Is distressed debt in Asia an opportunity now, an opportunity to come or an opportunity missed? It’s all of them. It just depends on what part of the market you’re looking at. While restructuring specialists are only now beginning to see work coming through, those looking for the bottom of the market for distressed credit have probably already missed it.

Asia’s market and corporate behaviour has been consistently different from that in the US and Europe. Banks haven’t collapsed, nor has residential property on any widespread scale, and those countries with significant domestic demand are still boasting GDP growth of better than 5%. But it’s not immune: Standard & Poor’s managing director Diane Vazza noted in June that the number of corporate defaults in Asia Pacific in 2009 to date, at nine, already matched the all time record from the Asian financial crisis in 1998. This, Vazza says, “indicates a buildup of credit quality weakness unlike any the region has experienced since the end of its last full-blown financial crisis.” Negative bias – a forward-looking indicator S&P uses to assess the potential for downgrade – has risen to 32%, its highest level since 1999. “Even though Asian companies came into this period with generally lower leverage than their western counterparts, severe disruptions to exports continue to pose stark profitability challenges,” Vazza says. “Covenant headroom has also become narrower among corporates from weakening valuation of assets and intangibles.”

Distressed debt institutions find opportunity in a number of ways in an environment like this. Some look to find essentially good debt trading at dramatically oversold levels, and to profit from the rebound when it comes. Some purchase portfolios of non-performing loans from Asian banks and tidy them up or sell them on. Some assist with restructuring companies to keep them alive. But each of these approaches has a very different cycle.

The first camp, for solid high yield or convertible debt in Asia, is the one where the best chances may already have gone. “When is the right time to get into that market? The answer is two months ago,” says Robert Morse, CEO of Primus Financial, which runs a number of strategies including a fixed income fund which looks closely at distressed debt. “It’s questionable how much value remains at current levels. There’s been a significant rally and a lot of liquidity has flowed into the market; May was close to a record month for non-investment grade new issuance. The internal rates of return and yields to maturity have come down significantly already.”

Primus was unavoidably among those who missed it since it didn’t formally launch until April 29. Many others remained unsure on the sidelines waiting for worse; those in the market say that people who caught the best of it were private banking accounts, demonstrated by early sharp movements in the market being in small volumes. “You could draw the conclusion,” says one observer dryly, “that it was people who knew those situations very well.” Many big players were still deleveraging and suffering with illiquid books, so were unable to get back in; additionally the proprietary books of the multinational investment banks are out of action while those banks have more pressing needs for their capital.

Still, it’s by no means certain that we won’t see a change of direction at least some of the way back to the levels seen earlier this year. “One question has to be whether the markets, both equity and fixed income, have got ahead of themselves,” says Morse. His view? “I do think they have moved very far very fast. I’m not sure the underlying fundamentals justify it.”

At Standard Chartered, Paul Jurie, who heads the alternative investment group for the bank globally, agrees. “The consensus amongst bankers is that the rally has been too much too quickly,” he says. “Investors have not sufficiently differentiated between quality companies and those that are likely to experience refinancing difficulties.” On top of that, high yield bonds have rallied on very thin volumes with few sellers of any size, as investors hold out for bond buybacks from companies, or wait in hope of selling their bonds closer to the par value many of them bought them at.

Jurie notes, though, that the loan market is an opportunity still to come. “Lenders are still not really convinced that we have seen the bottom of the market,” he says. “There has been less provisioning than we would have expected by Asian banks. As a consequence, we have not seen banks selling loans at a discount, other than a few LBO assets in Australia. That will change in time.”

He adds: “A number of companies are currently breaching covenants, and some of these will later develop into principal and interest defaults. We expect to see more opportunity over the next 12 to 24 months.”

There are other potential problems ahead (or, from the distressed investor’s perspective, opportunities). In 2006 and 2007 around $1.5 trillion of LBOs were conducted, and much of the debt associated with them was connected to over-leveraged companies whose cashflows have come down and whose ability to service debt is now questionable. Much of it was sold to collateralised loan obligation (CLO) investors who, as Morse puts it, “don’t really exist anymore. A trillion dollars of bonds and leveraged loans are coming due between 2011 and 2014 and it’s not clear whether there will be a refinancing market for many of them.”

