December 2009

If you had to pick one local currency bond market in the region that really stepped during the global financial crisis, it would probably be the Philippines. It’s not that the volumes raised in it are particularly great: less than a quarter as much was raised here as in Malaysia, and less too than Singapore or Thailand. But it’s the magnitude of improvement on previous years, delivered in a hopeless international environment, that stands out.

“One of the markets in the region that has developed most in my opinion is the Philippines,” says Sean Henderson at HSBC. “Historically it’s been a quite predictable, smallish-size kind of market.” But a look at issuance volumes demonstrates how it has stepped up. In 2008, according to ThomsonReuters, P86 billion was raised in peso debt; by November 19, the 2009 figure already stood more than 50% higher at P133.58 billion with several weeks of the year still to go.

Jose Pacifico Marcelo, head of investment banking at First Metro Investment Corporation, says the peso debt market has been more active this year than in any of his previous 10 at the bank. “It’s surprising, as only a year ago investment banking worldwide was thought to be in its death throes,” he says. “The local economy and financial sector has proven to be in better shape than counterparts in developed countries. As a result, the peso debt market became the haven of local borrowers and issuers who, fearful of the negative impact of the global financial crisis, advanced their funding requirements.” His own data puts total volume for the first 10 months of 2009 at P472 billion including government debt – a figure that has trebled year-on-year.

This bounty of new funding was vitally important for companies and banks in the Philippines. “Corporates’ ability to fund themselves without having to go offshore was vital in the depths of the crisis,” says Henderson. “If any one of them had had to come to the offshore high yield markets, they would have had to pay up massively.”

“So it’s done a few things,” says Henderson. “It’s kept a lot of borrowers out of G3 markets through the worst of the volatility; question marks over foreign borrowings haven’t been there; and it’s kept cost of funds lower than they might otherwise have been.”

Arguably the most significant local currency deal anywhere in southeast Asia in 2009 took place here: the P38.8 deal for San Miguel Brewery (see box). But that wasn’t all that happened. “San Miguel was an enormous benchmark for what people could get done,” says Henderson. “But on top of that you saw Robinson Land with two P5 billion issues, JG Summit – as corporate deals these were significantly larger than anything we saw in 2007-2008.”

In fact, a look at the bigger peso deals of 2009 shows a diverse roster of issuers. In the midst of the crisis, in February, Globe Telecom raised P5 billion in a deal led by BPI Capital, BDO Capital and First Metro. Then came the San Miguel Brewery landmark in March, followed by Petron, which raised P10 billion in May; Land Bank of the Philippines, which raised just under P7 in June, and then SM Investments (P10 billion) and Robinsons Land (P5 billion) the same month. Robinsons was back with another deal of the same size in August, by which time Energy Development Corp had raised P7.2 billion; since then Aboitiz Power Corp and Megaworld have raised P5 billion apiece. In short, funds have been raised for banks – including lower tier two capital – real estate, consumer goods and energy.

They’re also, mainly, household names. The brand recognition point reflects a powerful retail bid, expressed through the private banks. In fact, the investor base is quite diversified in the Philippines: banks, trust companies, insurance companies and mutual funds are all powerful. It adds up to a very liquid market for the right names. “When you look at San Miguel in Philippine pesos, that’s a deal size in local markets that’s been unheard of before now for corporate issuers,” says Jan Wipplinger at Deutsche Bank. “It shows the depth of the bid of the local investor base for local names.”

Notably, there is a strong onshore dollar bid in the Philippines too. “You saw with the SM Investment dollar deal, the largest ever corporate dollar deal, that there’s an enormous dollar bid onshore as well as a developing peso market,” says Rod Sykes at HSBC. “If you look at any Philippine dollar deal, in almost all cases there is significant onshore participation.” Wipplinger agrees. “When the Philippines launches in US dollars there is always a strong domestic bid. For SMIC and the banks there is a very tight domestic bid through international dollar curves.”

Peng-Meng Ling at Standard Chartered highlights the appetite for lower-tier bank capital in the Philippines, noting that investors show more interest in subordinated debt or preference shares than in other markets. Lower tier two sub-debt issuers have included Metrobank and RCBC since the collapse of Lehman – among the first places anywhere to reopen sub-debt issuance, he points out.

Still, things are not perfect, and in particular secondary market liquidity is weak. “Overall liquidity in the primary market is high,” says Marcelo. “For the secondary market, the only liquid issues are those by the government. For private issues, investors are primarily buy-and-hold.” He says tenor is lengthening, with retail bond issues showing some demand as long as seven years, and project financing up to 12 years. “Sophistication is still limited, as investors stick to simple products and top-tier issuers,” he says. “New products like securitization and REITs are expected to be more active in the next two years.”

Marcelo says the pipeline looks less impressive than 2009 has turned out. “With the May 2010 presidential elections, issuers will try to complete transactions by the first quarter,” he says. “The second quarter will likely be slow, and then volume will pick up by the second half.” In aggregate, he expects much lower overall peso debt volumes than in 2009, but hope springs eternal: “If the election results are credible, 2011 may be as good as this year.”

BOX: Deal profile: San Miguel Brewery.

