 on hopes of becoming the first issuer of a covered bond in the city state, only to be delayed amid uncertainty over whether covered bondholders had full entitlement to mortgages or could be subordinated by other entities like the Central Provident Fund. Singapore allows its citizens to use proceeds from the CPF, a savings fund for employees, to pay for mortgage payments. In a liquidation event, the CPF could potentially earn a claim on homes first, instead of going to covered bondholders. Moody’s also warned that Singapore, like Korea, did not have minimum liquidity requirements to pay for interest and principal on covered bonds, a rule that would ensure timely payments if the issuer faced financial stress. “Such requirements will be particularly relevant in Korea and Singapore, both of which lack a liquid secondary mortgage loan market,” said the March 3 report. Future pipeline Still, bankers are optimistic that the Singapore covered bond market will kick off once the changes from the recent consultation are accepted. Singaporean lenders, such as DBS, United Overseas Bank and Oversea-Chinese Banking Corp, are largely expected to kick start the covered bond market through multi-issuance programmes. This will allow different covered bonds to be sold and backed against the same pool of assets. Colin Chen, managing director and head of structured debt solutions at DBS, says the first covered bond can hit the market in the second half of this year. He estimates issuance can easily grow up to US$3bn over the next two to three years. Demand for Singapore covered bonds should be strong, given its stable mortgage market and its coveted Triple A sovereign credit ratings. The possibility that Singapore banks may be required to bulk up on liquid assets to conform to Basel III reforms can

The Vietnam Government has made great strides in improving local capital markets, yet foreign ownership limits and uninspiring privatisation programmes have frustrated overseas investors. There are a lot of reasons to be optimistic about Vietnam. Last year saw a host of partial privatisations, with the country’s banks effectively addressing non-performing loans and the economy expanding. GDP growth was 5.98% last year, versus 5.42% in 2013 and 5.25% in 2012, according to the country’s General Statistics Office. The rate for last year beats the International Monetary Fund’s 5.5% estimate. At the same time, the quarterly numbers last year suggested a much-improving growth rate: the economy expanded 5.06%, 5.34%, 6.07% and 6.96% in each successive quarter. “As the banks continue to de-lever and GDP growth gets back closer to 7%, where we were before things blew up in 2007, the outlook is good,” said Bill Stoops, CIO of Dragon Capital, a Ho Chi Minh City-based investment firm. Investors are moving into the nation’s equity markets, albeit in fits and starts. The Ho Chi Minh Stock Exchange’s VN Index reached a roughly 6.5-year high on September 3 last year of 640.75. Although it was down about 8% last week from that peak, investors are still confident that the current valuations will attract more issuers to market. Meanwhile, Vietnam’s record of dealing with the burdens of NPLs, including setting up a so-called bad bank in 2013, has instilled confidence among credit investors, as local banks have started to lend again to the stronger parts of the economy. Domestic credit expanded about 13% last year, according to Moody’s, which raised Vietnam’s rating to B1 from B2 last July. In lockstep with the increase in confidence, Vietnam’s five-year CDS last week was quoted at 183bp, down about 30% from 259bp at the beginning of 2014. For most investors, Vietnam this year looks like a safer bet than it was last year. These factors have lifted the quarterly results of listed and unlisted companies in Vietnam, including private corporations and those under state control. “We are reasonably positive on Vietnam for a number of reasons, including the improving GDP growth, lower inflation, stable foreign-exchange rate and better earning results from corporates,” said Rehan Anwer, head of Vietnam and frontier markets investment banking at Credit Suisse. “The capital markets used to be very heavily dominated by state-owned situations, but that has now changed and is more reasonably balanced between private and state-owned enterprises.” All of this sentiment is expected to bode well for the government’s ambitious privatisation plans, which call for hundreds of share sales, or partial privatisations, this year. Sceptical investors Yet, foreign and local investors have been sceptical of the plans and the companies the government is putting on the block. State-owned firms often lack transparency, the stakes the government is selling have been small, and shares often take many months after IPO to be listed on the bourse. One centrepiece of the country’s scheme to revitalise the state-owned sector, the IPO of Vietnam Airlines, did not attract as much foreign interest as many had hoped. In November, the state sold a mere 3.7% of the national carrier, raising about US$51m from 49m shares. More than a thousand, mostly local investors, participated. The government is going to have work fast if it wants to sell stakes in some of the more attractive state-owned entities, such as Vietnam National Textile and Garment Group, (Vinatex), Vietnam National Shipping Lines and MobiFone. The Communist Party of Vietnam will convene its 12th congress in January next year, and decisions made at the convention may lead to the country’s leadership off its pro-business path, market participants say. However, even if the government stays its course, reform could still be slow. Despite much progress, the government has yet to make good on some proposals that, if put into effect,