Australia will be at the heart of this. In terms of single asset distressed trading, “the most opportunities are in Australia,” says Stephen Le at Deutsche Bank. “Private equity firms have been very active in Australia and have done LBOs across all industries there in the last five years when leverage was cheap.”

Another important corner of the market is non-performing loans (NPLs). An example of an active investor here is Cube Capital, which runs a dedicated Chinese NPL platform as part of the QBridge fund, an open-ended fund launched in 2006 with $149 million under management, investing in Chinese NPLs, distressed real estate and special situation investments. “It’s a huge market,” says Thomas Holland, portfolio manager of the fund. “We estimate there is US$300 to 600 billion notional in the system.” Also, a lot of money has left the area with the financial crisis, putting the supply/demand dynamics in favour of those who are still around.

It’s not an easy market for an international player to compete in: so much depends on the local servicing partners on the ground in China, without whom the business can’t work efficiently. Additionally, bad loans in China are passed on to four state-owned asset management companies but a combination of the size of the market, a lack of incentives and political sensitivity tend to make it inefficient so that prices often don’t reflect supply and demand. On top of that, China is not known for the strength of its legal system.

Foreign players differ in their views on what these barriers mean. Standard Chartered’s alternative investment group has been active in Asian NPLs for eight years and has been a significant buyer of distressed single credits and portfolios in China, India, Thailand and Malaysia among other places, recently buying NPLs from Maybank, Thai Military Bank, SBI and ICICI. But in China, “we deliberately stayed away from the roulette business of buying Chinese NPL portfolios,” Jurie says, instead focusing on providing liquidity to companies with sound businesses but poor capital structures, helping them turn around. “There are only a few foreign investors who are actively buying portfolios,” he says. “The majority of the early entrants have either closed or refocused their businesses.”

Additionally, the Chinese NPL industry is very localised at a provincial level. “In order to effectively collect or restructure, you need to establish servicing platforms staffed with local people in the provinces. In most other Asian countries you can service from the capital city. It’s a very people intensive business.”

Holland agrees with the challenges but thinks that it creates an opportunity for those who have addressed them. “You need a domestic servicing partner and how you structure that relationship is really key to how you make it work,” he says. “You have to make sure the interests are fully aligned.  Identifying the right partner, structuring and testing the relationship, having it mature, in addition to all the financial structuring for repatriation and tax issues – it’s a one to three year process. You can’t just get a Bloomberg and think you can participate in the opportunity.” QBridge’s fund is invested primarily in portfolios in and around Shanghai and Beijing. In Deutsche’s case, it has a joint venture with China Huarong Asset Management Corporation called Rongde Asset Management.

Besides, there clearly will be more bad loans to come: Chinese loan growth is in some cases likely to run as high as 30% this year, and even if NPL ratios remain the same, the absolute number of bad loans is clearly going to increase.

Jurie’s preference for non-China NPL deals does have a hurdle: lack of deals. “We are still actively seeking to invest in stressed or turnaround transactions, but it has been quite difficult to convince lenders to take a discount, or equity holders to dilute their shareholding,” he says. Banks take time to accept drops in prices, and in Asia the banks themselves were generally in better shape than those in the west because of their experience from the Asian financial crisis.

If NPL opportunities do appear among Asian banks, it’s more likely to be in the consumer sectors such as cards and unsecured loans, or in country-specific areas such as residential lending and construction in Korea, or consumer stress in Taiwan.

The other opportunity for bankers is in restructuring. “What is unique in Asia is that almost no restructurings happen in a bankruptcy process,” says Ivo Naumann, managing director of the Shanghai office of Alix Partners, whose specialisms include corporate turnaround. “Everything happens in out of court restructurings. The bankruptcy process in Asia is not that well established.” He sees business coming from two areas: investments within private equity portfolio companies with tight banking covenants that are starting to be breached; and pre-IPO investments through offshore lending structures, which have run into trouble with the IPO markets being shut. Both sides are far quieter than in the US or Europe but, as Naumann says, “in Asia we are at the beginning rather than the end.”

