December 2009

If Asia came through the global financial crisis in better shape than it did the Asian financial crisis a decade earlier, one of the most crucial differences was the strength of local currency bond markets. In 1997, borrowers were over-exposed to the dollar, so when their currencies declined in value, their ability to service debt or to borrow again was badly damaged, often fatally. This time, the closure of G3 funding sources barely made a difference to southeast Asian borrowers: they just went local.

Jan Wipplinger, co-head of risk syndicate at Deutsche Bank, thinks the point was proven in the week when Lehman Brothers defaulted and Merrill Lynch was taken over by Bank of America. That same week, Deutsche, Aseambankers and HSBC led a deal for Maybank, a M$1.1 billion issue of tier one debt. “During the height of the crisis internationally, for a bank borrower to be able to go ahead with a tier one transaction shows how resilient the local markets were,” says Wipplinger. “They were somehow isolated from the crisis in the international markets, while local investors at the same time turned to the local borrowers they understood.”

It’s a sentiment echoed widely by international and local bankers. “A lot of countries benefited hugely by having their local currency markets ticking over through the crisis,” says Sean Henderson, head of debt syndicate, Asia Pacific, at HSBC. “When you’ve seen countries that are heavily reliant on offshore borrowing going through a state of volatility, that volatility is significantly enhanced when you’re having to apply to an offshore investor base that is typically the first to pull back its horns.”

ThomsonReuters data shows that local currency debt in southeast Asia had hit US$32.3 billion by November 19 this year, certain to beat the US$32.5 billion for all of 2008 and quite likely to top the boom-time figure of US$35.9 billion from 2007. Thomas Meow, head of debt capital markets at CIMB, estimates that local currency markets provided 85% of necessary funding through the crisis, and G3 markets 15%. “Governments in the region have focused on developing local currency markets” since the Asian financial crisis, he says. “This time around we can see there was not so much of a currency mismatch risk. There was a liquidity risk, when G3 currency markets shut down, but markets like Malaysia and Thailand stayed open.”

In this respect Asia stood apart from many Eastern European jurisdictions whose borrowings in euros became problematic. “If we’d had a very broad exposure to needing to borrow G3 from the Asian region in the depths of the crisis, we would have seen more questions being asked of some of these countries,” Henderson says. “But actually you got almost none: Malaysia, the Philippines, Singapore and Hong Kong were all seen to be relative safe havens through the depths of the crisis, and to a large degree borrowers kept the ability to turn over their refinancing in the domestic currency markets.”

One can argue that, in addition to proving their worth, some southeast Asian local debt markets actually took the chance to develop while other markets were shut. The most obvious example is probably the Philippines, where 2009 issuance was already up more than 50% on the whole of 2008 by mid-November. The record-breaking P38.8 billion San Miguel deal there, discussed in more detail in the Philippines chapter, was arguably the region’s standout deal in demonstrating an untested ability to provide significant funds in a dark global climate. “In the Philippines we’ve seen jumbo issues getting done domestically,” says Terence Chia, vice president, Asia debt syndicate, capital markets origination at Citi. “Local banks were doing subordinated debt there at a time when the dollar markets were shut” to sub debt paper.

Local capital markets were also well supported by the fact that in uncertain times local money wanted to stay invested in credits it was familiar with in its home markets. “Local investors are very comfortable with local credits,” says Chia. “Given what’s happened globally investors are more open to buying local credits than a more highly rated international name. We do see some interesting investor behaviour, and it really results from investors here viewing global credits as something they cannot control: they can’t see it, they can’t feel it.” That said, the Asian bid has returned to G3 issues now, and is an increasingly vital source of liquidity.

Prior to the financial crisis, some markets – notably Malaysia – were succeeding in attracting foreign issuers into their local markets. Singapore continues to do so, with strong interest from the supranational community (see story), but in Malaysia the influx of Korean names into ringgit has faded in 2009, a successful and opportunistic deal for Hana Bank notwithstanding. The basic reason is, as Wipplinger puts it, “the local markets became more local.” So instead of being driven by the offshore bid taking advantage of liquidity, the markets remained active with both local borrowers and local investors.

The growth of importance in local currency debt is such that it is attracting new foreign banks to seek underwriting mandates. “It’s one of the key factors underpinning our regional strategy,” says Reuben Tucker, head of debt capital markets for Asia at ANZ. “We have seen emerge out of the disruption of the last two years a far more resilient set of currency markets in Asia.” In southeast Asia, ANZ is active in Singapore and Vietnam in local currency debt, and plans to move into Indonesia and the Philippines too.

Certain funding structures seem to lend themselves particularly well to local markets. For example, raising lower tier two debt in G3 currencies is challenging for even large and respected Asian banks: OCBC raised US$500 million in November but widened 20 basis points in secondary trading the day after pricing. But lower tier two can be raised at competitive rates in Philippine pesos and Malaysian ringgit, for example.

Structurally, most issuance has naturally been quite straightforward, but there has been room for innovation even in these difficult conditions. For example, in February, as credit markets blew out in the west, Indonesia had its first ever launch of residential mortgage-backed securities, backed by Bank Tabungan Negara. Led by Standard Chartered Securities Indonesia as lead manager and underwriter with Sarana Multigriya Finansial (a government-owned agency mandated to promote Indonesian home ownership) as global coordinator, standby buyer and credit enhancer, it was a modest deal – Rp100 billion – but still a standout for bringing a new structure to a market in the middle of unprecedented global market turmoil (albeit at a coupon of 13%). A second deal, with the same originator, closed later in the year raising Rp391 billion, again led by Standard Chartered as arranger. Stanchart was also involved in a landmark securitization in the Philippines this year, the first to be done in local currency, for the Philippine National Housing Mortgage Finance Corp.

Interestingly the investor base varies quite widely among the six countries covered in this report. Bookrunners say that in Singapore dollars, an institutional base of banks, domestic insurers and pension funds typically create an order book of 20 to 25 investors, while retail can be tapped for tier one capital; Malaysia is chiefly institutional, made of asset managers, insurers, pension funds and some government related entities, often targeting different parts of the curve; Thailand is the market with by far the greatest contribution from retail; the Philippines is diverse, with a large contribution from private banking as well as institutional money.

“Retail is a very interesting angle for Asia generally and will continue to develop,” says Henderson. “We’ve seen a broadening of retail interest from equities into debt. There’s still some way to develop but it will become more important in the next 12 to 24 months.” In 2009 retail has represented the majority of the bid for bond issues in Thailand in 2009, and there is some appetite in the Philippines – where a recent Ayala deal caught strong retail demand, for example – and, previously, Singapore for tier one bank deals, although there have been few recent issues.

“The two countries with a very strong retail bid are Thailand and the Philippines,” says Terence Chia at Citi. “In both, retail investors are very used to buying bonds as part of their investments. When you compare that with what they can get from bank deposits or government securities, corporate bonds certainly do give them a pretty decent yield pick-up over other investment products.” Ling at Standard Chartered, a bookrunner on some of the bigger Thai deals, also highlights the retail phenomenon in Thailand and the Philippines, where the simple approach of going out to local distributing banks to reach as many retail investors as possible has proved very effective.