Myanmar has long been on the radar screen for bankers and investors hoping that the country can develop capital markets as it undergoes the transformation from military dictatorship to democracy. The recent granting of banking licences to foreign banks is a step in the right direction for capital market development, but much remains to be done. Last October, nine foreign banks were given permission to set up operations in Myanmar, with each of the Asia Pacific-based banks given a one-year timeline to meet central bank requirements and deliver on pitches made to the financial authorities three months earlier. One of the principal hopes of the Central Bank of Myanmar is that the foreign financial institutions, namely ANZ, Bangkok Bank, Maybank, OCBC, UOB, Bank of Tokyo Mitsubishi, ICBC, Mizuho and SMBC, will effect a transfer of banking technology and promote a culture of banking competitiveness in the country. This move complemented an earlier opening up of the Myanmar telecoms sector and the country has applied to join the global Extractive Industries Transparency Initiative in a bid to improve standards in its mining and oil-and-gas sectors. The Myanmar Government’s wide-ranging structural reform programme has borne fruit, with the Asian Development Bank forecasting that the country’s GDP growth hit 7.8% in fiscal 2014 (ending March 31 this year), one of the highest in the region. Foreign direct investment has underpinned this growth, with higher tourist arrivals, as well as rising commodity and natural gas exports. In terms of what is in store for bankers, apart from offering traditional banking services to individuals and corporations, one area of clear opportunity is to grab business is in project finance. The ADB’s resumption of operations in Myanmar in 2013,after an absence of 25 years, spells this out starkly and its re-emergence in the country came hand in hand with the announcement of an assistance package to foster economic and social development. The ADB has identified key areas in which Myanmar is constrained: transport, energy, agriculture and natural resources, education and urban development. Project-finance bankers are looking at these sectors for financing opportunities and the ADB is a prime candidate to leverage the public-private partnership route in this area of business. As a sign that the PF initiative is under way, Pan Asia Majestic Eagle raised back in October the first typical non-recourse PF financing seen in Myanmar via a US$85m loan. Funds, raised through a five-bank club loan, will go towards the construction of 1,250 telecom towers and the transaction represents a milestone in Myanmar’s emergence from decades of economic isolation. It is estimated that telecoms industry will account for around 50% of infrastructure investment over the next five years, with a figure of around US$2bn mentioned as the funding requirement. Indonesia is a template for Myanmar’s nascent telecoms industry and plenty of regional private-equity houses and tycoons are salivating at the prospect of building up the country’s miniscule mobile phone penetration rate of just 7%. Meanwhile, transportation infrastructure development is being showcased with the proposed new Hanthawaddy International Airport, where a South Korea consortium had proposed a 20-year financing set to raise US$770m, but walked away after failing to get funding. The project is still up for grabs, with Japanese banks and PE firms rumoured to be showing interest. “Myanmar is going to be firmly on the radar of the project finance community and it will be interesting to see if anything approaching best practice emerges there. I would imagine deals could get done quite quickly there, given the government’s control of land banks and its focus on getting infrastructure up to speed,” said a Singapore-based loan banker at a European house. Singapore has long had entrepreneurial ties with Myanmar. As such, it is not surprising perhaps that, with the opening of Myan

Tower Bersama finds itself in an enviable position among Indonesian corporations. It is the one of the largest telecom tower companies in the country and has an established track record of issuing debt in the offshore markets. This, along with steady revenue streams, has enabled the company to price some of the country’s cheapest corporate debt, turning to US dollars to beat high local interest rates. The firm’s most recent deal received orders of more than US$1.7bn for a US$350m offering of senior unsecured seven-year non-call four notes, priced to yield at 5.25%. The investor enthusiasm for the offering prompted some arguments that the Asian high-yield market was coming back to life. Shortly after the issuance, rival Solusi Tunas Pratama priced a US$300m offering of five-year non-call three notes at a yield of 6.25%. Prior to its latest offering, Tower Bersama’s most recent capital markets move was a US$1.3bn syndicated loan for expansion and debt refinancing in July 2014. The majority of its capital markets activities are in the loans market. “The main reason we’re in the bond market is because we’re trying to get tenor. We did a five-year bond and we just did a seven, and, most likely, next we’d prefer to do a 10-year. We don’t really need to go to the market, but a 10-year is something we’d like to develop as a way to get longer-tenor debt for our longer-life assets.” Bankers working on these deals have lauded the firm’s management, saying it is a credit that investors really like. Based on the way the company operates, revenues are largely fixed and long term, and it has a low cost structure, where earnings become very predictable. The company provides telecom firms with the infrastructure they need to operate, giving investors exposure to Indonesia’s fast-growing communications sector. “It (the most recent deal) was a good trade and investors really like the credit,” said James Holian, head of Asian debt syndicate at ANZ. “Tower Bersama has a great management team and generates very stable cash flows. So, you’re getting access to Indonesia in a very stable company at a good yield, compared to some alternatives in Europe and the US.” ANZ was a joint global co-ordinator on the latest issuance, along with Bank of America Merrill Lynch, Citigroup, Credit Agricole and UBS. These firms were also joint bookrunners with BNP Paribas, DBS, CIMB, HSBC, MUFG, OCBC, SMBC Nikko and UOB. The bond currently trades between 99.5 and 100.51 according to data from Thomson Reuters. Tower Bersama co-founder Gavin Caudle said he did not expect 2015 to be an active year in terms of debt capital markets. There was no funding target for the year, and he said the company accomplished the refinancing it wanted to do with the most recent deals. Caudle added that, if there was a strategic move the company wanted to make, there was plenty of money in reserve. “I wouldn’t expect to see any DCM activity,” Caudle told IFR. “We just did the bond and, basically, we’ve got unused lines of credit as we speak right now and more than US$600m in the bank. So, we’ve got plenty of firepower. We’re not looking at too much activity in the capital markets for a while. Our cash flow is at a point where it is close to being able to fund all capital expenditure.” When Tower Bersama does return to the international markets, however, it will be keen to do a 10-year deal. Caudle explained that what Tower Bersama eventually wanted was longer-tenor funding. The company had considered going to 10 years on the latest issue, but complications arose around making it a 144A. So, it was decided that a Reg S at seven years was more straightforward. “The main reason we’re in the bond market is because we’re trying to get tenor,” he explained. “We did a five-year bond and we just did a seven, and, most likely, next we’d prefer to do a 10-year. We don’t really need to go to the market, but a 10-year is something we’d like to develop as a way to get longer-tenor debt for our longer-l