Reg S: The team adjusts to a world of low banking fees

The year in numbers Review of the year 2018 To see the digital version of this review, please click here . To purchase printed copies or a PDF of this review, please email gloria.balbastro@tr.com .

To see the digital version of this review, please click here .  To purchase printed copies or a PDF of this review, please email gloria.balbastro@tr.com .

To see the digital version of this review, please click here .  To purchase printed copies or a PDF of this review, please email gloria.balbastro@tr.com .

To see the digital version of this review, please click here .  To purchase printed copies or a PDF of this review, please email gloria.balbastro@tr.com .

Just what was it that made 2018 so terrifying for the Asian debt markets? Perhaps it was all about rising US interest rates and their impact on the global cost of money. Perhaps it was about a slowing Chinese economy, dragged down by Donald Trump’s petulant trade war and the fear of a collapsing debt mountain. Or was it the start of a great reckoning, following the irrational exuberance of the quest for yield over the past decade or so, as central banks turn off the spigot of quantitative easing? The year has been fractious, nervous, with a constant sense that the next storm can never be far away. But deals got done, even if primary issuance in the G3 currencies failed to add to the record-breaking pattern of the past eight years or so. “Asian credit markets have behaved rationally against a backdrop of strong US growth and a higher end-point for US rates. In many ways it’s a case of ‘nothing to see here, move along’,” said Mark Leahy, head of fixed income at the Singapore Exchange. “Primary market volumes will be the second highest on record albeit about 20% lower than 2017’s boom year.” The secular growth of Asia’s G3 primary bond market over the past decade has been breathtaking in terms of volume and number of deals, and perhaps 2018, for all the background bearish noise, has not been an unmitigated disaster. In 2010, according to Refinitiv data, a total of US$84.6bn printed from Asia (ex Australia) via 211 new issues. By 2015 the tally had more than doubled to US$179bn. The gangbusters year was 2017, when a colossal US$333bn printed via 564 deals – an all-time high. We are off that at US$249m from 487 deals so far this year, and, barring miracles, won’t be beating that record-breaking clip when 2018 comes to a close. But that achievement doesn’t look too shabby in a year when Treasuries commenced what many leading luminaries – including guru Bill Gross of Janus Henderson Investors – envisage to be a long-term bear market, bringing to an end the US government bond bull run that kicked off in the early 1980s. There was even a ray of sunshine in the rebound of Japanese yen issuance, and the continuing popularity of Green finance as environmental, social and governance issues moved up institutional investors’ wish lists. “The Asian bond market has made significant strides in recent years in assuming structural importance in the region, becoming a core avenue of funding for issuers as well as a key part of the investment strategy for insurance companies, funds, banks and private banks,” said Carla Goudge, head of debt syndicate at HSBC in Hong Kong. “We have seen market participants adjust to higher US Treasury yields, and expect markets to remain open next year.” RATES AND REALITY  Digging further into the data shines a light on the impact of rising US rates on both issuers and investors. Emerging market Asian corporate issuance was down 28% in 2018 to US$221bn, while EM Asian sovereign issuance was down by 33% to US$14bn. This decline reflects both the unwillingness of issuers to lock in long-term funding at higher rates and of investors to step up – in anticipation of wider spreads and higher absolute yields to come as the Federal Reserve rate-tightening cycle continues apace. The lower reaches of the credit curve have borne the brunt of the forward-looking rate attrition, even though a flattening US Treasury yield curve has brought some relative value at the shorter end. “Lower-quality issuers are more sensitive to higher interest rates,” said Nachu Chockalingam, senior emerging market debt portfolio manager at Hermes Investment Management in London. “This is driven by the smaller headroom to absorb higher funding costs within free cash flows. Additionally, a bigger reliance on the front end of the curve leads to higher sensitivity to the flattening of the US dollar interest rate curve.” Asian high-yield suffered in 2018: corporate high-yield in Asia paid an average return of 10.3% at five years as of the end of November –