If the Philippine debt markets proved their worth in 2009, San Miguel Brewery’s P38.8 billion (US$800 million) raising in March was the deal that did most to create that impression. “San Miguel was the standout in redefining in people’s minds what was achievable,” says Sean Henderson at HSBC, which was a bookrunner on the deal alongside Development Bank of the Philippines.

This was a fourfold increase on the previous record biggest Philippine peso bond issue, achieved in the middle of a global financial crisis, for a first-time issuer. Originally, the issuer had looked at going to offshore markets, or an onshore/offshore combination, before the global markets locked up. Rather than downsize, the deal proved there was no need to go overseas.

The deal did underline the point that brand name is vital in Philippine debt as well as equity. The prompt for the issue was San Miguel Corp’s spin-off of its brewery business, the largest brewery in the Philippines – a 95% market share – and a world-recognised beer brand.

The deal came in three tranches, a three-year at 8.25%, five years at 8.875% and 10 years at 10.5%. All priced at the tight end of guidance. Appetite came from institutional banks, pension funds, insurers and retail, with a wide range of domestic underwriters brought in order to increase to the greatest possible degree the reach of the deal. BDO Capital, BPI Capital, China Bank, First Metro Investment Corp, ING, Land Bank of the Philippines, Philippine Commercial Capital, Rizal Commercial Banking Corp, and Standard Chartered Bank, all ended up with joint underwriting credit alongside the bookrunners.

Other corporate bonds are covered in the main texts, but government issuance has been notable too. Marcelo considers the most significant deal for 2009 to be tranche 11 of the Retail Treasury Bonds, which raised P114.4 billion in September: the biggest retail bond issue for the Philippines since the government first started offering the bonds in 2001. Marcelo also highlights a project finance deal, Cebu Energy Development Corp – the first of its kind to raise all its debt requirements from the peso debt market, raising P16 billion.

Malaysia has become one of the region’s most liquid and reliable bond markets. Partly, that’s a function of having the region’s only mature and tested Islamic sukuk market, but the ringgit debt market has also proven itself for conventional issuers – including, to a growing extent, foreign ones.

According to ThomsonReuters data, by November 19 issuers had raised M$42.1 billion in 2009 to that date, already well ahead of the M$38.82 billion in all of 2008 and with an outside chance of matching the M$ 54.94 billion of 2007.

But although the overall numbers have stayed resilient through the crisis, the market has thinned in one sense, in that it has only been highly rated names who have had access. “Up to the Asian crisis in 1997-8, you would see bonds of BBB being traded in emerging markets,” says Seohan Soo, head of debt capital markets at AmInvestment Bank. “After the Asian crisis, for bonds issued anything below single A, there are no takers. And since subprime, we have also lost the ground of the single A market.”

Soo says that in 2009 to date, financial institutions have made up 30% of new issues, and government guaranteed or AAA names 58%, with AA rated issues accounting for 10.4% – this is typically big investment holding companies like IJM and some project financing such as toll roads and power plants. Below that, there’s almost nothing: 0.9%, or M$460 million, from single A rated issues; just M$134 million, or 0.2%, for BBB and below. “The single A market was more or less obliterated after subprime,” says Soo.

It’s not just lower rated names that have stepped back. “We are seeing more high grades, more government guaranteed, more triple A: that kind of issuer,” agrees Thomas Meow, head of debt capital markets and syndicate at CIMB Investment Bank. Lower rated credits and project financiers have appeared less. “We have seen a significant slowdown in project financing, understandably, because the government has been busy tackling the economy and took some time to come out with a stimulus package,” says Meow. “This stimulus plan will take one or two years to come to the market. But this activity will come back: the Malaysian bond market has been funding project finance requirements substantially. In the past 25-30% of the money raised here has been to fund project finance – a major difference between Malaysia and any other regional bond market.”

As the crisis unwinds, aversion to lower rated credits will probably alleviate in time. “I think investors will be cautious,” says Meow. “There will be some growth in trading appetite, it’s tipping back, but I don’t expect it to change overnight.”

In order to help it return, the government set up a credit wrapping agency, Danajamin Nasional, which formally opened on June 30. Danajamin, jointly owned by Bank Negara Malaysia and the Ministry of Finance, was launched with a guarantee quota of M$15 billion to wrap paper from lower-rated local credits in order to access Danajamin’s AAA (from local agencies Ram and Marc) rating, for a fixed fee, and find buyers. Even then, the issuers must have an investment-grade rating from a recognised rating agency in Malaysia.

“Those parts of the economy, the single A issuers, are very important to Malaysia and the government has taken steps to make sure there will be an avenue for these companies to tap the bond market rather than go back to the banks,” says Meow. “I don’t think the government wants systemic risk in the banking market.”

The hope is that Danajamin will give a shot in the arm to the markets, bring back confidence and eventually help create an environment in which single A-rated credits can issue unsupported. “To me, single A is still workable,” says Soo. “When the return is marginalized by the concentration on superior credits, eventually investors should look towards well structured transactions for single A credits for better spreads. It’s a sentiment issue.”

A separate theme in the ringgit markets has been foreigners using it to raise debt. This has chiefly been a Korean phenomenon, and had its strongest expression in 2008: Export-Import Bank of Korea raised M$1 billion in five and 10-year funding in March 2008, followed by M$1 billion from Industrial Bank of Korea the following month, M$650 million for Hyundai Capital Services in May and, the same month, M$530 million for Woori Bank. (Earlier in the year Gulf Investment Corp had raised M$1 billion).