On the institutional side, Jan Wipplinger notes, “compared to the international markets what you don’t have is the more fast money: you don’t see the hedge fund community, and if you do, it’s on the government bond side rather than corporate bonds. You see a much more buy and hold investor base in local currencies than you see in US dollars.”

One question is whether, now G3 markets are back open again, the status of local currency markets has in any way changed or if borrowing behaviour will return to the way it was before the crisis. Many major Asian borrowers – most recently Hutchison Whampoa – are borrowing opportunistically in dollars, despite not really needing the money. Nevertheless, “local currency markets will still be extremely important,” says Henderson. “The majority of flows still happen in local currencies away from G3.”

Rod Sykes, head of debt capital markets, Asia Pacific at HSBC, points out that “this year you’ve had people doing five or six quarters of funding in one year because the market was shut for a significant portion of last year,” but nevertheless thinks the local currency pipeline is good for next year because of the number of expected redemptions coming up.

Although it’s easy to think of the importance of these markets of having diminished now the financial crisis has passed, that is short-sighted. “It’s easy with the current liquidity of G3 markets to say that local currency is not important, or is less important – that it was just a phase,” says Henderson. “But liquidity in G3 is a volatile beast. The quality of local currency markets is high: it is real economy driven, private wealth, with growing funds under management, insurance and pension funds. It is a real money economy. It’s nice to be able to tap G3 but doing it completely leaves you beholden to global forces. Local currency gives you that escape valve that keeps you out of the worst of the crisis.”

December 2009

Singapore wants its local currency debt capital market to be one of its many foundations as a regional financial centre. It’s doing fine, but it might be a surprise to learn that it’s not even southeast Asia’s most prolific corporate bond market – more was raised in ringgit in 2009 than in Singapore dollars, according to ThomsonReuters data.

“The primary market got off to a rocky start at the beginning of the year, mainly driven by a lot of caution,” says Clifford Lee, managing director and head of fixed income at DBS. “Funding was done for refinancing rather than added leverage and the general tone has been more defensive than anything else.”

Although full-year totals are likely to be down from their highs – S$15.235 billion was raised in 2008, whereas just S$9.87 billion had been raised in 2009 by November 19, according to ThomsonReuters – the signs are good for a broadening of the issuer base.

Lee believes in recent years the Sing dollar market has answered its critics. “Previously there were three criticisms of the Singapore dollar market,” he says. “First and foremost was that this market can’t absorb large size. We’ve proven that to be untrue,” he says, referring to a self-led S$1.5 billion hybrid tier one deal for DBS Bank in May, the country’s largest ever Singapore dollar bond deal. Other big deals last year – including a S$600 million hybrid tier one deal for Maybank – support his view. “That belief of constraint has been emphatically debunked.”

The second traditional complaint was that longer tenors could not be achieved. “The market has matured and 10 years is now commonplace,” says Lee. Shortly after speaking, DBS completed an inaugural S$660 million bond issue for Temasek in 20 and 30 year maturities, and has done other deals with 15 and 20 year maturities. “In fact there’s more demand there than for below 10 years,” Lee says. “We are cracking the maximum tenor glass ceiling: for government-linked names and high grade names in Singapore, that’s not an issue anymore.”

The third is the number of investors. Here, too, Lee has seen change. “DBS has been in the Singapore dollar bond market for many years, and previously when we did a transaction we would have maybe 10 to 15 investors within a transaction, maximum. Of them, five or six would be the anchors for every transaction.” Today, things have changed. “The last few public transactions we’ve done saw 60, 70, 100 coming in. It’s taken away from the situation where it was dominated by a handful of investors. It’s given price tension some development, and the secondary market trading is starting to pick up nicely, though it’s still not where it should be yet.”

A key theme in 2009 was the arrival of supranational issuers in Singapore dollars. KfW came twice, for just under S$300 million and S$200 million respectively; the African Development Bank raised S$310 million, and the World Bank S$230 million, all four deals coming within two weeks in August and September. Attracting multinationals does test the limits of the swaps market, but interest so far has been strong.

“The supranational issuance was probably 90% triggered by two things,” says Jan Wipplinger at Deutsche Bank. “Local treasuries of banks being long liquidity; and the MAS [Monetary Authority of Singapore], in regards to allowing AAA-rated supranational issuers and their bonds to be used in the same way as SGS local government bonds for minimum liquid asset requirements [see MAS interview, box]. All of a sudden, investors could switch out of government bonds into supranationals, and use that for the same purposes as government bonds before.” That, Wipplinger says, explains why all the supranational bonds this year have been three years in duration: “That’s where the best pick-up is offered: 50 to 75 basis points over government bonds.”

In previous years retail has played a role, particularly in tier one bank issues, although that has been less widespread in 2009. “In Singapore, the tier one space will come back again,” says Terence Chia at Citi. “In 2010 we should expect to see more such tier one issues either from the local banks or very strong, internationally-recognised names tapping the Singapore dollar market.”

Peng-Meng Ling at Standard Chartered notes there is clear appeal for retail in a low-interest, high-wealth market like Singapore. If a deposit account is paying 1% or less, then a recognizable name offering 5% for two or three years – a bank, perhaps – is going to find an audience. Ling highlights the strength of high net worth individuals as a key part of the Singapore investor base, active in deals for issuers like Hyflux, HPL, CDL and Korea Development Bank in 2009.

Still, retail here is not really the same force as in Thailand, in which buyers drop into their branch to buy a bond. “99%, if not more, of the bond offerings in Singapore have traditionally been offered into the QIB market, for qualified institutional buyers. It hasn’t been meant for mass retail as yet,” says Lee. “So-called retail participation comes in the form of private banks: priority banking-type customers, and they are governed by a minimum size of $250,000 per investment. From an arranger’s standpoint we still don’t sell directly into retail: we sell to private banks, and they sell to retail.”

Still, despite improvements, the Singapore dollar bond market is not all that it could be: lower rated names struggle to access capital. “Rating is still a constraint in the Singapore dollar market,” concedes Lee. Regulation in Singapore doesn’t require bonds to be rated to access the market, but going down the credit curve is nevertheless a challenge.

“We feel we’ve reached a point in the market where domestic investors are keen to see a return of a wider range of international issues,” says Reuben Tucker at ANZ. “But the Singapore dollar market has been exceptionally well balanced in terms of the types of deals seen here: well-known corporate, property transactions, and international issuers.”

Box: The MAS

The Monetary Authority of Singapore oversees the development of Singapore’s local currency bond market. The institution shares it views with IFR Asia on how it’s doing.

“Compared to five years ago, the Singapore bond market has steadily grown by more than 50%, with healthy activity seen from both the corporate and public sector,” says an MAS spokesperson. The authority says it expects healthy new corporate debt issuance in the coming year, in light of expectations of rising global interest rates. “Anecdotally, investment banks have also indicated healthy deal pipelines going into 2010.”

