The growth of the Reg S bond market has been one of the defining trends of the Asian capital markets in recent years. Driven by the seemingly unstoppable rise of Asian wealth – especially deep-pocketed Chinese investors – US dollar bond sales in the region no longer depend on the participation of US institutions.
Dollar debt issuance swelled to a record US$376bn in 2017 in Asia Pacific, excluding Japan, up 45% on the previous year. Offerings targeted at the US investor base, however, are now in the minority: analysts estimate less than one tenth of that total went to onshore US investors. Instead, an alternative Asian market for dollar bonds has developed, much in the same way that the Eurodollar market emerged in the 1960s.
The change from 10, or even five, years ago has been dramatic. At that stage, Asian issuers needed the US market to be ticking higher before they could even consider launching a new issue, and US investors expected a healthy concession for taking on Asian risk. In contrast, recent new issues have seen Asian borrowers wrap up deals even before the US wakes up, with regional buyers willing to accept better terms than their western counterparts.
All this has contributed to the dominance of Reg S documentation, where new issues are not offered to US buyers but disclosure requirements are lighter. Chinese companies have been the major beneficiaries of the trend, winning access to the international markets at low costs, but borrowers from Australia to India have also elected to issue under the Reg S format. Even global issuers have turned to the Asian Reg S market to target discrete pockets of US dollar liquidity, notably through onshore issues in Taiwan’s Formosa market.
This phenomenon raises some intriguing questions. For one, how far can the Reg S market really go? After Postal Savings Bank of China sold US$7.25bn of Reg S capital securities in 2017, it is clear that jumbo dollar deals are now possible outside the US. But is the trend sustainable as US interest rates rise? What happens if and when Chinese capital flows reverse course? And does a more concentrated, regional investor base pose liquidity risks for Asian borrowers in the future?
IFR gathered a panel of market participants to discuss these and other topics in Hong Kong late last year. The panellists included the Export-Import Bank of Korea, one of Asia’s best-known issuers in the US market, and Hong Kong-based power producer CLP Power Holdings, a repeat borrower under Reg S, providing an intriguing contrast of views for the debate.
The weeks since the discussion have produced more of the same, with more Asian issuers tapping the US dollar market and Asian investors showing no signs of losing their risk appetite.
Rising US rates, however, typically spell danger for emerging markets, and expectations of heavy supply will test the depth of Asia’s homegrown buyer base during the year. The debate on the merits of the Reg S market looks sure to continue throughout 2018.
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