This has been much tougher in 2009, but some deals have got away, most notably a M$1 billion deal for Hana Bank in June, upsized dramatically from a minimum target amount of M$300 million. The deal was guaranteed by the Korean government – a fairly short-lived guarantee program since Korea would prove to be one of the first economies out of recession. “We got the timing perfectly right,” says Chay Wai Leong at RHB Investment bank, the sole lead. “They were the first and the last. Straight after they used it there was a pick-up in the Korean economy and banks not longer needed to use the scheme.”

Critics say that there is a limit to how far this market can ever grow, given the limits available in the swap market. There was a feeling in 2008 that no other issuers, Korean or otherwise, could have come to the market even if they had wanted to because the ability to swap back into dollars or another currency had been exhausted.

Although Korean issuers have regained their access to dollar markets, Chay feels they will recall their positive experience raising funds in Malaysia and that the market has been developed as a consequence. “They very much appreciate this alternative avenue of fund raising,” says Chay. “After its first deal Kexim tapped the market another three times. Malaysia is on the map and it will remain on the map for them because they will remember the dark days when they needed money and there was nobody answering. Malaysia was there to plug the gap.”

The corollary to foreigners coming to Malaysia is Malaysians going overseas, such as Genting building Resort World in Singapore, YTL acquiring a Macquarie REIT also listed in Singapore, and various Malaysian companies acquiring or launching projects in Indonesia. Soo hopes this will drive the domestic debt markets. “What we are hoping to see is that our market becomes a source of capital for our regional investments, not just domestically,” he says. “Our market is too small: our population is 25, 26 million people, compared to over 200 million in Indonesia. The population in Jakarta alone is higher than Malaysia.”

Perhaps that will help get the market up to the level Soo believes it should be. Generally in the region, he says, countries have a ratio of total private debt issuance to GDP of around 100%, but in Malaysia it is below 80% – or around M$600 billion compared to an M$800 billion economy. “So we have M$200 billion to grow.” 

The investor base in ringgit debt varies according to maturity: foreign funds wanting to take a view on the ringgit as a currency play congregate in shorter-dated, one to three year securities; medium term investors like fund managers are active in the three to five year space; and insurers and pension funds dominate at five to 10 years.

Retail does not yet have a significant role to play – certainly nothing like Thailand – but there are moves towards changing that. Bursa Malaysia, the stock exchange, has been pushing to get bonds, and in particular sukuk, listed on it. Petronas and Cagamas, a special purpose vehicle of the Malaysian housing mortgage corporation, have led the way, with Cagamas starting out by listing all outstanding sukuk and bonds under its five residential mortgage-backed securitizations, amounting to M$4 billion. This follows a new rule that took effect on August 3, called an exempt regime basis, allowing the listing of sukuk and bonds on debt securities on the exchange, but in a non-tradable form. “Investors want transparency, they want governance,” says Raja Teh Maimunah Raja Abdul Aziz, head of Islamic capital markets at Bursa Malaysia. “I’m pitching that one way you can offer it is to come through an exchange: then you get regulated, reporting is required, and if any issues come up the stock exchange will take them on. Retail investors would soon appreciate that issuers are offering themselves to be regulated, and the issuers will get better pricing.” She has said she would like to see a retail trading regime for sukuk.

As far as sukuk goes, the market is widely recognised as the most mature local Islamic market in the world, by a distance. As of September 2009, there were M$168 billion of outstanding sukuk, accounting for 57.7% of all outstanding corporate bonds. If anything, the relative strength of this market on a world scale is getting more pronounced as Middle Eastern economies, particularly the prolific issuers of sukuk, have flagged and in some cases experienced defaults. “Malaysia has undoubtedly been the standout market for the last 20 years,” says Soo.

BOX: KEY DEALS

Key transactions in 2009 have tended to be government-guaranteed or highly rated. An example is the M$2.5 billion deal for Pengurusan Aset Air (PAAB), led by CIMB, upsized from M$2 billion in October. This included one year, five year and 10 year pieces, all off a M$20 billion MTN programme, and rated AAA.

The background to this deal is what makes it interesting. PAAB was set up in 2006 as a wholly-owned company of the Ministry of Finance as part of an attempt to restructure the country’s water services industry. PAAB was launched to acquire all the water assets in the country owned by state government or private water operators, with the MTN program funding the purchases.

“In the past few years, al water projects in Malaysia were funded in different ways, some with bank loans, some by the state, some through the bond market,” says Meow at CIMB. “So the privatization by the state of these assets was a problem the central government needed to solve. A new financing model needed to be put in place.”

Meow adds: “On the surface you can look at it as a bond issue, but behind it is a new private financing model that came out of the process. It allowed them to come up with a more efficient cost of financing by piggybacking on the government’s ownership,” giving it a AAA rating. “It allows the government to provide a very competitive water tariff plan.”

Another significant deal was the M$5 billion, 30-year Islamic raising for 1Malaysia Development, which at the time was known as Terengganu Investment Authority (TIA). 1MDB, as TIA is now known, subsequently set up a joint venture with PetroSaudi International in order to invest in strategic projects in Malaysia and the region.

