No Asia-domiciled house has made a more strident attempt to be a regional player than Singapore’s DBS. It’s been this way for more than a decade, as one CEO after another has come to fulfil a vision of a bank from Asia, covering Asia. The latest CEO, Piyush Gupta, puts it like this: “The Asian bank of choice for the new Asia.”

DBS got its pan-regional ambitions underway with the acquisition of Dao Heng in Hong Kong in 2001 and has been steadily adding pieces and bedding down businesses ever since. Today, Gupta aims for a DBS with a 40:30:30 split of earnings, split Singapore/Greater China/South and southeast Asia, chiefly India. In this, it differs from CIMB, the closest comparable approach in the region, which aspires only to be a powerhouse within Asean.

Where does investment banking fit into this? In truth, it’s not the sharpest part of Gupta’s vision; he told Euromoney in September 2010 that “We are really a good commercial bank, a good universal bank.” He said that did not cut out investment banking, but “there is a recognition that this will not be our forte, to go out against the bulge bracket banks in high end capital market transactions. It’s not our principal area of strength.”

Be that as it may, DBS is an exceptionally powerful presence in investment banking in Singapore and is increasingly exporting that into other markets. “We originate out of Asia and distribute globally,” says Clifford Lee, who heads the fixed income business. “From an origination standpoint we are very much focused in Asia: this is where our expertise lies, when we are investing to add more value to the market.” Asia’s occasional opacity is an asset for DBS, he says. “The most valuable commodity in the market now is information. Certain markets are more opaque, onshore and offshore areas of control make things a little less transparent than we would like, and credit information is less available. We hope to be able to navigate through these issues in a more informed manner, considering this is our back yard.”

It is already a leader in all areas of investment banking at home: it has turned up on the landmark IPOs from SingTel’s S$4 billion IPO back in 1993 right through to the deal that took its record, HPH Trust, which raised US$5.5 billion in March. It was instrumental in launching the REIT market (and business trusts, of which HPH was the biggest example) and has handled a greater volume of underwriting on these than anybody else. It is a clear leader with the debt and equity needs of SMEs. It has helped to build one of the greatest duration curves in any local currency debt capital market, beyond 40 years. And it appears on most M&A deals involving a major Singaporean institution.

Along the way has come a sense of what can be achieved in other markets too. It has been involved on cross-jurisdiction equity deals for years: examples are Adaro Energy in Jakarta, San Miguel Brewery in Manila, Astro All Asia Networks in Kuala Lumpur and Australand in Sydney. And generally, the newer frontiers are making a steadily bigger contribution: China, India, Taiwan and Indonesia contributed 17% of group revenues in the third quarter, with earnings up 35% from a year earlier.

It’s perhaps on the debt side where regional strength with a local feel is most valuable. “In the immediate future, we intend to stay relevant and competitive in the G3 space, which is extremely crowded in Asia already,” Lee says. “But it is in local currencies in the region that we really hope to continue to grow. The faster markets open up, the faster we will be able to make headway.” DBS dominates Singapore dollar league tables in the debt side but is also starting to appear more frequently on CNH, or offshore RMB bonds. DBS was a bookrunner on the RMB3.6 billion offshore RMB bond from Baosteel in November – the largest corporate dim sum bond to date. It has appeared on several others as well. “CNH feels more like a credit market than the bank space, which is more of an interest rate play,” Lee says, suiting DBS’s strengths. He says he will “continue to monitor” Indonesia for opportunity, with a focus so far on the high yield space (where it has worked on deals for Indosat and Adaro, among others), and has built a rupee capability in India.

China is an example of a business where investment banking does make a key contribution. Gupta has said corporate and investment banking in China, which drive that business, have been growing at 40 to 50% per year, at least in the run-up to China’s slowdown. This is arguably the great advantage of Dao Heng: the fact that it creates a way in to China rather than starting from scratch. Half of DBS’s customers in China are from Hong Kong, while red chips are responsible for the biggest growth in the Hong Kong business.

Going regional is not straightforward. “The difficulties of maintaining a multi-regional, multi-country strategy or platform for an investment bank are not only must you be very good in your home market, you must at the same time take on the best of the local market players in each of the other countries you set your sights on,” Lee says. “That’s becoming increasingly difficult as domestic banks are improving, increasing in sophistication, and are increasingly able to provide more basic investment banking needs.”

But going regional is now a key part of the DBS plan. “We were born in this region, we’ve been invested in it for a long time, and we invest on a much longer term basis and have ridden the storms,” Lee says. “The competition is harsh but we just have to psych ourselves accordingly to take them on.”