The MAS highlights its high turnover – one of the highest in Asia – and increasing liquidity, with tenors available from one to 20 years, and structured instruments increasingly commonplace. In 2009 it has also attracted increasing numbers of foreign issuers, particularly supranationals. “Foreign issuers make up approximately 30% of S$ debt issuance,” the authority says.

One of its more recent initiatives was to build an Islamic market. In January it announced its first sukuk facility. “It is unique in two aspects,” says the spokesperson. “First, issuance is on a reverse inquiry basis, which means we will issue sukuk according to the needs of banks in Singapore conducting Islamic finance. Second, the sukuk is priced against the Singapore government securities market to provide a transparent price discovery mechanism for these instruments.” The theory is that as the sukuk market grows in Singapore dollars over time, it will then develop its own pricing benchmarks.

“The design of our sukuk facility reflects our effort to tap the strengths of conventional finance, while adhering carefully to Shariah principles,” says the authority. The MAS says the facility has received “strong response”, and has issued tranches to the Islamic Bank of Asia (part-owned by DBS), OCBC and CIMB Bank. “We remain committed to the programme size of S$200 million.”

Additionally, the MAS says the private sukuk market has developed substantially since the facility was launched. City Developments Ltd set up a S$1 billion medium term note programme in January, with S$100 million issued to date, while the Islamic Development Bank issued S$200 million of sukuk via a private placement in September.

One of the biggest impacts the MAS has had on the market this year was the enhancement to its treatment of high quality collateral, allowing AAA-rated Singapore dollar debt securities from supranationals, sovereigns and sovereign-guaranteed companies to be used as collateral to access central bank liquidity. Banks are also permitted to treat these securities as tier two liquid assets with the same (zero) weighting as Singapore government securities.  “These measures, and the issuance that followed, helped banks to diversify their holdings of liquid assets, in the process strengthening financial stability in the banking sector by growing available high quality assets in the banking system,” says the MAS. Since the implementation of the framework, the market has gained about S$2 billion of new issues from triple A rated issuers.

December 2009

Regional bankers tend to express more disappointment about the Indonesian rupiah bond market than any other in southeast Asia in 2009. It didn’t do badly, exactly, but it probably did less than other markets to emphasize its role as a liquid alternative funding source to dollar debt.

ThomsonReuters data says Rp16.8 trillion was raised in 2009 by November 19, already ahead of the Rp16.01 trillion for all of 2008 but well short of Rp24.85 trillion in 2009. That said, many in the industry, interviewed in November, believed there was plenty more to come in 2009, with some still expecting a Rp30 trillion total for the year that would put it in a wholly different light. In particular, an expected Rp3 trillion or larger sub debt raising from Bank Mandiri, due to be settled in December, was being closely watched.

Dhanny Cahyadi, president director of PT ING Securities Indonesia, says the rupiah bond market was “volatile but performed relatively well” during the global financial crisis. It started weakly, before Astra Sedaya Finance became the first private sector corporate bond deal in rupiah in April, raising Rp900 billion in an upsized, multi-tranche issue led by HSBC, Indopremier Securities, ING and Mandiri Sekuritas. With Astra having launched successfully, other blue chips flowed, among them Indofood, which raised Rp1.61 trillion, the largest non-financial corporate bond in 2009; Medco Energy; Bank Ekspor Indonesia, whose four-tranche deal raised Rp2.5 trillion; Panin Bank; Bank BTPN; and state-owned pawnship chain owner Perum Pedagaian. There were no real surprises in the list of issuers. “The type of issues remains relatively the same as previous years,” says Cahyadi. “The frequent issuers are typically from the financial institutions sector, including banks and consumer finance companies.”

Perhaps the most significant rupiah bond in Indonesia this year was much smaller than those – a Rp100 billion deal backed by Bank Tabungan Negara, the first mortgage-backed securitization in Indonesia. “Before this, all bonds were basically straight bonds,” says Iwan Wisaksanai in corporate finance at Kresna Securities. “This was the first securitization.” Regulation permitting securitization actually dates from 1997, but it has taken this long for sufficient interest to develop on both the originator and investor side. “It took more than 10 years to launch one transaction,” Wisaksanai says. A second transaction followed in the fourth quarter, bringing the total issuance between the two to almost Rp500 billion; Standard Chartered was lead arranger on both.

But international bankers have been disappointed with what they’ve seen. One points out that the government bond market is 35-40% held offshore – the highest percentage in the region – and that bigger borrowers still tend to go offshore because liquidity is not abundant at home. “Indonesia is probably a little bit more a hostage to the G3 markets.”

Terence Chia at Citi adds: “Companies in Indonesia are pretty open to issuing in dollars and can get decent sizes done, but issuing in the local currency market is generally not as deep as some other markets.”

Locals seem to view the market differently to foreigners. “We are quite busy, especially in the first half of this year when interest rates were quite low,” says Wisaksanai. Speaking in mid-November he expected a number of non-financial institutions to issue bonds in the fourth quarter, and hoped full year issuance would be between Rp20 and 25 trillion, followed by a drop back to Rp10-15 trillion for 2010.

Similarly, asked if 2009 has been busy in local debt markets, Dini Wijayanti, vice president in the investment banking division of PT Indo Premier Securities, says: “Of course. It’s been very active.” She, too, considers the pipeline so strong, with about Rp12 trillion on its way, that a full year issuance of Rp30 trillion could still be achieved. She is watching closely Mandiri’s forthcoming deal, which she says could raise as much as Rp5 trillion in tenors of up to seven years. “Looking at the current pipeline the most important is Mandiri,” says Wijayanti. “It’s a good company, a massive issue, and the pricing is quite generous, so that one I think will be the benchmark for other issuers in Indonesian bonds.”

It is tough for lower rated names to access rupiah bonds, the more so since a new regulation came into place requiring pension funds to invest only in bonds rated single A or above. “There are not many companies that have a rating of A, so in terms of debt issuance, it has fluctuated a lot in the last 10 years,” says Wisaksanai. Wijayanti adds: “The pool of investors has become a bit smaller for bond issuers below single A.”

Higher rated companies tend to congregate in three to five year maturities, though some have gone as long as seven or 10. “We are bound to see more sub debt issuance and securitization deals so we would not be surprised to see a lengthening of the tenor,” says Cahyadi, although all local participants add that the corporate bond market lacks liquidity. “We hope that over the years the IDR bond market becomes more mature and developed as the other domestic bond markets,” Cahyadi says. “A lot needs to be done by the regulator to create a more conducive environment but we are moving in the right direction.”

Generally, though, the world seems quite optimistic about Indonesia, one of the standout emerging market economies through the financial crisis, and now blessed with political stability after president Susilo Bambang Yudhoyono was returned for another five year term. “After the general election we heard a lot more good things about Indonesia, from both Indonesians and foreigners,” says Thomas Meow at CIMB, which is heavily represented in Indonesia through its ownership of Bank Niaga. “We are very positive and believe investors will be putting more money to work in the bond markets there.”