The bond, led by AmInvestment Bank, was the first ever 30-year issue from Malaysia. “If you look at the region, not many countries have a yield curve above 10 years, never mind 20,” says Seohan Soo. “Malaysia has 20-year government securities, but we did a 30-year government-guaranteed bond, well beyond benchmark government issues. These are the things that separate our market from the rest: we have arguably the longest yield curve in the region.”

The Indonesian sovereign has been arguably the most interesting and important debt issuer in the world in the early months of 2009. In the space of a few weeks it reopened the international debt markets for emerging market countries with a $3 billion deal; then launched Indonesia on to the global Islamic financial markets with a $650 million landmark sukuk.

It has had to pay for its success, but its ability to raise such funds has not only eased the country’s capital position but made an important statement about investor confidence in it. The next question is whether this success can trickle down into the local debt markets when many companies have an urgent need of it.

When a Ministry of Finance team set off around the world in a non-deal roadshow in February, it did so knowing Indonesia had a lot on its plate. With world markets – both stock and credit – remaining in a mess, ministry staffers knew their country was facing a hefty debt load: total external debt of $149.1 billion, including short-term private external debt of $22.6 billion, with the sovereign itself needing to raise $4 billion swiftly to deal with its high budget deficit and provide stimulus to a flagging economy. Finance minister Sri Mulyani Indrawati led the team, and she presented well. “It was good to have the minister on the road,” says Fergus Edwards of UBS, who was on the roadshow. “She talks about the numbers. She doesn’t even appear to be spinning for a political audience.”

Across Europe, the US and Asia, questions came up about the size of the budget deficit, the country’s resilience in the face of commodity price shocks, tax revenues and sources of funding. “What they liked beyond any specific answer was the degree of detail around all those answers,” Edwards recalls. Additionally, Indonesia’s economy was starting to look relatively healthy by global and regional comparisons. “It’s interesting,” says a banker. “Indonesia during bullish periods tends not to grow as fast as the others, but when there is a financial crisis or a situation where growth is slower, it’s less affected by the external environment due to the fact that a lot of their economy is still domestically focused.” So by the time the roadshow was concluded, there was confidence that a deal could go ahead.

Getting one away was not straightforward. Historically Indonesia has launched its deals one at a time, which causes problems with market timing since every deal requires its own standalone documentation. This time, Indonesia had mandated UBS and Barclays Capital to set up a global medium-term note programme, which will allow it to issue at any time (the same banks were then mandated as bookrunners on the bond), but still ministry officials had to go back to parliament to get approval for any bond.

That proved to be unfortunate. On Friday February 13, with strong demand and markets about as good as could be expected given the broader environment, the deal went before Parliament; a swift approval would have allowed it to issue. “But then on Monday we got the very disappointing news that the parliamentary session would be postponed until a week later,” says Rahmat Waluyanto, director general of debt management at the Ministry of Finance. “It affected market sentiment and also the yield of the bond.” Markets became skittish in the meantime, thanks partly to renewed worries about the viability of Citigroup. “It might not have been ideal but given the legal constraints and the need to run a transparent process there was no alternative,” says Edwards.

The fallout of all of this was that Asia’s biggest deal since Hutchison Whampoa in 2003 got away in hellish markets, but at considerable cost. A US$1 billion five-year tranche priced at 10.375%, or Treasuries plus 850 basis points, and a US$2 billion deal priced at 11.625%, or 881 basis points over Treasuries. Market watchers reckon the delay probably cost the sovereign as much as 90 basis points on the 10-year deal. But in truth, particularly on the ground, there is little sniping about the deal. “It borrowed at cost, but at least it has borrowed,” says one senior foreign banker in Jakarta. It also demonstrated the depth of conviction that foreign investors have in Indonesia’s story: some 50% of the 10-year allocation went to the USA, and the bulk of it from long-only fund manager money. For his part, Waluyanto thinks that despite the widened spread, “we still managed to execute the transaction at a relatively tight new issue premium.”

Twice in the space of a year, Export-Import Bank of Korea (Kexim) has launched landmark issues in the Malaysian ringgit bond markets – but they are landmarks for quite different reasons.

The first, in March 2008, was a M$1 billion sale of five- and 10-year notes. Given the slew of similar deals that followed it, it’s hard now to recall what a tough sell this must have been at the time. “To do a billion from a country that has not issued here before – it was not a walk in the park,” says Chay Wai Leong, managing director of RHB Investment Bank, which joint led the deal with CIMB and OCBC. “Many investors knew very little about the bank or Korea itself. Then there was the problem of the swap market to deal with. A lot of things had to be right for the deal to be successful. I can’t even explain in a few sentences the level of difficulty it took: an unknown name, swimming against the swap market.”

The swap market challenge – picking a moment when the economics of swapping ringgit into dollars and then on again into won still left the transaction commercially viable – would become more and more of a problem as the year went on. Instead, the novelty of a Korean issuer to a Malaysian investor base was arguably the bigger challenge to overcome, with a major knock-on effect on later deals. “It was very important for us to do it right,” Chay says.

