Hutchison Whampoa’s US$5bn three-tranche bond issue, launched in November 2003, stands out as a key moment in the development of the Asian bond market. The deal remained Asia’s largest dollar bond offering for more than a decade, until Sinopec matched the size in 2014 and Hutch beat its own record later that year.
“It was the first time an Asian issuer had done a deal that stood shoulder to shoulder with the top European and US issuers in terms of size,” said Stephen Williams, head of global banking for South-East Asia at HSBC.
The Hong Kong conglomerate had already raised US$1.5bn via Merrill Lynch in February and tapped that issue twice for US$1bn each time in the following months, before it sold €1bn in July. In late 2003 it called in banks and asked for ideas on how it could raise another US$3bn–$4bn over the next few months. That turned into a US$5bn seven, 10 and 30-year trade, setting a new record for an Asian issuer.
“We advised them they would have to do something big that investors couldn’t ignore, and give comfort that they were not going to return to the market any time soon,” said Williams. “It really redefined what Asian issuers could do.”
Williams has seen the Asian bond markets mature dramatically since IFR Asia printed its first edition, having run DCM for the region at UBS in 1996-2000 before joining HSBC. In 1996, the last good year before the crisis, Asian issuers sold US$29.5bn of G3 bonds, excluding Japan and Australia. Twenty years later that total had risen to US$219.2bn, according to Thomson Reuters data.
In the late 1990s, when an Asian issuer sold dollar bonds it entailed a lengthy tour of the US to meet investors, as a deep regional investor base had yet to develop.
“Every deal was very well-flagged, and every deal was taken to the States,” said Williams. “I remember trying to find a Korean restaurant that was open in Hartford, Connecticut at 11pm on a Thursday. Nowadays much of the money that counts is in Asia.”
South Korea was an early innovator in the Asian G3 bond market, with Korea Development Bank, Export-Import Bank of Korea and the sovereign among the names that led the way.
“Kepco (Korea Electric Power Corp) was also a sizeable issuer back then, as it owned all the gencos, had large financing needs and was also extremely creative,” said Williams. “I remember it issued a ‘cocktail bond’ comprising lira, Deutsche marks and sterling which later needed to be bought back when the company spun off its generating assets.”
“There were also a lot of deals to finance golf courses. Korean developers took advantage of tax incentives to borrow in US dollars, and started doing structured deals based on golf membership fees.” When the Korean economy stumbled, people cancelled their golf memberships and the notes ran into trouble.
Asian high yield came to life in the mid-1990s, driven by Indonesia. The likes of Indah Kiat, Asia Pulp and Paper, and Indonesian toll-road companies were highly active, and one issuer was budgeting around US$30m per quarter in fees for its financings.
“The market went from deals secured against a plant, to deals secured against shares listed in Singapore, to deals with a second lien against shares listed in Singapore,” said Williams.
Inevitably, it ended in tears, with APP creditors, which included many Korean merchant banks that were investing in foreign-currency notes for the first time, suffering heavy losses after it finally defaulted in 2001.
The wave of defaults also hurt some bookrunners who had ended up holding paper.
“Yankee bonds were very rarely backstopped, but the more esoteric FRN-type deals were,” said Williams. “The Asian crisis was a great leveller in forcing people to adopt better market practices.”
Malaysia’s sukuk debut in 2002, the first by a sovereign in US dollars and the first time a bond roadshow had included a visit to Mecca, also set a benchmark in the market’s development.
“Malaysia has been very successful in issuing Islamic paper to conventional and Islamic investors at no premium,” said Williams. “The only premium is in the extra execution time.”
In general, the time to market for Asian issuers has greatly diminished. “The more sophisticated issuers have MTN programmes and documents ready, and they are only 36 hours away from pricing a deal,” said Williams. “In the early days, that would have been a three-month timeline.”
Competition has also increased, and this has squeezed profitability for bookrunners.
“The playing field has got immensely more crowded,” he added. “You didn’t have to do so many deals to make a decent return, because you would earn 50bp-60bp in fees for a high-grade bond and 250bp for a high-yield bond, split between two or three bookrunners. You would have to do a lot of deals to make the equivalent revenue today.”
In the late 90s, the market largely comprised US banks selling Asian bonds to US investors in US dollars, but since the Asian crisis there are greater foreign currency holdings in the region and more funds that can be deployed in the bond market.
“The great thing is there is now a huge capital market in Asia, so you don’t have to be beholden to investors outside the region when you want to borrow money, which is what contributed to the crisis 20 years ago. In 20 years’ time, probably sooner, I’m sure the renminbi will challenge the US dollar as the main international funding currency in Asia.”
To purchase printed copies or a PDF of this report, please email firstname.lastname@example.org .