BOX: Interview with Rahmat Waluyanto, director general of debt management at the Ministry of Finance.

Rahmat Waluyanto oversees the debt capital markets activities of Indonesia. He’s best known on the world stage for his involvement in landmarks like Indonesia’s dollar issue at the start of the year, and the landmark sukuk; however he also has responsibility for development of the rupiah debt capital markets.

From the point of view of government issuance, he says the impact of the global financial crisis was clearly present in increasing yields and a lower volume and frequency of secondary market trades, but was not drastic. “Last year we only issued bonds until October, and then we started again in January,” he says. “The rising yields in the domestic market meant that we couldn’t award the bids in our auctions, but only for two of three months. After that, and especially after our US$3 billion global bond issue, the markets calmed down, as investors perceived that the government had been able to secure its financing for that year.” Contingent financing from the ADB and other multilaterals also helped to calm the markets, and brought down yields on rupiah government bonds considerably.

“Everything has changed drastically,” he says now. “The yield of rupiah bonds [more recently] was 400 basis points lower than in October 2008.” This drop, in turn, helped Indonesia to secure the budget; it conducted its final auction of the year in November and will offer no more until 2010.

Waluyanto notes that something striking happened in October. The net buying of rupiah bonds by foreign investors that month was Rp8 trillion. “It is much, much bigger than the net buying of foreigners in the stock market.” He is encouraged to see foreign ownership of rupiah bonds is increasing, and notes: “There is no tendency that it is going to be lower.” He puts foreign ownership at about 18% of total tradable government bonds outstanding (a total market of about Rp580 trillion), compared to 16% as recently as December. He credits this rise to the strengthening rupiah, the spread between Indonesian government bonds and US treasuries, and growing confidence in Indonesia generally. He also notes that almost 80% of the bonds held by foreigners have a longer tenor, of five years and beyond.

And what of the corporate bond market? Waluyanto denies that issuance in this market has flagged, and makes a bold-sounding estimate echoed in other parts of the market that full-year issuance could hit Rp30 trillion despite the fact it was barely half that by mid-November. He notes, though, that companies have been able to raise funds in the booming equity market this year, which may have removed the appeal of the debt markets.

There is a sense that Indonesian issuers are much more likely to go for dollars than rupiah given the choice. Waluyanto says: “If everything goes well, with no market volatility, we prefer to have rupiah bonds. Basically, it is going to be more stable if we have a widened investor base in the domestic market. There are some advantages of issuing overseas because it can support the reserves, the balance of payments, and create a benchmark for international issuance for corporate. But our policy is still prioritising domestic bond issuance.”

He adds: “The global market cannot last forever in terms of its stability. At any time something can happen: the market dynamics can be destabilized by a bank collapse. We are better prepared by having an investor base in the domestic market.”

So how can the corporate bond market be boosted? “Well, I think we must give them space,” he says, by which he means not crowding corporate issuers out with government paper. “The government has been the largest single bond issuer in the domestic markets, so our main concern is to avoid carving out the domestic markets.” He says that by issuing globally in dollars, samurai, global sukuk, and other offshore measures, “that is one of the ways we gave some space for corporate bond issuance in the domestic market.” Also, he says the government has tried to lengthen the duration of its issues. “This is also to give space to the corporate sector who only issue in the medium term. Five years, three years – we try to do our best to avoid issuing bonds in that tenor.”

Waluyanto has been instrumental in the development of a sukuk market in Indonesia, going right back to the legislation that had to be passed in order to allow the government to issue in the first place. The global dollar sukuk caught the headlines, but it has also issued domestically in rupiah, using the ijara structure, using government assets as the underlying. “Going forward we need to diversify our sukuk instruments by trying to introduce a project-based sukuk next year, hopefully,” he says. “We will select one or two projects that can be financed through sukuk issuance as a pilot.” These deals are in preparation but Waluyanto says they will be in rupiah.  He also argues that there is no additional cost in sukuk issuance. “Any time we issue sukuk, we never give any extra premium.”

December 2009

Vietnam is much the youngest local currency debt capital market covered in this report, and the most vulnerable to external shocks. After a promising 2007 in which D10.5 trillion was raised, issuance almost completely dried up in 2008, totalling less than a tenth of that, according to ThomsonReuters.

In that context, 2009 was something of a return to form. By November 19 D7.3 trillion had been raised by local issuers, including the country’s biggest corporate bond to date, an important, market-reopening D3.5 trillion issue for electricity utility EVN.

Still, both locally and internationally, bankers vary on their opinions about the market’s development and prospects. “I think the market has huge potential,” says Terence Chia, vice president, Asia debt syndicate, capital markets origination at Citi. “It is still at the developing stage but the sorts of sizes we have been seeing getting done are pretty amazing for a market that is so new.”

Since the EVN deal, these have included D1.5 trillion of issuance for Vinacomin, the coal and minerals mining conglomerate; D2 trillion for Sacombank; D1.362 trillion for another bank, BIDV; and most recently D2.1 trillion for a third, Techcombank, in October.

Citi led the Vinacomin and (with ANZ and Sacombank Securities) Sacombank deals; Chia says Vinacomin could have gone well over D2 trillion had it wanted to. “Vietnam certainly has the potential to develop a pretty robust local currency market,” he says. “I think issuance will remain sporadic for the time being because of the interest rate environment, which has been volatile this year. But if we see the rate environment stabilise we should see more deals getting done in the local market.”

Certainly, many of these deals have been impressive in any context, and not just EVN, discussed in the box in this article. Sean Henderson at HSBC points to BIDV, the first lower tier two deal in Vietnam for three years, which HSBC jointly led with BIDV itself. “That was a great print in terms of being able to execute a lower tier two deal through the crisis,” he says. Doing it internationally would have been “exceptionally difficult if not impossible for most names – you’ve only just seen OCBC do it. So it was a great success being able to get them capital out of their domestic market.” HSBC also joint-led the Techcombank deal, with Standard Chartered, the largest single tranche by a financial institution this year. Peng-Meng Ling at Stanchart thinks there’s more where that came from, and reports a number of local currency deals in the pipeline.

There’s certainly no shortage of a need for funds. Vietnam’s vice minister of planning and investment, Dang Huy Dong, tells IFR Asia he hopes the local bond market can be one of many sources for the country’s vital infrastructure funding. “We need a substantial amount of capital to finance our ambitious and huge demand for infrastructure developments,” he says. “So far we have been relying on the conventional sources, such as the national budget, grants and loans. Now we have to look to the commercial bond markets, domestically and internationally.”

He accepts there is more to do. “The domestic bond market is developing,” he says. “It’s still in its initial stages, but we are learning by doing, and as people become more confident it will expand. I’m optimistic about it.”

And it’s not just the projects that need funds. Companies need to expand and are keen to do so with rates low. “Corporates want to raise medium to long term funding for two reasons,” says Nguyen Quang Minh, deputy director of the treasury department at Vietcombank. “Firstly there are real needs to finance their projects. Secondly, they expect that next year interest rates will increase, so if they raise funds now it will be cheaper than in the next two years.”

