Bond markets have been supported by some market-friendly data and while Fed speakers were again mixed, it was the more dovish remarks that captured attention.
Asia’s growth unlocks value of new markets
The rising global stature of Asian investors and their search for fresh avenues to deploy their expanding wealth is aiding the growth of new markets.
The rising global stature of Asian investors and their search for fresh avenues to deploy their expanding wealth is aiding the growth of new markets. This was the main conclusion of a panel on alternative capital markets and investment solutions at the recently concluded sixth annual Asia Pacific Debt Capital Markets conference organised by NAB in Singapore, Hong Kong and Tokyo.
“There is an exponential growth of capital across Asia and Asian investors are playing an increasingly important role in the capital markets as they look for alternative sources to park their money,” noted Tabitha Chang, Director of Capital Markets Origination, at NAB, kicking off a lively discussion.
In particular focus was the evolution of the loan market across Asia and the rapid expansion of the US private placement (USPP) market, which is emerging as a destination of choice for issuers and investors across Asia, Australia and New Zealand.
Robust economic growth has helped boost Asian household incomes and, in a region known for its high savings rate, fuelled a boom in investible funds. In turn, the loan market has exploded with annual volumes rising from USD7 billion to USD734 billion in total outstandings over the last 20 years, according to NAB estimates, with China leading the league tables in a market historically dominated by European and Japanese banks.
Keen to capitalise on this trend, a growing number of borrowers are tailoring their issuances to the Asian investor base, offering higher yields and larger allocations to institutional investors, according to Lorna Greene, Director/Head Debt Syndicate and Origination Asia, at NAB.
The institutional term loan (ITL) market has been a big beneficiary of this trend, Greene added, with a growing number of life insurance companies as well as asset managers, especially in Japan, Korea, Taiwan and Hong Kong, now favouring longer-dated loans. The ITL market is also attractive from an issuer’s point of view, as investors are increasingly prepared to expend resources on in-house credit analyses in order to invest directly in projects and earn higher yields.
“Sourcing these higher yielding investments has been a really big theme throughout the last 12-18 months,” Greene noted.
Asian investors’ appetite for longer dated securities is also helping burnish their market reputation, especially in Australia and New Zealand.
According to Greene, Australian borrowers tap into the liquidity in Asia through the Reg S bond route, widely regarded as one of the prime catalysts of Asian capital markets.¹ The Reg S market complements their existing Euro Medium Term Note (EMTN) programmes and offers flexibility in terms of minimum benchmark sizes, which suits Australian borrowers’ typically lower funding needs, she noted, pointing out that average volumes in the Reg S market have climbed significantly in recent years. Dollar debt issuance swelled to a record USD376 billion in 2017 in Asia Pacific, excluding Japan, up 45 percent over the previous year. ²
“Another aspect that keeps the focus on Asia is that a lot of Australian corporate borrowers have been doing business in the region for quite a long time,” she said. “There’s very strong interest in Australian credit in Asia and we expect more borrowers will access the market in the future.”
The USPP market is emerging as another major resource for issuers and investors, accounting for 40 percent of the A$35 billion that Australian corporations borrowed globally in 2018.
“Given that a lot of Australian borrowers are going to [the USPP] market, if you do want access to Australian credit, then that is a market you really should focus on,” Greene advised.
Twenty years ago, only US investors were coming to the USPP market, observed Geoffrey Schmidt, General Manager, Corporate Finance North America at NAB, and issuers were “vastly different than the companies that come through today, which are world-class.”
Additionally, the democratisation of market intelligence has helped eliminate the information asymmetry that previously handed a disproportionate advantage to a few investors, Schmidt noted. Investors have greater flexibility in choosing where to invest, especially if regulators welcome foreign capital and offer robust financial covenants.
“We were traditionally borrowing in the bank market in Australia…the USPP market is exactly the same, essentially the same covenants as we get with our banks in Australia,” noted Matt Brassington, CEO of Melbourne-based Aquasure, which has taken the USPP route three times since 2016.
The USPP market has also become a go-to destination for borrowers looking to raise long-term finance, observed Brassington, noting that Aquasure had issued bonds with a tenor as high as 15 years in the market. “Every time we’ve wanted there’s been deep pools of capital available…we know if we want tenor, that’s where we’re going to get it.”
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