In particular, those companies with heavy exports to the US have been hit hard, and even if America bounces back Naumann thinks US consumers will still start saving at least 7 or 8% of their disposable income, which would take away a trillion dollars of consumer spending at a stroke.

The peak of the default and restructuring cycle is being delayed by the fact that Asian markets are generally flush with liquidity. Chinese loan growth continues at a pace, the local currency bond markets appear to be back, and in many countries the state has got involved. This means that, despite the high technical default rate identified by Standard & Poor’s, companies are not generally ending up in bankruptcy or even being forced into firesales. “Deals that otherwise should be defaulting are getting refinanced,” says Holland. “For example, many small to medium Chinese property developer deals should have been restructured but have been able to get refinanced from the domestic market.”

Still, it’s all on its way: bad loans, troubled assets, flagging companies. Morse says there is about $100 billion of distressed demand, in terms of investors, which is likely to be a lot less than the situations that need capital. “So,” he says, “there’s still an excess of supply over demand and that should make things very interesting.”

Interview with Dato’ Mohd Razif Abdul Kadir, Deputy Governor, Bank Negara Malaysia

Dato’Razif, a more than 30-year veteran of Bank Negara, supervises regulation and development of sectors including banking, insurance, Islamic banking and takaful.

Public speakers on Islamic finance project different personas from the podium. Some are aggressive about the strength of the discipline compared to the conventional world; others are humble, recognising the gulf in scale between Islamic and conventional finance; some are a bit self-righteous, enjoying the lack of collapses among Islamic financial institutions as western banking behemoths crash and burn. Dato’ Razif: he’s just enthusiastic.

“I can talk for hours about this, days,” he says, flicking through a presentation he has made just weeks earlier at the University of Reading. His mantra is that Islamic finance is a source for stability, and he’s right, he really can talk for hours about the reasons: the direct link to the real economy; the lack of leverage; the ethical stance; the greater transparency and disclosure that comes from the additional level of Shariah governance; the greater fiduciary duties and accountability that come from the same source; and the different contractual relationship of the Islamic world, with equity-based and risk-sharing transactions rather than “a debt credit relationship where if you default I will go after you.”

One can argue at length whether Islamic banks have escaped the credit crunch more through luck or judgment, but Razif is in any event realistic that the sector has not emerged unscathed. “I always emphasise that Islamic finance is not insulated from what’s happening in the world,” he says. “The first phase of the crisis was not a problem because Islamic principles ensured there was no way [Islamic banks] would get hold of toxic assets. But the second wave, of underlying economic activity, has severely affected it. There’s no way any system can withstand it, and especially Islamic finance because the underlying has to be from those economic activities.”

So where do those principles leave sukuk today? Clearly sukuk issuance slowed in 2008: from RM121.3 billion of new issues in 2007 to RM43.23 billion in 2008, although the number of issues didn’t decline so much, from 59 to 47. “There is a lot of interest,” says Razif. “That’s not a problem. But the underlying market is very bad. It is so difficult to get the supply of dollars. This is nothing to do with Islamic finance: people are waiting to see the best time. A sukuk is a long term commitment and people don’t want to lock the cost, so in the meantime they’d prefer to access bank finance and then issue when it is settled and back to normal.”

Razif claims the interest is coming from both domestic and international issuers, and says there are “six or seven” issues waiting to come. Interestingly, he confirms an issue is in the queue from an Australian issuer, though he declines to name it; Australia is one of the many markets Razif and others have visited on roadshows to promote the idea of sukuk issuance in Malaysia. Another, unsurprisingly, is the Middle East.

Razif was delighted to see the issue last year from the Islamic Development Bank, the multilateral institution owned by many Middle Eastern nations, in ringgit. “It’s important because they are saying: Malaysia is a funding base. They know the market is so liquid. And for issuers you don’t want a one-off issue, you want your name to be known.” He cites the example of Toyota, whose most recent sukuk issue was a RM1 billion private placement in May. For companies like that, he said, the ringgit market (and particularly the Islamic ringgit market) present a strong source of liquidity and usually of pricing, so “even after the swap it’s cheaper.”