But Nguyen is typical of local bankers in seeing harder times ahead, and his tone is more cautious than the international players. He says despite the successful issues this year – he calls it “the year of the corporate bond” – things may get tougher. “Now I think it is very difficult for corporations to issue,” because the State Bank of Vietnam is not adding liquidity to the market. Similarly at BIDV, Trinh Quynh Thanh, deputy manager of the dealing room, also bemoans the lack of liquidity and calls 2009 “a tough year” for that reason. “In 2007 you could see a strong amount of capital coming to Vietnam and a lot of government bond investment, but after 2008 and the financial crisis it ran out. There was also a sell-off of government bonds in Vietnam and after that liquidity fell to a low over 2009.”

And the future? “We think 2010 will also not be really good for liquidity for bonds. We need the recovery not only of Vietnam but the whole world.”

Indeed, one of the striking things about the bond issuance in 2009 is that it has been done almost entirely with only a single slice of the potential investor base – domestic banks. Local funds play a limited role, but international capital, once so active, has all but gone. “Last year they [foreign investors] got very big losses because of fluctuations in the exchange markets,” says Nguyen. “I don’t see them coming back yet – the main players are the domestic commercial banks.”

Getting this international capital back into these markets requires changes to happen both inside and outside Vietnam. Minister Dang Huy Dong says that dispersed FDI in the first 10 months of 2009, at US$8 billion, is not significantly down on the $9 billion figure for 2008, but the committed FDI is dramatically down – $18.9 billion for 2009 to date when we spoke to him compared to $69 billion in 2008. And portfolio flows have been even more flighty. “I don’t think they are ready to come back because of their home country; they don’t have the confidence elsewhere in the world,” he says. “But quite a few foreign funds are still active in the stock markets.”

Some are no doubt deterred by the macro position, particularly inflation. “Just like any other country inflation is always an issue and any government has to take a close look at it; Vietnam is no different from that,” he says. “As we are rolling out the stimulus package, we install the mechanisms with a number of different indicators to keep a close watch on inflation.” And what are those indicators telling him? “At the moment they are saying we are still on the safe side. The moment we feel it is shaky, we have mechanisms.”

If foreign flows do return to dong bonds, they ought to support growth in the market. “In 2010 the picture may be a little brighter, but it should be taken step by step and there will not be a big change in the market,” says Trinh. “If you look at the macro, Vietnam is quite an attractive place to invest: we have positive GDP growth rates in 2009, a little bit higher in 2010; we are recovering quite well. By the second quarter of 2010 we may have some cashflow coming back into Vietnam.”

Deal profile: EVN

EVN’s D3.5 trillion bond re-opened a market that had been flattened for more than a year. “The market had really been closed since the fourth quarter of 2007, given the disruption to local fixed income markets with rapidly accelerating inflation,” says Reuben Tucker, head of debt capital markets for Asia at ANZ. “The bond markets had been shut for five quarters.”

ANZ had been close to EVN for years, having handled its inaugural transaction in dong. “We saw them as an ideal candidate to reopen the market with an appropriately sized benchmark deal, to signal to domestic investors that the market was open.” Early in the first quarter of 2009 the bank began sounding out accounts who said they had a lot of dong liquidity to deploy, given the dearth of trading available in the secondary markets at that time. Finding appetite from large domestic players, the bank went back to EVN with that feedback in late February, and the issuer set out for a D1.5 trillion transaction. “We felt that would be large enough to represent a true benchmark in the market, and also an adequate size to reopen the market with.”

Documentation took around four weeks, which Tucker suspects is a record in the local market. “But more important than the timing was the fact that we used the deal not only to reopen the market, but create a benchmark of international style documentation in the local market. It closely resembled a traditional Regulation S offering circular in international markets.”

The bookbuild took three days and closed at over D5 trillion, allowing the deal to increase to D3.5 trillion, the largest ever Vietnamese dong corporate bond. It succeeded in reopening the door, as many other issues followed.

Tucker says he is “very optimistic about this market, which is why we continue to commit more resources to it. It is in early stages of development but there is good diversity in terms of issuers: we have had large SOEs, joint stock banks, and a listed company in the tech space this year. The market is showing its capability to absorb credit across the entire spectrum of issuer types, and that’s occurring at a very early stage in the market’s development.”

He says he is seeing the level of sophistication in bank and asset manager portfolios lifting dramatically. He hasn’t yet seen international funds returning to the market, though he feels it will come back. “The encouraging thing to note is that many transactions have been successful based on almost 100% onshore distribution. While the return of international investors will be an encouraging signal, the fact that the market has seen the volumes it has without them is a strong sign.”

December 2009

The Thai baht debt capital markets have enjoyed a year so vibrant it’s as if the global financial crisis never happened. According to ThomsonReuters data, by November 19, Bt304.36 billion had been raised in local currency bonds in Thailand in 2009 over and above government issuance – well up on Bt198.31 billion for the whole of 2008 and Bt182.73 billion for 2007.

“2009 has been beyond everybody’s expectations,” says Surabhan Purnagupta, head of investment banking at Bangkok Bank.

Why the increase? Part of the reason is a peculiarity of the Thai market: the power of the retail investor base. “Retail buyers have become very important players in the market,” says Surabhan. “They are seeking alternative investments to their deposits, as the bank deposit rate has become very low.  They’re becoming more and more familiar with corporate debentures.” Bank deposit rates plunged as the Bank of Thailand cut policy rates through 2008 and 2009, from 3.75% in mid-2008 to 1.25% by May this year, and although economists have started to project modest rate rises in early 2010, investors have spent much of 2009 looking for a better return than the 1.5% they can typically get for a two-year deposit with banks today. Contrast this with the 3.2% offered on the three-year bonds sold by PTT, the country’s darling credit, in April; or the 3.5% on two-year paper from Toyota Leasing Thailand, which is rated AAA, in February (although rates were still declining at that stage and had not bottomed). Corporate debentures have particular appeal since government yields on short dated bonds have fallen hard too, paying as little as bank deposits.

This marks a shift in the investor landscape. “It has changed a little bit,” says Thiti Tanthikulanan, capital market business head at Kasikorn bank. “In 2007 and 2008 it was mainly financial institutions who subscribed for bonds. This year it has been retail investors.  This year the credit spreads have been quite volatile, very wide at the beginning of the year but narrowing quite quickly as the year went on. So demand from financial institutions has been diverse and uneven.” Retail, needing the yield, has more than compensated.

Retail is easy to reach in Thailand: now that customers are familiar with the corporate debenture product, they buy the bonds in their local branches. On the day IFR Asia calls Bangkok Bank, it is the first day for subscriptions for a new issue of up to Bt8.4 billion in senior debentures for Charoen Pokphand Foods, for which Bangkok Bank is an underwriter. “Retail investors can just go to their bank branch and subscribe,” says Surabhan. This is one reason the primary market is vibrant but the secondary market lacks liquidity. “The people who invest in corporate bonds normally tend to hold them until maturity.” He reckons retail represents more than half of the market, and has been involved in some deals, such as the Bt12 billion multi-tranche issue for Skytrain operator Bangkok Mass Transit System in July, in which retail made up more than 80% of the deal.

