Macro challenges are hampering G3 bond issuance, but could they present an opportunity for savvy issuers and investors to take a closer look at what Asian local currency bond markets have to offer?
Geopolitical challenges have fuelled inflation and, combined with the US Federal Reserve’s rapid rate hikes, have brought volatility to capital markets globally. Debt markets have experienced a drop-off in G3 bond issuance, but Asia’s local currency markets have earned their place as a safe haven.
G3 volumes from Asia ex-Japan dropped 35% for the first half of 2022 compared to the same period last year, according to Refinitiv data. Asia’s local currency markets, though, have stayed resilient, and total issuance was up 30% in H1 2022 compared to last year1.
China drove most of the growth, with the offshore renminbi (CNH) market up 160% year-on-year and the Hong Kong dollar market seeing 35% growth during the same period2.
Venkat Rao, Managing Director and Head of MTNs and Local Currency Syndicate for APAC at HSBC, said this trend was a signal for issuers.
“These markets have remained reasonably insulated from recent market volatility due to their local nuances and demand-supply dynamics,” Rao said. “For issuers, these markets offer currency-matched financing in the fastest growing region in the world, investor diversification, and pricing benefits, while also providing ease and certainty of execution. For investors, the benefits include asset and liability matching in their currency of choice, excellent choice of credits and lower market volatility.”
The CNH, also known as Dim Sum, bond market, in particular, has seen a surge in activity because of favourable interest rates, opportunities from new trading channels, and broader trade trends.
A boom year
In the first half of 2022, the Dim Sum market saw 205 deals priced with a total volume of CNH107.5bn (US$15.9bn), compared to CNH91bn from 158 deals for the whole of 2021, according to Refinitiv data. The recovery, after several subdued years for the market, saw the outstanding amount of Dim Sum bonds in Hong Kong increase by 29.4% at the end of June from a year earlier3.
A boost in primary activity has come from the opening of the Southbound channel of the Bond Connect programme (SBBC), which allows selected mainland investors to access CNH- and HKD-denominated bonds.
“The new SBBC channel has been of significant interest to both buyside and sell side market participants, providing an avenue for investors to become more active in a broad range of credit issuers and enticing issuers to deepen their investor base into PRC based buyers.” Rao said.
One deal saw Asian Infrastructure Investment Bank (AIIB) issue a CNH2.2bn 2.95% three-year bond private placement in late August through the SBBC, the first time AIIB had used the new channel. HSBC was the Sole Arranger4.
It gave AIIB an arbitrage opportunity and exceeded expectations in terms of size and tenor, the issuer said.
Darren Stipe, head of funding, AIIB, noted that 30% of the bank’s year-to-date funding was in Asian currencies.
“We expect to finish 2022 with a higher mix of funding in Asian currencies compared to last year, and that has certainly been helped by the work undertaken to enable AIIB bonds to be eligible under the Southbound Bond Connect channel,” Stipe said.
HSBC has been the top underwriter of CNH bonds since 2011, according to Refinitiv data5.
Bank deals and ESG shine in Singapore
The Singapore market also made headlines as the overall volume for Singapore dollar bank capital deals more than quadrupled in the first half from a year earlier to S$3.9bn (US$2.8bn). That comprised S$2.5bn of Tier 2 deals and S$1.35bn of Additional Tier 1 paper3.
HSBC was active in the market as an issuer itself, raising S$900m for a 10NC5 Tier 2 capital deal, the largest such issuance in the Singapore dollar market in the last decade. The deal saw wide participation from private banks and institutional investors and opened the door to more issuers, with HSBC assisting several overseas issuers, including ABN Amro, Macquarie and Westpac.
Green finance has added to the momentum in Singapore dollars, with more issuers adding an ESG angle.
The Government of Singapore, with the Monetary Authority of Singapore as its agent, on August 4 priced a S$2.4bn 50-year green bond6, the longest tenor seen in the category so far worldwide, as part of a larger S$35bn green issuance programme. HSBC was a joint lead bookrunner on the deal.
“As proceeds are dedicated to long-term infrastructure projects in clean transportation with substantial environmental and social impact, the issuance puts Singapore a step ahead on best practice market standards, reflected in the strong demand from top-tier international green investors,” said Sean Henderson, Co-Head Debt Capital Markets Asia Pacific, HSBC.
Looking ahead, redemptions totalling S$26.3bn this year, according to Refinitiv data, will also result in issuers’ need to refinance and investors’ need to reinvest7. The private bank bid also made a return in Asia, which has historically supported issuance of bank capital deals, particularly in a market environment of limited supply.
The boom in activity this year has shown that Asia’s local currency funding markets offer a viable alternative when offshore markets are hard to access.
Having a diverse mix of funding currencies and markets will become even more critical for frequent borrowers in 2023 as the global central banks continue to tighten monetary policy in their fight against inflation.
HSBC’s 2022 deal flow across local currency bond markets has demonstrated the breadth of its capabilities in structuring deals for issuers ranging from corporates to sovereigns, despite the ongoing macro challenges facing the global economy.
1 Refinitiv data for January 1-June 30 2022. 2 Refinitiv data for January 1-June 30 2022. 3 Hong Kong Monetary Authority Half-Yearly Monetary and Financial Stability Report September 2022, p7 (https://www.hkma.gov.hk/media/eng/publication-and-research/quarterly-bulletin/qb202209/E_Half-yearly_202209.pdf). 4 HSBC mandate, Asian Infrastructure Investment Bank, Aug 2022. 5 Refinitiv data for January 1 2022-June 30 2022. 6 https://www.ifre.com/story/3467539/singapore-looks-to-the-long-term-with-50-year-green-bond-hmxyzkkxtg 7 Refinitiv data for 2022
PRODUCED IN ASSOCIATION WITH HSBC