Like the conventional markets, sukuks have a problem with swap market capacity. “That is a global phenomenon, not only Malaysia,” he says. Is it capacity or cost? “Both. Supply is quite difficult,” he says.

Bank Negara is the driving force behind the Malaysia International Islamic Finance Centre (MIFC), which has now issued eight fully-fledged fund management licences, with the latest going to Aberdeen Asset Management, Nomura and CIMB Principal. Each has been given seed capital – the amount varies depending on “their commitment”, Razif says – and mandates, with the hope that in time they will then bring further capital to Malaysia from outside it. That, if it happens, should increase the liquidity still further.

Hyundai Capital Services hit two landmarks when it launched a RM650 million deal on May 20. It became the first Korean corporate issuer in Malaysian ringgit; and it raised the biggest single tranche by a foreigner in that currency.

Getting there was not especially straightforward. True, the three year senior unsecured fixed rate deal was launched amid a flurry of Malaysian interest in foreign issuers: Kexim had already been in the market by that stage, and Industrial Bank of Korea, so the interest of local investors in Korean names was already established. “The deal was based on elevated appetite from onshore investors for both the Hyundai Capital name and for Korean names in ringgit generally,” says Jan Wipplinger at Deutsche Bank, lead manager on the deal.

But that popularity brought a problem too. All Korean issuers, Hyundai included, needed to swap funds out of ringgit – in Hyundai’s case first into dollars, and then on to won. The problem was that by then the wealth of interest from Korean names in Malaysian issues had already had an effect on swap market capacity and pricing. In early April, Hyundai decided the widening basis swaps on both cross-currency trades made the deal uneconomical and delayed it.

As it happened, it was just a question of waiting for the right time, and when the circumstances came right just over a month later (the issue date ended up being May 20), the numbers were not just practical but enticing, and Hyundai upped the deal from a planned RM300 million to RM650 million.

Clearly, the credit was not the problem here, but the economics of the swap. “We did a roadshow to get investors familiar with the name, and then just needed to wait a few weeks to get the right window for the market to open,” Wipplinger says.

Most Korean names up to that time had had at least some state backing and had proven attractive to Malaysian pension funds. Hyundai Capital, lacking that backing, instead appealed to a different group of investors: fund managers, insurers and banks.

That said, there is an element of top-drawer backing in Hyundai Capital: the fact that GE Capital, with a AAA rating, holds a 40% stake in the company. This is believed to have proven attractive for the issuer in many of its offshore deals in recent years, and doubtless didn’t hurt in Malaysia either.

It proved a useful deal for the market, demonstrating there was still life in ringgit for Korean borrowers, and within weeks the issue had been joined by a RM380 million two-tranche bond from Woori Bank. While that might seem to owe more to the IBK and Kexim issues that preceded it, in some ways Woori had more in common with Hyundai: IBK and Kexim are both state-owned government policy banks, Woori and Hyundai represented pure commercial risk. Pricing was reasonably similar between the two as well, with Hyundai Capital’s deal paying 5.5%, and Woori paying 4.68% and 5% on three and seven-year tranches respectively.

Later in the year, Hyundai was back. On September 24, with the US stock markets in utter turmoil, it launched a RM205 million further drawdown off what is a RM2 billion MTN programme. This deal, a private placement of 1.5 year notes, was led by CIMB. This time the deal paid 6%, by which time its three-year notes were trading at around 6%.

Getting any such deal done in those markets was an achievement, and the private placement model appeared to be the only workable method at the time (and arguably still is for a foreign, non-state-backed credit). While the recap was watched closely, bankers were reluctant to read into it any improvement in the market for foreign issuers in ringgit, and so it proved: there would be no other foreign issue in the public markets for the rest of the year.

The notes carried a rating of AA1 from RAM, a rating that would struggle to find an audience in a public deal in today’s markets. But the size of the MTN programme suggests the issuer will be back sooner rather than later when markets allow. Merrill Lynch arranged the swaps on this second deal.