The period since the global financial crisis has coincided with a time of heavy investment by Japanese financial institutions. Emerging from their own 1990s banking crisis and the economic torpor of the post-bubble era, Japan’s restructured and rejuvenated banks looked overseas for growth from an enviable position of strength. Mitsubishi UFJ Financial Group’s purchase of a 24.4% stake in Morgan Stanley and Nomura buying Lehman Brothers’ European and Asian businesses were the most high-profile examples of Japanese banks moving out into the world. Other banks acquired huge portfolios of assets from international players forced into panicked post-crisis deleveraging, in the process further globalising their footprint. Mizuho’s purchase of RBS’s North American loan portfolio, for example, added bankers in key areas such as debt origination and leveraged finance. In corporate and investment banking, the three mega-commercial banks have led with their large balance sheets and have long been leading cross-border syndicated lenders. Refinitiv’s investment banking fee data (covering M&A advisory, DCM, ECM and syndicated lending) had the three megabanks plus Nomura in the top 25 global fee earners at the nine-month 2018 stage. Notably, Mizuho, MUFG and Sumitomo Mitsui Financial Group heavily outperformed the market: while the global fee pool fell 4.8% year on year, Mizuho increased its take by 12.8%, MUFG by 12.4% and Sumitomo by 9.1%. It is fair to say, though, that while the Japanese houses are slowly building better non-Japan DCM profiles (particularly Mizuho and MUFG), they are not yet competing at the top table and their international equity and advisory businesses lack scale. THORNY TASK Japanese banks need international profiles now more than ever given conditions at home, where Bank of Japan stimulus has killed net interest margins and an ageing population has curtailed future business opportunities. But the thorny task confronting management now is not just to lessen reliance on lending, it’s weaving everything into a coherent – and more profitable – global whole with a convincing strategic back-story. They must do so amid parallel initiatives to cut costs, reduce headcount, and close branches at home – all of that against the backdrop of potentially tricky global market conditions and challenging industry trends. “As long as they play to their competitive niches and core strengths, they’ll do OK. But this is not the most fortuitous time to be adopting a generalist approach,” said Benjamin Quinlan, CEO of consulting firm Quinlan & Associates. “This is especially the case in the current regulatory climate, where legislation such as MiFID II is forcing banks and brokers to become disciplined about where they play and the content they produce while ratcheting up their cost base. I do think the Japanese banks will run into headwinds.” Nomura has had its fair share of pain since acquiring the Lehman businesses, yet Steve Ashley, global head of its wholesale division, is cautiously upbeat. “Market conditions remain very challenging, but the changes we’ve made to our wholesale business since April 2016 have left us with a solid core operating business with a proven track record. Our flow macro business, despite a challenging last few quarters in some regions, continues to be a large contributor to overall profitability for wholesale,” Ashley said. In terms of priorities, Nomura will continue to focus on reinforcing its agency execution business Instinet by positioning it as a multi-asset platform. Business diversification is high on the agenda: one area earmarked for growth is the Americas advisory franchise. Nomura launched a private-side business unit – client financing and solutions – in April, taking content from IB advisory, client coverage, and sales and structuring in global markets to create a suite of structured credit products. The firm is rolling this out internationally with a view to increasing cross-selling. SUST

China’s role in the global economy is under intense scrutiny, thanks in no small part to the US president’s Twitter account. But while Donald Trump continues to rail against unfair competition, intellectual property theft and currency manipulation, China’s financial markets are finally opening up. “The theme of the opening up of China’s economy to the rest of the world has been talked about for decades, but the pace of change in the last 12 months has been remarkable,” said Julien Kasparian, head of securities services for Hong Kong at BNP Paribas. “Whether you look on the equities side, where we had the inclusion of China A-shares in the MSCI index, or whether you look at fixed income, where China announced a number of changes to the market infrastructure following the launch of Bond Connect during the previous year, the pace of change has been quite staggering. And more importantly for foreign investors, access to China has never been so easy.” Recent changes go beyond improving access for foreign investors. In April, China’s securities regulator finally gave the green light for foreign investment banks to hold majority stakes in their securities joint ventures and lifted similar restrictions on shareholdings for fund management and life insurance companies. Regulators have finalised a stock trading link between Shanghai and London and revived plans for overseas-listed companies to issue depositary receipts in China. “The theme of the opening up of China’s economy to the rest of the world has been talked about for decades, but the pace of change in the last 12 months has been remarkable.” “If you’re talking about the opening up of China’s financial sector, the real shift arguably began with the launch of the Stock Connect trading link between Shanghai and Hong Kong several years ago,” said Alexious Lee, head of China capital access at CLSA. “But whereas for the past several years the focus has been on testing the robustness of different access channels, we are now entering a different phase, which is about foreign investors stepping up their participation.” The trillion-dollar question, of course, is whether tensions with the US will lead China to change course. Will regulators target US-based banks and asset managers in retaliation for trade tariffs? Or will the chilling effect on global growth force Chinese policymakers into a more protectionist stance to defend economic growth? Most market observers are confident that China will continue to open its capital markets – gradually – even if tensions with the US escalate further. “I think it’s partly due to the foreign reserves being under pressure so there is an incentive for the government to attract foreign investment,” said Caroline Yu, head of Greater China equities at BNP Paribas Asset Management. The trillion-dollar question is whether tensions with the US will lead China to change course. Will regulators target US-based banks and asset managers in retaliation for trade tariffs? Or will the chilling effect on global growth force a more protectionist stance? “But more importantly than that, China realises that increasing the participation of foreign institutional investors in its domestic capital markets is crucial to its long-term development. So I don’t expect them to shift position because of the trade tensions.” INDEX ENDORSEMENT There is plenty of US interest, too. The biggest endorsement of China’s reforms so far came from MSCI, which began adding A-shares to its benchmark emerging markets index this year. The New York-based index provider formally incorporated 226 large-cap mainland stocks with an initial weighting of 2.5% of market capitalisation in June before increasing their weighting to 5% in September. MSCI has since outlined plans to increase the weighting of A-shares in its index to 20% of their market value in two phases next year. It has also said it plans to expand the universe of stocks available in its index to include shares listed on ChiNext, China’

The year in cartoons Highlights of the year in black and white To see the digital version of this review, please click here . To purchase printed copies or a PDF of this review, please email gloria.balbastro@tr.com .