Kexim is of course a major issuer in world markets and its arrival in Malaysia was welcomed as something of an endorsement. “They have done fund raising all around the world: Mexico, Turkey, Hong Kong, Singapore, and all the major currencies,” says Chay.

This first deal priced at Malaysia government bonds plus 55bp and 80bp on the five and 10-year deals respectively, pricing that looks very good now. The coupons were 4.08% and 4.5%. It went to about 40 onshore accounts, and provided Kexim not only with diversity of funds but also attractive pricing for the time. It also opened the floodgates: within a matter of weeks Industrial Bank of Korea, Woori Bank and Hyundai Capital had all also issued in ringgit.

The deal was the first hit out of a M$3 billion MTN funding programme, and one year on Kexim tapped it again, to widespread surprise. Chay says the second deal came about partly because of an update program. “It was very responsible of them,” he says. “They came back to update investors of Kexim and brought along a representative from the Ministry of Finance to update them on the Korean economy and financial markets. Because of that, demand was generated.”

That was remarkable given the scrutiny of Korea at the time – perhaps the Asian market most directly hit by the credit crunch. “There were still a lot of questions being asked of Korea, the economic numbers were all very bleak. The world was writing about Korea every week. Against that backdrop, how do you do a Korean deal?”

RHB and financial advisor Merrill Lynch targeted investor demand precisely, raising RM220 million in a three-year deal since that was what the market wanted. It priced at 4.75%, a spread of 227bp over the three year ringgit interest rate swaps and the equivalent of mid-swap of 395bp over Libor in US dollar terms – once again, effective funding.

Competitors were a little surprised to see the deal go through, particularly since it was widely accepted that swap rates had made such deals prohibitive (in fact, the lack of demand for these swaps meant the bank got a number of offers, according to Chay). But it got done, and not just through a bank relationship. “People have asked if it all ended up on our books,” says Chay. “Not a single dollar is on our book. There was a pension fund, banks, insurance companies.”

What’s not clear is if Kexim will once again have a galvanising effect on the markets, bringing other Korean issuers in its wake. Hana Bank is believed to be looking closely at a deal, but it is unlikely Malaysia will see quite the same slew of Korean bank names in its markets as was the case last year.

A year ago, Malaysia was enjoying a remarkable influx of foreign issuers raising capital in the ringgit debt markets. As G3 credit markets locked up and Asian issuers began to look for the widest possible range of funding sources, Malaysia seemed to have seized an opportunity to prove its depth, sophistication and flexibility.

One year on, it doesn’t look quite so rosy: investor appetite has changed as it has all over the world, and swap market pricing has turned against most potential issuers. But even in this environment deals are getting done, and Malaysia’s role as a credible funding source for foreign issuers is likely to remain a permanent fixture when the dust settles on today’s market volatility.

Foreign issuance in ringgit debt dates back to the Asian Development Bank in 2004, or arguably even to the Shell Islamic private placement back in 1990, but last year’s cluster of issues was kicked off by Export-Import Bank of Korea, or Kexim (see deal profile). The RM1 billion Kexim raised in five and 10-year funding in March 2008 through RHB, CIMB and OCBC demonstrated clearly that the bulging liquidity in Malaysia was prepared to find a home in foreign paper, provided it was the right kind of paper.

By April it had been followed by a RM1 billion three-tranche deal from Industrial Bank of Korea, led by RHB and CIMB. This was in some respects a similar deal: a Korean policy bank, with state backing, which was enough to give Malaysian investors comfort about the creditworthiness of the issuer. Later deals, though, would show a greater daring among investors. Hyundai Capital Services, a corporate borrower with no state backing (but part-owned by AAA-rated GE) raised RM650 million through Deutsche in May, followed later that month by a three-tranche, RM530 million deal for Woori Bank through RHB and CIMB.

Alongside this Korean influx came some promising signs that Gulf institutions were willing to issue in ringgit. In January 2008 Gulf Investment Corp succeeded in raising RM1 billion in a dual tranche deal led by ABN Amro (now RBS) alongside RHB Bank and Standard Chartered; GIC is an investment company owned by the six nations of the Gulf Cooperation Council. This was a conventional issue, and was followed in August by a sukuk from Islamic Development Bank, which raised RM300 million for IDB projects in Malaysia in an issue of five-year notes. CIMB and Standard Chartered led this deal.

But these were the good times: high liquidity, investor appetite for foreign names, attractive pricing both in terms of the local markets themselves and the swap markets to get the proceeds out again. Nothing good lasts forever, and it didn’t.

Markets are nothing like as easy now for foreign issuers as they were then. “Liquidity for foreign issuers is becoming very limited, for a few reasons,” says Seohan Soo, head of debt capital markets at AmInvestment Bank. The first is that there are very good opportunities for investors among local issues. “If I invest in Cagamas rated bonds today, I’ll get MGS plus 80 to 95 basis points for a 10 year deal. There’s no compelling reason for investors to take riskier assets for a slightly better return.”

Besides, investors are focusing on protecting capital (hence the flood of government guaranteed bonds in the market – see the next article for more). “So investors are looking at local issuers whose credit they are familiar with, and they have the comfort of knowing that the assets reside in Malaysia. On the other hand, if you buy a bond from a Korean state-owned bank with zero assets in Malaysia, a credit downgrade or default would actually be a much bigger risk for them. This is an added disincentive for investors to invest more in foreign names.”