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.

Take a look at any area of Islamic finance in Malaysia and there will be a statistic to support its success. Banking? There are 16 Islamic banks, 11 Islamic windows, four international Islamic banks. Insurance? Eight takaful, four retakaful and one international takaful operator. Fund management? Malaysia had 149 Islamic unit trusts at the end of 2008, the highest number in the world, with RM17.19 billion of assets, ranked second in the world after Saudi Arabia.

And the Islamic capital markets provide the most compelling evidence of all. As of September 2008, 64% of all total sukuk outstanding worldwide were from Malaysia, and, while 2008 was much quieter for new issuance, the country still accounted for 36.92% of new launches that year, still the highest chunk anywhere in the world. Malaysia has pushed sukuk with vigour, to the point that 57% of outstanding corporate bonds in Malaysia take the Islamic form. Between 2001 and 2007 there was an average annual growth rate of some 22%. Along the way Malaysia was home to the largest sukuk issue ever launched, for Binariang, at RM 15.35 billion.

More than that, sukuk is an area of clear innovation in Malaysia. Exchangeable sukuks have been launched by groups including, repeatedly, Khazanah; Maybank in 2007 came out with the world’s first international subordinated sukuk; and Malaysia was also home, back in 2002, to the world’s first global sovereign sukuk.

“It is the deepest and broadest sukuk market anywhere in the world,” says Badlisyah Abdul Ghani, CEO of CIMB Islamic. “There is nowhere else you can find a 50-year sukuk. There is nowhere else you can find a RM15 billion sukuk, a straight sukuk, a stapled sukuk, asset-backed securitizations, subordinated sukuks. Whatever you can find in the conventional bond market you can find in the sukuk market in Malaysia.”

Malaysia has achieved this by making an effort to build the most sophisticated regulatory environment in the world for Islamic finance. It has been able to do so because of a combined view at government, central bank and regulator level – in the form of the Ministry of Finance, Bank Negara Malaysia and Securities Commission – that combined action was needed to make it work. Separate interviews with Bank Negara and the Securities Commission in this guide give a sense of how seriously they take it.

International issuers have started to take notice. Ever since Shell launched the first ever Islamic corporate bond in ringgit in a private placement in 1990, Malaysia has sought to attract international issuers to its markets, and that approach has gathered pace through 2004 (IFC, the first ringgit sukuk by a supranational) and 2005 (World Bank, the largest supranational deal in ringgit to that point), until it really took hold in 2007. Issuers since then have included Japan’s Aeon Credit Services and Toyota Capital, and the UK’s Tesco Stores.

Additionally, this is one area where Malaysia’s long-held ambition to attract capital from the Middle East is bearing fruit. In recent years two major Gulf issuers, the Islamic Development Bank and Gulf Investment Corporation, have raised funds in ringgit, although GIC’s maiden issue was a conventional deal. Some managers boast lengthy lists of Middle Eastern institutions in varying states of readiness, some with rating in place and due diligence done, waiting for the right market conditions to return or for a private placement opportunity. “We’ve got a healthy pipeline from the GCC looking for ringgit issuance,” says Abdul Ghani.

For all the recent success, though, the sukuk market has not been immune from problems in the conventional markets. “You can’t really segregate the sukuk market from the broader bond market,” says Abdul Ghani. “It exists in the same market space, it goes after the same investor base, albeit there are Islamic investors who chase sukuk. Broadly the same forces that influence the debt capital market influence the sukuk market.” That’s evident in new issuance volumes: There were 47 sukuk worth RM43.23 billion issued in 2008 compared to 59 worth RM121.3 billion in 2007. Also, the same problems in the swap markets that inhibit foreign borrowers from approaching conventional ringgit deals apply in Islamic ones too.

That said, Malaysian markets generally have not suffered anything like the same ructions as those elsewhere in the world. “In Malaysia, both the Islamic and conventional markets were not as affected by what happened elsewhere in the world,” he says. “There were no toxic assets.” Malaysia also boasts the only sukuk market in the world with meaningful secondary trading.

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.”