Alternative definitions of the year’s buzzwords Amp Short for ampere, unit of electrical charge AMP Creator of imaginary charges Belt & Road 1. Fast track to Chinese regulatory approval; 2. Anything you want it to be Biotech IPOs Buy four, make money on one Blue bond When a frontier market issuer jumps in at the deep end Bondi A blockchain bond without blockchain settlement Chairman Bond buyer of last resort Chinese Depositary Receipt regulatory own goal of the year Collar financing A share-backed loan that comes with a noose around one’s neck Cryptocurrency An asset that loses value even faster than the rupiah Dual-class shares Just what the doctor ordered (HKEx); why did we bother? (SGX) Frontier market issuer Jumping the HY queue Indian AT1 In public sector banks, senior debt that can be repaid at any moment – basically a state-backed loan Jho Low See below Lay low To go into hiding Liability management Finding a scapegoat for dodgy sovereign-linked deals Mahathir Mohamad Face of Asia’s youthful future Masala bond Indian recipe requiring years of seasoning Maturity mismatch Using proceeds from a 10-year sovereign bond to fund a three-day APEC summit Money for Nothing 1 Insurance policies imposed on Australian bank customers Money for Nothing 2 Australian bank executives’ 200% bonus for “on-target” performance Musk (verb) To drive up a company’s share price using Twitter NBFC Non-Bank Facing Crunch Papua New Guinea Seeking bonds of paradise PIG notes Bonds for which the interest is paid in ham because the issuer ran out of money RBI Reserve Bank of India. Definitely nothing to do with the Indian government Retail bond Two Singapore aunties spending time shopping together Royal Commission Monarchist wing of Australia’s banking sector Shanghai Tech Board A pot of gold at the end of a rainbow Shanghai-London Connect Brexit casualty Sustainable finance Not issuing one-year bonds at 15% TLAC In Japan, 2018’s must-have fashion accessory Trade war Cowardly way to score political points Volatile market Also known as bear market (when did you last hear a rising market described as volatile?) Wealth management product In China, probably someone’s repackaged AT1 notes. Who knows? Yield curve control The latest trend in Japanese minimalism To see the digital version of this review, please click here .  To purchase printed copies or a PDF of this review, please email gloria.balbastro@tr.com .

IFR Asia Awards 2018 The end of 2018 may not feel like much cause for celebration in Asia’s capital markets, but it would be a mistake to overlook the tremendous achievements of the past 12 months. After a slump in emerging-market currencies took hold over the summer, many market participants were left waiting for the end of the year to reset expectations. Investors who did well at the start of 2018 soon found themselves reeling, as higher dollar rates and fears for trade growth brought their portfolio values back to earth with a bump. Despite this tough backdrop – at least in the second half of the year – Asia’s capital markets took some enormous steps forward in 2018. Hong Kong ushered in reforms to bring its listing regime into the 21st century, and found immediate rewards with a string of major IPOs from technology companies with dual-class shares and biotech developers without a profitable track record. While secondary performance has been tough in some cases, the new framework will serve the entire market well in the long run. China also began laying the foundations for an overhaul of the domestic equity capital markets, with plans to introduce basic international standards such as market-driven pricing and a registration-based system through a new Shanghai technology board. Reforms in the Chinese bond market have been arguably even more significant, with renminbi securities poised to enter global indexes in 2019. Beyond Greater China, Asia’s frontier markets also took some important steps forward in 2018. There were bond market debuts from the Papau New Guinea government and from Cambodia’s corporate sector, while Vietnam’s stock market welcomed major international investors – and some big new listings. The outlook for 2019 is far from clear, with questions lingering over China’s continued growth as a trade spat with the US threatens to spiral out of control and as regulators crack down on excessive leverage in the financial system. After some tough months over the past year, however, much of the froth has already gone. Most recent financings have relied on real demand from international institutions, rather than leveraged orders from China’s corporate sector, and the exuberant acquisitions of recent years have all but vanished. That should limit the downside from this point, assuming there are no more nasty surprises. To see the digital version of this review, please click here .  To purchase printed copies or a PDF of this review, please email gloria.balbastro@tr.com .