Tan Ai Chin, head of investment banking at OCBC Malaysia, adds: “There is still a market for foreign issuers but investors are a lot more cautious about the underlying credit profile of the issuer and also the economic fundamental of the domicile country.” In her view it is unfortunate that most of the foreign issuers who have come to market have been financial institutions, which is probably the sector under most scrutiny from investors today.

VIETNAM

 There was a time when Vietnam was something of a darling of the global credit markets. No more: worries about the state of its economy have sent investors elsewhere.

In the debt markets, the starkest confirmation of this change in attitude came in June when the sovereign, the Socialist Republic of Vietnam, officially ended plans for a G3 currency issue this year. Last year Barclays Capital, Citi and Deutsche Bank were mandated on a US$750 million global bond, but it had been clear for months that the deal was not going to make it across the line. Vietnam’s finance ministry has indicated that the deal will come back at some stage. But both because of the state of the global credit markets, and Vietnam’s own problems, nobody is expecting that to be any time soon.

Corporate issuance has gone the same way. Rumoured deals from Vietnam National Textile and Garment (US$500 million, through Deutsche), Vinashin Petroleum Investment and Transport (US$200 million) and PetroVietnam have come to nothing.

It’s a far cry from 2005, when a $750 million 10-year bond flew out the door, with orders of more than $4.5 billion. That bond paid a yield of just 7.125% for a new emerging market issuer.

The biggest problem has been the headlong arrival of inflation into what had otherwise been a vibrant economy, which had grown at 8.48% in 2007. Inflation figures for April were 25.2%, a 10-year high. On the back of that data, the currency has been badly hit and spreads have widened dramatically. The trade deficit is growing (although it did narrow in May on the back of a tighter monetary stance) and there are problems in the property market. Some consider the situation to be so bad that a localised version of the Asian financial crisis, with currency devaluation and a painful period of write-offs and recovery, may be on the cards; a Morgan Stanley report outlined exactly this vision in May, causing some alarm among domestic banks and fund managers. Against all this the stock exchange halved in value in the first half of the year.

The domestic bond markets don’t look much better either. In April, the government failed in a fourth consecutive domestic bond auction, with the coupon said to be as much as 100 basis points below the level investors think is fair.

Domestically at least, there are still plenty of borrowers ready to launch when things improve.  Vietnam International Commercial Bank (VIB) got a Moody’s rating, from B1 to Ba2 depending on the structure and term of the issue, in July, having gained approval to sell D3trillion of bonds this year the previous month. Techcombank has also been given approval to sell D5 trillion of bonds this year. And Sacombank has also received approval for domestic borrowing.

And, despite Vietnam’s absence from the international debt markets, domestic deals have got away even in the current environment. Vinpearl Tourism and Trading sold D1 trillion of privately placed three year and five year bonds through Bank for Investment and Development of Vietnam in May; the same month, Vincom Joint Stock Co sold D2 trillion through Vietnam Bank for Agriculture and Rural Development (Agribank).

The big question now is what happens to Vietnam’s economy. While the Morgan Stanley crisis theory remains an outlier view, there is still widespread expectation of devaluation in the currency, although the improvement of the balance of payments position in May does suggest that Vietnam has a good chance of bringing inflation under control. The State Bank of Vietnam raised its base rate by 200 basis points on June 11.

A typical strategist view is to say that things can be fixed, but that investors should still be wary. “Although in our view the authorities are moving more forcefully against inflationary pressures, and we believe we have seen the worst in terms of the deterioration in the trade deficit and rising inflation, the country is not yet out of the woods,” said Nicholas Biddy at Barclays Capital in a June study of the country’s position. He expects at least another 200 basis points of hikes in coming months. “We currently recommend investors err on the side of caution in the case of Vietnamese financial assets.” The state of bank asset quality is a particular concern, which in turn is likely to have an impact on their funding programs and use of the local and international debt markets.

KEXIM

Kexim Bank has been a stunningly active borrower in the capital markets this year. It has been everywhere, from the major currencies to Asian and Latin American local capital markets.

“Kexim is one of the savviest borrowers in the region,” says Sean Henderson, head of debt syndicate Asia-Pacific at HSBC. “They’ve proven again this year they have significant flexibility to consider almost every global market – and that is a lot more complicated than it looks.

“It requires a degree of internal sophistication in understanding a number of different market practises across documentation and execution, as well as an ability to accurately time each currency as opportunities arise.”

Kexim’s most recent adventures have been global. In May it raised a Eu750 million SEC-registered five-year bond through Citi, Deutsche Bank, Depfa, RBS and HSBC – the first euro-denominated deal from Asia in a year. It is understood to be planning a dollar deal, with the five banks to handle it (Barclays Capital, Deutsche Bank, Depfa, Merrill Lynch and Morgan Stanley) already agreed although no firm mandate has been given. Market rumour is for a US$1 billion 10-year global.