This is also a reason that domestic bonds in Thailand tend to have a large number of lead arrangers – it increases the ability to reach as many retail investors on the ground across Thailand. PTT’s Bt35 billion issue in July, for example, credits 11 bookrunners – not just local leaders like Bangkok Bank, Siam Commercial Bank, Krung Thai Bank, Kasikornbank, Siam City Bank, TMB Bank and Bank of Ayudhya, but dedicated securities houses Thanachart Securities and TISCO Securities, and foreign-owned houses Standard Chartered Bank (Thailand) and CIMB Thai Bank. The sense is of using every possible avenue to reach the ordinary investor.

One also sees the retail influence in deal structure. Many of the biggest deals this year have come with multiple maturities. The Bangkok Mass Transit System issue, although it uncharacteristically had only two bookrunners in Bangkok Bank and Standard Chartered, came with five separate maturities – three, four, five, six and seven years. This was partly a retail strategy. “Normally in the market people say that if you issue three and four year tranches for sale at the same time, they cannibalise each other,” says Surabhan. “I didn’t believe that, and so we went out with three to seven year bullets and it proved successful. If you are retail and you want five years you take five, if you want seven you take seven; but if you want an amortising nature, you buy the three, the four and the five tranches at the same time, or all of them.” The strategy proved sufficiently successful to upsize the deal to Bt12 billion from Bt10 billion; not bad for a company emerging from restructuring and seeking to pay off hefty floating rate debt. “It was two times oversubscribed for a company that was only recently out of rehabilitation,” says Peng-Meng Ling, managing director and regional head of capital markets for southeast Asia at Standard Chartered. “It was a classic case of putting in the hard work in educating investors: after they learned to appreciate the credit they were willing to come back and invest in this paper.”

Some issuers have taken greater advantage than others in this environment, but none more so than the PTT group. In February the parent, PTT, issued Bt15 billion of eight-year paper. Another arm of the company, PTT Aromatics & Refining, raised the same amount in April, this time at five years. Then came PTT Exploration and Production in May, which raised Bt40 billion in the country’s biggest single deal of the year, in four tranches, at three, four, five and 10 year durations. So, seeing the attitude, the parent came back again: PTT raised Bt35 billion in July at three, seven and 10 years. In total, that’s Bt105 billion group-wide in five months – and more than one third of the national total for the whole year to date.

Unsurprisingly bankers consider the PTT deals the most significant of the year, “just because of the size of it,” says Thiti. “It wasn’t hard to do, because the name is so good and because at the time interest rates were quite low with not much prospect of recovery. So the bond was a very good alternative investment for financial institutions and retail investors.”

For issuers of PTT’s cachet, there is liquidity up to 10 years and beyond, though the bulk of corporate debentures come in the three to six year range. For lower-rated or less well-known issuers, access is tougher, though there have been signs this year of interest in names below the top tier. CH Karnchang is rated BBB+, and sold a Bt2.5 billion issue of three and five year paper earlier this year at rates that don’t seem excessive on a world scale: step-up rates from 5.3% to 6.3%.

One surprising thing about the success of corporate deals is that they have also had to compete with a sale of government savings bonds by the Ministry of Finance, that took Bt80 billion out of the market in mid July in a deal so popular it was fully subscribed within hours and upsized from its original Bt50 billion; and a Bt130.7 billion retail savings bond raising by Bank of Thailand in September, more than doubled from its original target, which attracted 60,000 retail investors. The Ministry of Finance may well be back again before the end of this year. 

Bank issues have been less noticeable, although they have been present: Krung Thai Bank raised Bt20 billion in February, and Kasikornbank Bt 600 million in a lower tier two issue. At the time of writing Thanachart Capital, a holding company for Thanachart Bank among other things, was due to launch a Bt10 billion five-year issue, and KrungThai Card, Thailand’s largest card issuer, was finalising a four and five-year raising. Other bond issues in the works at the time of writing were ThaiCom, formerly known as Shin Satellite; and Toyota Leasing (Thailand), a regular issuer in baht. One puzzling trait, though, is that the Bank of Thailand is believed to have refused approval for a number of foreign issuers in baht in recent months, although market participants seem to expect these approvals to be granted in 2010.

Quite apart from retail demand, there are other reasons it makes sense for companies to issue debt. “Most are trying to lock into the yield curve, with the risk of the BOT’s policy rate being either flat or rising in the coming months ahead,” says Somphan Eamrungroj at Export-Import Bank of Thailand. “Personally, [I feel] the yield curve has risen during the last two months too fast so may incur some corrections in the weeks ahead. The BOT has been passively trying to keep the policy rate stable amid their FX interventions to stem the strengthening of the baht, causing them to absorb the surplus baht out of the system.” Still, he says Thai Exim is “watching the market closely as we have some refinancing needs emerging in 2010.”

Additionally, the threat of the global financial crisis added an incentive for issuers to raise funds when they could. “At the end of 2008, a lot of corporates were concerned about the liquidity in the system and whether banks would still lend money,” says Thiti. “They saw what was happening in the US, where banks weren’t lending, and were afraid if that might happen in the Thai banking system as well. So corporates issued bonds to make sure they had liquidity going into 2009.” Then, with interest rates dropping through the first quarter, the attraction grew.

Has the surge run its course? “The pipeline is looking a bit thin at the moment,” says Thiti. “People who wanted to issue have already done so. Going into 2010 we think the volume will not be as large as in 2009.”

Still, the long term looks promising, and is attracting foreign banks despite the political uncertainty. CIMB pushed into Thailand when it became the largest shareholder in Bank Thai in 2008, rebranding it CIMB Thai Bank in May 2009. “The recently announced master plan [launched by the Bank of Thailand in November to cover the development of the financial sector over the next five years] placed a lot of emphasis on the bond market,” says Thomas Meow, head of debt capital markets for CIMB overall in Kuala Lumpur. “We believe there are a lot of opportunities there.”

Indonesia’s rupiah bond market is on course for a year of growth. By late July 22 deals worth US$1.4 billion between them had been raised in 2009, not counting government issuance, according to Dealogic, well on course to beat the 30 deals worth US$1.7 billion in 2008.

They have included some deals of reasonable size, including six worth the equivalent of more than US$100 million. The largest, for Bank Ekspor Indonesia, raised IDR2.5 trillion (US$195 million) in June through Danareksa and Trimegah Securities; others have come from Indofood Sukses Makmur, Perum Pegadaian, Bank Tabungan Negara, Medco Energy Intenasional and Perhsahaan Listrik Negara. That represents a mixture of bank and corporate issuance.