The record D31trn (US$1.3bn) initial equity offering of property developer Vinhomes tested the limits of the Vietnamese stock market, proving that the fast-growing country has the ability to host sizable offerings. The country’s largest ever share sale offered global investors a rare chance to gain significant exposure to Vietnam’s growing economy and real estate market. Interest in Vietnam has ballooned since Vincom Retail, another Vingroup company, pioneered the IEO structure in 2017 with a D16.1trn offering that slashed the months-long delay between pricing and trading to a matter of weeks. Although Vinhomes took advantage of the same structure, its biggest challenge was to convince investors that the local market could support such a large float. It was looking to raise almost twice as much as Vincom, and would become Vietnam’s second-biggest listed company, behind its parent Vingroup. Vinhomes and its bankers reduced some of the pressure on the public market with a US$853m pre-IEO placement to Singapore’s sovereign wealth fund GIC in April, a month before the public offering. To further increase the odds of success, Vinhomes brought in mainly foreign cornerstone investors for shares totalling D23.4trn or 75% of the offer. Seven buyers took up about 77% of the cornerstone tranche, namely Avanda Investment, Capital Research and Management, Dragon Capital, Ivy Investment, JF Asset Management, Korea Investment Management and Mirae Asset Global Investment. Despite the benchmark Vietnam Index trading down almost 10% in the three weeks before pricing, Vinhomes managed to price around 267.8m secondary shares from undisclosed shareholders – equal to a 10% stake – at the top of the D110,500–D114,700 range. The final price implied a 2018 P/E of 18, a premium to the about 14x for regional real estate players in Thailand, Indonesia and the Philippines. Demand was strong. The deal was covered after three hours of bookbuilding and the final book was multiple times covered. Around 80 investors participated. Geographically, Asia took up 83% of the float, the US 15% and Europe 2%. After the IEO, Vingroup, together with subsidiary Vincommerce, owns 73.8% of Vinhomes, GIC owns 7.1%, cornerstone investors 7.4% and public investors – including some existing individual holders – 11.7%. Citigroup, Credit Suisse, Deutsche Bank and Morgan Stanley were the joint global coordinators for the float, and joint bookrunners with HSBC and Maybank Kim Eng. Saigon Securities was the domestic joint bookrunner. Vinhomes has developed 48% of all high-end property in the last three years in Hanoi and Ho Chi Minh City. Its land bank is nearly 20 times more than the next largest player and is sufficient for approximately 15 years of development. To see the digital version of this review, please click here . To purchase printed copies or a PDF of this review, please email gloria.balbastro@tr.com .

The Independent State of Papua New Guinea put itself firmly on the map for global fund managers with a wildly popular debut sovereign bond, proving that the capital markets can provide essential growth funding even in torrid conditions. Papua New Guinea ended a 20-year journey to the international bond market in some style, raising US$500m at a 10-year tenor – a rare feat for a first-time issuer with lowly ratings of B2/B (Moody’s/S&P). The deal was all the more impressive after three failed attempts in previous years and given that it priced in September, in the middle of an emerging-market sell-off that had sent Asian credit spreads soaring. Hints of a successful deal became apparent during the roadshow, as global emerging-market investors quickly expressed interest in a debut sovereign issuer with a wealth of natural gas reserves. Investors jumped at the opportunity to invest in a debut emerging-market credit that was also offering attractive returns. Some even thought that the deal could offer a hedge against volatile conditions that had hit broader markets. The combination of these factors was a huge hit when the deal went live. Guidance was tightened 62.5bp from initial price thoughts – one of the most aggressive revisions of the year – before the deal priced at par to yield 8.375%. The order book was more than six times subscribed at reoffer, underlining the diversity appeal of a new frontier credit. Demand from emerging market specialists in the US was impressive, as the decision to opt for a 144A/Reg S offering paid off. The US accounted for a whopping 56% of the bonds, while Europe took 27% and Asia 17%. Papua New Guinea’s choice of a 10-year maturity over the far easier five-year standard was especially noteworthy amid fears that rising US interest rates would affect demand for long-dated debt, even though the US Federal Reserve raised its benchmark rate during the week of pricing. Global EM investors backed the longer tenor, allowing proceeds to be used to support liquefied natural gas and mining projects that will drive the country’s medium-term economic growth, but which will take a few years to make a difference to GDP. The 10-year tenor also gave Papua New Guinea the opportunity to extend the weighted average duration of its debt and opened up a new way to diversify away from expensive local borrowing that had stoked inflation. Papua New Guinea had first mooted a global bond two decades earlier, and its long-overdue debut paves the way for the country to return to the international markets to fund future development plans. Credit Suisse was global coordinator for the deal, and also joint lead manager and joint bookrunner with Citigroup. To see the digital version of this review, please click here . To purchase printed copies or a PDF of this review, please email gloria.balbastro@tr.com .