It has also issued twice in the Swiss markets, most recently with a Sfr350 million two-tranche fixed and floating rate senior bond in April, led by ABN Amro. It had already issued a five-year in January and has voiced an intention to return regularly. Kexim said at the time that the deal achieved funding around 20bp inside what it would have managed in dollars. Elsewhere, a five-year Y1billion deal went through in February via HSBC, and a seven year HK$375 million trade through Citi the same month.

It has also been active in less obvious funding markets. In April it launched a S$50 million one-year deal through HSBC, increased to S$70 million on demand. In March, it went for the ringgit markets, raising M$1 billion in five and 10-year bonds, placing to 40 local accounts. This was the first issuance by a South Korean borrower in ringgit; RHB led the deal with CIMB and OCBC as joint lead arrangers and Merrill Lynch as global financial advisor. Kexim has a M$3 billion MTN funding programme in Malaysia, so is likely to be back in that market before long.

And it’s not just in Asia that Kexim has been busy. In January it launched a Ps1.2 billion five-year floating rate bond issue in Mexican pesos through Merrill Lynch. This followed a 10-year Ps750 million global last October, again led by Merrill, which was tapped for a further Ps800 million in April this year. Earlier, the bank had taken a foray into Brazilian reals with a series of MTN deals in August 2007. It has even been active in Turkish lira.

This diversity looks set to continue, with the bank approved the right to sell up to Bt3.5 billion of local currency debentures in Thailand in the second half of this year. Once again, it will be a trend-setter: the first Korean financial institution to borrow in the baht market. Also looking ahead, Kexim has filed updates for Y200 billion of issuance between the end of June 2008 and 2010.

“It’s difficult to overstate the value of diversification in the current market,” Henderson says. “Global liquidity is shrinking, and various currencies can open at different times; often a borrower’s ability to lower cost will depend on being able to access the most appropriate market at any one time.”

He adds: “It pays not to overload one particular funding source. If you are too reliant on one market, it increases the risk you’ll eventually get backed into a corner either on a challenging market environment or investor capacity issues, and this adds up to more expensive funding.”

It hasn’t all been plain sailing, though. In April it cancelled a three and five-year Samurai issue two days before it was due to price, after failing to reach the Y50 billion the bank was hoping to achieve. Leads on the planned trade were Daiwa SMBC, Nikko Citi and Nomura. On April 23 the bank put out a statement blaming unfavourable markets, meaning it could not achieve the size or the pricing it wanted, although it is understood that there was demand for at least Y22.5 billion. There has been some conjecture in the markets that part of the problem was the fact that Kookmin Bank had launched a bigger deal, worth Y24.4 billion, just a week earlier in its inaugural Samurai issue, and that Kexim couldn’t countenance a smaller deal than its Korean contemporary. It remains to be seen whether the late pulling of the deal damages Kexim’s ability to return to Japanese investors.

This remarkable activity is to help get through a US$ 5 billion funding requirement for this year, spurred by an announcement in January that Kexim plans to lend W40 trillion this year, the largest amount since the bank’s foundation. There’s more to do, but Kexim has already got much of the hard work behind it.

ANZ

ANZ has demonstrated its strength and sophistication as a borrower consistently through the credit crunch. It says something that, despite ambitious capital raising requirements, it has almost completed its 2008 funding program already without having to pay through the nose for any of it.

So far this year ANZ has raised the equivalent of around A$32 billion. It has been active in euros, dollars, yen, Australian and New Zealand dollars, Swiss francs and Singapore dollars; increasing the period under review to the last 12 months adds several sterling deals to the mix as well.

“Since the onset of the global credit crisis our approach to funding has been to maintain an evenly balanced strategy much as we would do within normal market conditions,” says Rick Moscati, group treasurer at ANZ. “We set a strategy at the commencement of the year, we articulate that strategy to the market, and try to stick to that strategy.” That means not surprising investors with unexpected volumes. “If we say we’re going to do $25 billion of term debt issuance we don’t then do $40 billion or $15 billion. Transparency is very important for investors.”

It seems to have worked. Moscati says that since the credit crisis began, “we have had the opportunity to issue in all major global debt markets. By and large it has continued to be an issue of price.”

Perhaps the most significant was a domestic deal in April. The bank initially raised A$1.35 billion in senior five year fixed and floating rate transferable deposits, in a self-led deal; a day later it increased it by another A$150 million. Pricing, at 128 basis points over the three month bank bill swaps rate for the floaters, and an 8.5% coupon yielding 8.615% with a 128bp spread over A$ mid swaps for the fixed, was not especially cheap but did demonstrate the viability of a market that had been largely inactive for months. A month later, ANZ tapped the bonds again, bringing the total outstanding on them to A$1.75 billion.

It was a very closely watched deal. “There had not been a lot of issuance at the longer end of the domestic curve prior to this transaction,” Moscati recalls. “I think that deal gave the market some confidence: it was at the upper end of our volume expectations and it confirmed the Australian market was working well for domestic issuers.”

Another striking transaction was ANZ’s samurai debut in March. This deal raised Y135.8 billion, or US$1.3 billion, in a three-tranche issue that represented the largest ever yen-denominated bond from Australia. Daiwa SMBC, Mizuho and Nikko Citi were joint leads. “That’s been an important new market for borrowers this year,” says Moscati. “It brings with it some increased diversification, which is always attractive for us.”