While the market has been reasonably active, participants are expecting much more to come from it. Dennis Reshijaya, head of institutional debt capital markets at Mandiri Securities, says investors are waiting to get a sense of the total government issuance for the year before showing appetite for corporate bonds. In particular, they are waiting to see if a samurai bond, long talked about by the Indonesian sovereign, is successfully completed. “If they get the Samurai bond done, local IDR bond issuance will be less,” he says. “And if the government is not going to issue so much supply into the market, investors might change their view” towards corporate bonds. “In the second half there will be a lot of bond issuance, corporate bonds.”

Reshijaya says investors prefer state-owned companies with a minimum rating of single A or A plus, “especially for the pension funds”. Issuers like PLN, which are essentially government owned, can find a following, although tenor tends to be on the short side and it would be tricky to get bigger deals away than those that have already been done this year. Also, secondary market liquidity is generally weak.

The rupiah markets might have been expected to grow while the dollar markets were effectively shut, as happened in Malaysia and China, among other places. That hasn’t proven true to any significant extent, and now it appears dollar funding may be back as a viable alternative for names of reasonable size and reach. Philip Lee, chief executive officer of investment banking for Southeast Asia at JP Morgan, expects high yield issuance to pick up from Indonesia in the second half of the year cross-border, too, reflecting changing attitudes towards credit which have an impact on the local market as well. “If you’d mentioned high yield six months ago you would expect to get kicked out of the room,” he says.

Rohit Chatterji, managing director of investment banking at JP Morgan in Singapore, notes that “in the domestic market liquidity doesn’t go out very far in tenor,” and adds that it is tempting for many Indonesian names to consider US dollars for other reasons too: “There is a natural hedge for many of them because they are exporters of commodities.” Consequently the development of the domestic markets has to deal with not only skittish local appetite but the apparently increasing allure of dollar issues too.

One area of potential growth is the rupiah Islamic bond market. While the dollar sovereign issue earlier this year captured the headlines, Indonesia has long had plans for Shariah-compliant programmes domestically too. In January it said it hoped to complete four rupiah-denominated sukuk placements in 2009, raising up to Rp10.8 trillion; a first retail sale, underpinned by a Rp13 trillion portfolio of government buildings, took place in February, attracting Rp5.57 trillion. Rahmat Waluyanto, who heads the debt programme for Indonesia, has said another Islamic retail bond will follow in the second half of this year, while other issuance has included private placements to Indonesia’s own department of Religious Affairs, although these issues are not tradable.

But this market is not growing as fast as some would hope. “The Islamic bond market is not growing that much,” says Reshijaya. “The size that can be placed through Islamic bonds has not improved.” Certainly, it is likely to take time before sovereign issuance of Islamic paper is sufficiently entrenched to attract much corporate or bank sukuk issuance to price off the back of the sovereign yield curve. Still, Malaysia has demonstrated the liquidity that can be tapped by building a successful sukuk market; the majority of debt issuance in Malaysia now is Shariah-compliant rather than conventional.

The panda bond is a great idea with a problem: it’s all talk, no execution.

From an issuer’s perspective, the appeal is immense. China has vast liquidity looking for a home; borrowers find themselves starved of opportunities in most of the world’s traditional bond markets as investors there remain risk averse or short of cash. Putting the two together, with foreign issuers raising funds in renminbi on the mainland, seems a great idea, but it just won’t gain any traction.

Will it in future? There have been many steps in the right direction. When first suggested in 2005, panda bonds were intended as a tool for multilaterals: International Finance Corporation launched bonds in 2005 and 2006, and the Asian Development Bank in 2005. This was on the understanding that the proceeds remained in China for development purposes.

 In July 2008, China published a draft revision expanding the scope of Panda bonds from these development institutions to foreign banks and corporations with operations in China. Specifically, the issuing bank’s Chinese domestically incorporate branches had to have three years of profitability before being permitted to issue bonds. (It appears this means all domestically incorporated branches, rather than the first one to be opened by a bank; this is a key point and makes a big difference.)

 Part of the challenge is the sheer range of groups that need to be in agreement before a bond can get away. Even for the multilaterals, “it does require several regulators to work together towards that goal,” says Rita Chan, an executive director at Goldman Sachs. “Subsequently, with individual corporates, there are much more detailed issues to consider: what accounting principle they should use, what ratings they should use, can they use international ratings – a lot of technical details still need to be finalized among the regulators.”

 Specifically, the National Development and Reform Commission regulates the corporate bond market for unlisted companies; the People’s Bank of China regulates the structure – interest rates, and so on; the Ministry of Finance was involved in the supranational issues; the China Securities Regulatory Commission regulates the corporate bond market for listed companies and oversees the underwriters; and the National Association of Financial Market Institutional Investors regulates the commercial paper and MTN markets. If a listed company from overseas issues a bond, there are further questions about the authorities that govern that company. On top of that, if the issuer then wants to take funds offshore again, then the State Administration for Foreign Exchange gets involved too.

 At the heart of it is that China has to consider why it would want to let foreign issuers – and especially foreign sovereigns, a logical next step – into this market anyway. “The Chinese government has been careful in terms of making sure the development of the panda bond market doesn’t impact its foreign exchange policies,” says Patrick Tsang, head of cross border debt capital markets at Deutsche Bank. “But from an issuer perspective, we’ve definitely seen a lot of inquiry – from supranationals, to banks, to corporates who have business in China.”

 Still, even if it’s slow, the direction is clear. “There’s a lot of interest from international issuers who would like to be able to access the China domestic bond market,” says Ronan McCullough, an executive director at Goldman Sachs. “As bond markets in China continue to move towards something that feels like an international model, there’s definitely going to be room in investor portfolios for this type of credit.

 “And this will tie in with other initiatives we’re seeing: international banks looking to access the domestic bond market business; Hong Kong and Chinese banks trying to access the RMB market in Hong Kong. All these things are different strands that will lead to a situation where the market is sufficiently developed, mature and diverse to be really viable in an international context when the market is opened up to external investors.”

 So who’s first? Standard Chartered has confirmed it is working on issuing RMB bonds in China – making them the first locally incorporated foreign bank to do so. In June, Stanchart said it was targeting a RMB3.5 billion issue. HSBC and Mizuho have also expressed an interest in launching these bonds in China.

 Separately, HSBC and Bank of East Asia both have approval to launch RMB bond deals in Hong Kong – an interesting separate development. The legal framework for launching these bonds in Hong Kong has been in place since 2007, and mainland banks including Export-Import Bank of China, China Development Bank, Bank of Communications and Bank of China have already taken this route, although HSBC and Bank of East Asia would be the first foreigners to do so.

 This market has a slightly different rationale. “Hong Kong is clearly a market which has a very limited pool of investors from which to draw,” says McCullough. “It’s effectively retail deposits in Hong Kong – there isn’t any pool of institutional renminbi liquidity in Hong Kong. It’s been a useful alternative for investors who would otherwise be putting their renminbi on deposit at close to zero per cent in the bank.” While that’s obviously a limited market, the recent steps to allow RMB settlement in Hong Kong have the potential to give it a fillip. From the issuer perspective, foreign banks do need to raise funds in renminbi to fund their capacity to grow on the mainland.

