Debt capital markets in Asia enjoyed another positive run last year as liquidity flowed into the region as part of the global hunt for yield.
Even with the risk of further Fed tapering on the horizon – rather than expect a shutdown of the Asian debt market in 2014, bond issuance will be front-loaded, says Paul Au, head of debt syndicate, Asia at UBS.
"Rising interest rates don’t necessarily mean that debt capital markets in Asia will close. Corporates need financing and refunding. There may be an uptick in volatility once Fed tapering comes into play but we expect debt volumes in 2014 to be similar – or higher – than those we have seen this year," says Au.
Timing is also important when looking at the prospects for the year ahead, given that refinancing activity is likely to be healthy, he adds.
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"2004 and 2009 were strong years for Asian debt, so it is likely that the corporate issuers that tapped the market at that time will consider refinancing and push up debt volumes in 2014," says Au.
According to Kaushik Rudra, global head of credit research at Standard Chartered, around $350 billion of debt will need to be refinanced across emerging markets in 2014 and 2015, with around $130 billion coming from Asia (ex-Japan) companies.
Moreover, with the opening up of China’s economy, tighter regulations on the banking sector and the onset of Basle III regulations in 2014, Chinese state-owned enterprises will be forced to access the bond market for cheaper and easier funding.
"SOEs in China have benefited from access to traditional types of credit allocation in the past so have the most to lose from a market-based regime, so they are the ones that are forced to look for alternative sources of credit. They will be the ones moving to the debt market," says Viktor Hjort, head of Asia fixed-income research at Morgan Stanley.
Rudra says: "Asian banks are generally well capitalized, so Basle III is not an issue right now, but banks are preparing for the next five years. As Asia grows, banks will require more equity, and this will have a clear impact on loan financing."
Chinese SOEs, including energy and utility companies, will be the main driving force behind volumes in 2014.
According to Fitch, China Mobile Limited, China National Petroleum Corporation (CNPC), the State Grid Corporation of China (SGCC), China National Offshore Oil Corporation (CNOOC), and China General Nuclear Power Corporation (CGNPC) are all expected to expand capacity within the next few years to accommodate the growing regional market and will be looking to increase their capex requirements through the debt market.
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| Viktor Hjort, head of Asia fixed-income research at Morgan Stanley |
"The growth of the debt market is a positive development, adding funding flexibility to corporates," says Hjort. "Banks that were perhaps limited to the local-currency bond market are also looking offshore, and investors have access to a new market."
The bond market in Asia is still relatively small at $3.3 trillion. But as Rudra points out, increasing pressures on corporate financing are expected, taking the size of the corporate bond market in Asia ex-Japan to above $10 trillion by 2017. The increased bond issuance should help ameliorate some of the pressures on loan financing.
"The increased issuance is expected to raise the share of bond markets’ total funding mix to around 40% in 2017 from 25% today," says Rudra.
Equity returning?
After a subdued start to the year, and in spite of missing out on the blockbuster listing of Alibaba – at least for now, activity in Hong Kong’s equity markets sprang back to life towards the end of 2013.
The comeback was confirmed by Hong Kong’s biggest initial public offering of the year on December 12, from Beijing-based SOE China Cinda Asset Management Company, which sold 5.3 billion shares at HK$3.58 to raise HK$18.5 billion ($2.5 billion).
According to data compiled by Bloomberg, shares of Cinda closed at HK$4.50 in Hong Kong, 26% above the original IPO price, marking it as the biggest first-day gain for a $1 billion-plus IPO in the region since Chinese hypermarket operator Sun Art Retail Group debuted in July 2011.
The company, which buys bad loans and distressed assets from China’s state-owned banks and corporates, is well positioned to make a hefty profit as China’s growth slows.
Ten cornerstone investors backed the IPO with a combined $1.1 billion. These included Oaktree Capital Management, the world’s largest distressed-debt investor; New York-based Och-Ziff Capital Management Group, which has a strong focus on distressed debt; China Life Insurance; and Norges Bank Investment Management, Norway’s sovereign wealth fund.
The allocation to retail investors had to be raised from 5% to 20% to satisfy strong demand.
"One theme well illustrated by the Cinda deal is the return of blue-chip cornerstone investors in equity investments, which will actually give other investors confidence in the deal," says Jerome Leleu, managing director, global capital markets, at Morgan Stanley.
China to take the lead
While Chinese corporates will continue to issue at home and offshore, domestic issues – although mostly closed to overseas investors – are set to grow as Beijing steps up efforts to reform capital markets.
In 2012, more than a third of new issues in China suffered a decline in profits within the first nine months of their listing. In retaliation, regulators shut down China’s IPO market in October of that year in an attempt to clean up the saturated market, boost investor confidence and curb the issue of overpriced stocks on the mainland.
On November 30 2013, the China Securities Regulatory Commission announced a series of reforms aimed at modernizing its approach to stock listing, spurred by China’s pivotal Third Plenum on November 9, at which the Chinese leadership backed IPO reform among other measures aimed at strengthening the markets.
The regulator wants to streamline the country’s lengthy IPO process, give added protection to retail investors and give listed firms more options for raising cash. And while regulators face a difficult balance between building investor confidence and managing financial risk, bankers believe that China’s equity market is due to take a leap forward.
"During the first half of the year, investors looked for growth in southeast Asia, and the Philippines, Thailand and Indonesia saw a lot of equity activity around this time," says Leleu. "In China, there were a lot of IPOs in the pipeline ready to go last year, but a softer market made the corporates put any plans they had to float on hold. Now they are ready to go."
But with around 760 companies waiting to list on China’s domestic stock market, some investors worry that a flurry of IPOs might flood the market. After the announcement was made by the regulators, Chinese stocks took a tumble. The ChiNext Index, which tracks companies with a median market value of $1 billion, sank 8.3%.
"When they are given the go-ahead, regulators will be sure to drip-feed the market," says one banker. By the end of January 2014, 50 Chinese corporates are expected to be given the go-ahead to float by the regulators.
Convertible bonds
"Convertible bond issuance has been on a sharp decline over the last few years, and by June 2013, things looked set to look the same as 2012," says Nathan McMurtray, head of equity-linked origination for Asia at Deutsche Bank. "But there has been a sharp increase in equity-linked products because it benefits from good performances on both the equity and debt side of things. In August, there was a massive rush in convertible bond issuance."
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| Nathan McMurtray, head of equity-linked origination for Asia at Deutsche Bank |
Although convertible bonds usually pay lower interest rates to investors, under certain conditions they can be converted into equity, which can lead to higher earnings for bondholders in fast-growing companies. At the same time, companies can cut borrowing costs with an option for bondholders to buy shares at a fixed price when the bond matures.
When stock market volatility is high, the value of that option is increased, which means companies can pay less in cash interest than they would with a straight bond.
Technology companies are drawn to convertibles because their share prices tend to be relatively volatile, and hence they get more value for the equity option, says McMurtray. On November 15, Chinese technology company Sina, which owns a majority stake in Chinese social media platform Sina Weibo, sold $700 million in five-year convertible bonds with an annual coupon of 1%, with the option to convert to equity at $123.70 per ordinary share.
The issue followed China’s second-biggest search engine company, Qihoo, which raised $550 million over five years with an annual coupon of 2.5% at the end of August on the New York Stock Exchange.
According to Dealogic, convertible bond deal value year to date in mid-December 2013 in Asia had reached $20.7 billion, with 118 deals completed – double the volume for the whole of 2012.
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