This deal was actually cheaper than the Aussie dollar bonds that followed it. A Y37.1 billion three-year fixed rate note had a 1.77% coupon, making 80 basis points over Libor; A five year fixed rate deal raised Y27 billion at 2.07%, or Libor plus 95; and a Y71.7 billion five-year floating rate note was priced at 95 basis points over three-month yen Libor. The five year pricing was equivalent to around BBSW plus 110 basis points, making it 18 basis points cheaper than the Australian trades of the same tenor.

Recent months have also brought benchmarks in euros and dollars. Barclays Bank and Credit Suisse led a Eu2 billion bond for ANZ in May, followed in July by a US$2 billion raising through JP Morgan, Citigroup and Goldman Sachs. “Part of our strategy  is based around executing at least one benchmark bond transaction annually in each of our core strategic markets,” Moscati says. “Traditionally these markets have included the Australian domestic, euro and to a lesser extent the US markets. We have already initiated a strategy to expand this to include all major currencies, including yen, sterling and a greater focus on distribution into Asia.”

ANZ is likely to be quieter in the second half of the year, having already done almost all it needs to for 2008. “We’ve largely completed our 2008 funding task,” says Moscati. “To the extent we issue any larger public deals for the remaining part of this year it will be mainly about pre-funding 2009 requirements, which we expect to be similar to what we’ve done in 2008.”

THE PHILIPPINES

Some decent-sized deals are getting away in the Philippine peso bond market. There’s not much going right in the country’s stock market or economy, but at least it’s clear the local debt markets are maturing.

For example, in May Banco de Oro Universal Bank raised P10 billion, the equivalent of US$235 million, in a bond through HSBC, ING and Standard Chartered. The deal, a public offering of lower tier 2 notes, was originally planned as a Ps5 billion offer but was doubled in size after applications reached five times the initial amount. It flew out the door so fast that the public offer on the bond was ended a week early.

The coupon attracted investors – at 8.5% on the unsecured subordinated notes, it was higher than some other lower tier notes sold this year – but it was not widely priced. Instead, it reflects the growing liquidity in the peso market.

Another example came with a lower tier 2 deal for Philippine National Bank, which raised P6 billion in June in a deal led by Deutsche Bank. This deal, a 10-year non-call five subordinated bond, had drawn Ps8 billion of demand by a week before the scheduled close so, just like BDO, closed a week early. Again, the notes were priced at 8.5%. And while BDO had priced at a zero spread over the benchmark, PNB actually came inside it, pricing at 40 basis points below the Philippine Dealing System Treasury rates.

Other deals, if not quite as tightly priced, have found an enthusiastic following. Rizal Commercial Banking Corp raised Ps7 billion in February, through HSBC and ING, even after lowering its price guidance on the 10 year non-call five issue.

Seeing this, other banks are likely to follow. Metropolitan Bank & Trust is expected to launch a Ps10 billion lower tier two issue in the fourth quarter of this year; it has previously raised Ps8.5 billion in a sub debt issue through ING and Standard Chartered last October. This next one, however, may be partly in US dollars. Additionally, Allied Banking Corp has approved from Bangko Sentral Ng Pilipinas, the Philippine central bank, to go ahead with a Ps5 billion lower tier two offering, with ING understood to be mandated.

An upper tier two deal is also believed to be in the works for Philippine Export-Import Credit Agency – the first major such deal in pesos by a Philippine financial institution. (An upper tier two deal did get away last October, for GM Bank, but at Ps75 million it was not considered particularly significant.) The issue, understood to be slated for the end of the third quarter, is expected to raise up to Ps3 billion.

Aside from the banks, some other groups have been active in the market. National Food Authority raised Ps8 billion in a corporate bond in February, with AB Capital & Investment, Philippine Commercial Capital, Deutsche Bank, United Coconut Planters Bank, Multinational Investment Bancorp and SB Capital Investment lead managing it. Ayala Corp raised Ps6 billion in November, and its affiliate Ayala Land has mandated BPI Capital, HSBC and Land Bank of the Philippines to lead and underwrite a Ps4 billion five year-bond, expected to be launched in August (and, unusually, to list them on the Philippines Dealing & Exchange, as Ayala Corp has also done).

And among foreign issuers, something of a landmark was launched by European Investment Bank, the supranational, in January. It raised a Ps2 billion five-year bond with settlement in US dollars. While not especially large, the deal – led by HSBC – was seen as heralding the start of a synthetic peso market, allowing offshore investors to get exposure to the peso. The issue was mainly taken up by Asian investors but European and American buyers participated too. EIB has previously used a similar model in Indonesian rupiah.

The activity reflects greater local liquidity, a more established benchmark along the curve which makes it easier for other issuers to price off, and also favourable interest rate policy. But it’s really one of the few areas of optimism in the Philippines today. HSBC noted in a recent bond market report: “The Philippines’ unpopular Arroyo administration and the central bank will face an extremely difficult time ahead trying to strike a balance between inflation containment and sustaining economic activity.” Noting high inflation, political uncertainty, poor tax collection and potential revenue shortfalls, HSBC says: “Clearly, the sovereign credit metrics will stay under pressure and investors will be disappointed that the government will have to tap the offshore market to finance its growing budget deficit.”