 One other interesting development is Chinese corporate issuing onshore in China, in dollars, as China National Petroleum (CNPC) did in May. This raises another prospect: foreigners raising money in dollars in China. “The development of that market is definitely encouraging,” says Chan. “But it remains to be seen when and how much the regulators would be willing to open it up, because it involves taking US dollars out of China and into the home country of these corporates, where the actual use of proceeds would be hard to monitor.” Additionally, the onshore swap market is not very liquid yet.

Last year, as your shares went up in smoke and your super evaporated, there was a way you could have been earning almost 15%: boring old Australian bonds. In 2008, as the Australian stock market fell 38.9%, the UBS Composite Bond index – the most widely referred to benchmark for Australian fixed income – went up 14.9%.

That’s quite a return, and most out of character: the same index is up a more pedestrian 6.8% a year over five years, and even that is higher than the sort of figure people normally hope to get out of bonds over the longer term. Bond investments are meant to be the defensive, anchoring bit of a portfolio, an irksome drag on returns in the good years but a vital insulator when things turn bad. “Fixed rate bonds have traditionally been a place of refuge for investors when economic growth deteriorates,” says Greg Michel, head of fixed income at ING Investment Management in Sydney.

It’s the scale of that economic deterioration, with its savage effect on shares, that has made bonds look so good. “Falling interest rates produce capital appreciation in bond investments, and strong outperformance when compared with growth assets such as equities,” says Michel. Around the world central banks, Australia’s included, have slashed cash rates, making cash less attractive than it used to be in Australia, while at the same time bonds have performed strongly.

Before assessing the outlook, though, it’s worth being clear that there are many different kinds of bonds, with very different characteristics and accessibility. At the top of the tree, in terms of the safety of the investment, are government bonds (those issued by others but guaranteed by governments are similarly secure). “The risk free nature of these bonds reflects the ability of governments to continually raise income via taxes to meet their financial obligations,” explains Michel. An awful lot has to go wrong with a country before it starts defaulting on its own bonds. But, correspondingly, these bonds tend to pay much less than other types: a 10-year Australian government bond yield at the time of writing was yielding around 4.4%, and a US 10-year less than 3%.

Next come corporate bonds, issued by a company. Here, your assurance of getting your money back is based on the strength of the company itself. If the company goes under, you’re in trouble. That said, it is useful to understand something called the capital structure which reflects the way companies raise their money. If the company is wound up, bond holders get paid before equity holders, who may well be wiped out completely. There are further distinctions too: some issuers (banks are the main example) issue both senior debt and subordinated debt. In this case, in the event of the company getting into trouble, the senior debt holders are paid first, then the subordinated debt holders. Consequently, the subordinated debt tends to pay a better return to reflect that risk.

Corporate bonds cover a multitude of financial strength. There are companies out there with higher ratings than many national governments; there are others who are so risky that their bonds attract the term “junk bond”, or, to use the more polite modern parlance of investment banking, “high yield”, which strictly speaking refers to any bond with a rating lower than BBB- from Standard & Poor’s, one of the rating agencies who assign ratings to reflect the creditworthiness of companies and their bonds.

Then there are hybrids, very common in Australia. These combine characteristics of bonds and shares. Usually, they start out life as a bond, and in certain circumstances – sometimes pre-set, sometimes decided by the company that sold the bond – turn into shares. Companies like them because they offer lots of flexibility with their capital management, and investors have tended to like them because they pay a high yield while they are in their bond form, and are in most cases very easily bought on the Australian Stock Exchange.

On top of that, there are of course many more bond issuers out there beyond our shores, and the international debt markets are deep and sophisticated.

Asia’s bond markets enter 2009 at a crossroads. Last year many of them demonstrated that they were credible alternatives to credit-clogged G3-currency markets, at least for local borrowers. But  what happens next? The coming 12 months will demonstrate whether Asian markets have shown sufficient depth and maturity to hold their ground as a key funding source or will once again be only an afterthought to the major global currencies.

“Local currency markets are a lot more important than people give them credit for,” says Sean Henderson, head of debt syndicate for Asia Pacific at HSBC. Dealogic, the data provider, says bonds in the 10 main Asia ex-Japan currencies combined amounted to the equivalent of US$231.8 billion in 2008, compared to US$28.3 billion for Asian issuers in dollars, yen and euros combined. “Both in terms of scale and the trajectory of the markets, local currency became a lot more important in 2008,” Henderson says. In particular, Asia proved itself a rare location in which borrowers could raise bank capital: Maybank, UOB, DBS and OCBC all raised tier one capital locally in 2008, and several Philippine lenders raised tier two funding.

Different markets responded to the opportunity – if one can call a global credit crunch an opportunity – in different ways. The standout, by a considerable distance, was China. The 10 largest local-currency bonds out of Asia last year were all in Chinese renminbi, and the smallest of those 10 was worth Y19.5 billion (US$2.85 billion). Consider China Ministry of Railways: in September, as Lehman Brothers plunged towards bankruptcy, it raised Y20 billion; a month later, as world stock markets hit some of the worst volatility for nearly a century, it raised another Y20 billion; and in November, amidst all that global uncertainty, it trumped them both by raising another Y30 billion in the largest bond of the year. China National Petroleum Corp, China Merchants Bank, China Development Bank and the sovereign itself have all raised billions of dollars worth of local money in 2008.

“China’s bond markets are starting to play a more meaningful role in the overall economy and we expect to see this welcome development continue,” says Mark Leahy, head of global risk syndicate for Asia at Deutsche Bank. “The regulatory framework around the bond market, and in particular the corporate bond market, continues to be strengthened and will allow more participants to play a more active role. This is the area we believe will have the most rapid growth in the coming years.”

But China is something of a special case. “It is the most cloistered of the domestic bond markets,” says Fergus Edwards at UBS in Hong Kong. “Local investors have a relatively limited number of markets to consider, and at present those with cash are less likely to invest in equities or in property than they were a year ago. That makes the bond market a very attractive third option.” Also, Edwards says, the Chinese are a relatively protected investor base, unaffected by declines in global markets, forex wobbles or the oil price. “Chinese companies continue to grow strongly, driven by continued, if weaker, domestic demand. The renminbi market allows them to domestically fund the investment that generates this growth.” Edwards, who was on the October Ministry of Railways deal, says the ructions in world markets at the time were “not a problem. Chinese accounts focused on the strength of their home market rather than the weakness of others.”

Elsewhere in Asia, though, few places were quite that resilient. Most markets showed healthy issuance until the October crash, and then locked up just like everywhere else. Malaysia, for example, hosted deals in ringgit worth $500 million or more from Cekap Mentari, Syarikat Prasrana, Cagamas (twice) and Khazanah, but there’s been nothing of any size since September. Barring an encouraging $554million-equivalent deal for Woori Finance in December, the same is broadly true of the Korean won. Philippine pesos and Indonesian rupiah have been active in low quantities (though Indonesia effectively shut down in August), but traditional stalwarts, especially the Hong Kong dollar, have been all but dormant: there hasn’t been a deal worth US$100 million in Hong Kong dollars for almost a year now.