ICBC

A long-awaited deal from ICBC successfully cleared the market late on Wednesday, enticing investors with the first true exposure to a mainland Chinese bank in an international bond market.

The US$750 million 10-year senior unsecured bond, issued by a vehicle called Skysea International Capital Management, was guaranteed by ICBC’s Hong Kong branch. This is a crucial distinction: Hong Kong is a full branch and represents exposure to the parent, whereas all other deals from mainland Chinese banks in the dollar markets have been through subsidiaries such as ICBC Asia or Bank of China (Hong Kong), giving exposure instead to Hong Kong subsidiaries. “This transaction provides the market with the very first direct exposure to the Chinese banking space,” said someone close to the deal. “All the other names are quasi, pseudo Chinese banks.”

Perhaps for this reason, the deal was marked by far higher than usual participation from Asian insurance companies. 95% of the deal went to Asia – Europe and the US represent no happy hunting ground at the moment – with insurers representing 33% of the book. “It’s not common at all to allocate one third into insurance,” said one banker. “They are buy and hold, high quality accounts, so we wanted to give as much bonds to them as we could, and we managed to find quite a number of anchors from insurance companies.”  Banks took 29%, fund managers 25%, private banks 8%, and corporates and others 5%. “It’s a unique opportunity for insurers to get direct exposure to the Chinese banking sector, and there are not many 10 year issues – insurance funds prefer that longer duration to match their liabilities,” the banker said.

For some weeks, market talk has been about ICBC’s willingness, or otherwise, to accept the price necessary to issue in such a challenging market. In the event they came at 310 basis points over Treasuries, inside guidance of 320, and proved popular, with an orderbook of over $2.25 billion from 160 accounts. “The issuer clearly has been very price conscious,” said one banker close to the deal. “They did the roadshow back in October and they have been monitoring the markets. It’s been very volatile.”

UBS, Barclays and ICBC International were joint global coordinators, alongside HSBC and Standard Chartered as joint bookrunners, on the Regulation S deal, which carried a 4.875% coupon with a re-offer price of 97.708%.

This week has looked brighter for debt markets after a miserable and volatile spell, although it remains to be seen how long it lasts. “I think the window has been open since the start of the week,” one banker said. The global joint intervention by central bankers is felt to have had a bigger impact on equity markets than debt markets, but “in the credit market we do feel better as well,” a banker said. ICBC moved in about 10 basis points on Thursday morning from launch, in line with the broader market.

An illustration of the improved conditions was a deal in the market as Euroweek went to press for Hyundai Motor Company, through its Hyundai Capital America vehicle. This 5.5 year 144a/Regulation S deal was capped at $500 million, and expected to raise that amount, in a deal through Bank of America Merrill Lynch, BNP, HSBC, JP Morgan and Morgan Stanley. It was being offered at guidance of 345 basis points over five-year treasuries as of Thursday afternoon, Asia time. The 5.5-year tenor is becoming more commonplace in Asia; KDB launched a $1 billion deal of that duration in October, and a subsequent bond from Bank of East Asia was 10.5 years with a call at 5.5.

Other deals expected from the market do not appear ready to launch. Reliance Industries has appointed Bank of America Merrill Lynch, Citigroup and UBS as lead managers on an expected US$1 billion 10-year; someone close to the issuer said they were “still watching and waiting” last night. And Chinese internet company tencent has completed a worldwide roadshow, concluding in New York, for a Reg S/144a dollar deal of its own through Deutsche, Goldman Sachs, Credit Suisse and HSBC, but yesterday the leads were “continuing to monitor the market”.

DIM SUM

The dim sum bond market continues to break new ground after last week’s landmark Chinese corporate issue from Baosteel. This week brought a new issuer and the first mandate to Latin America, even as the CNH deposit base in Hong Kong declined.

The new issuer was BMW Australia Finance, whose RMB400 million one-year deal was the second from an Australian corporate after Fonterra, which launched a RMB300 million three-year deal in June.

The deal paid a coupon of 2.4% and was re-offered at 2.4%. BNP Paribas was sole bookrunner on the deal.

Further ahead, the Mexican telecommunications group America Movil will hit the road next week for a dim sum bond of its own – the first from Latin America. It is understood the company, owned by Carlos Slim, will meet investors in Singapore on Monday and in Hong Kong on Tuesday, with HSBC as sole arranger.

While demand for these securities has generally outweighed supply in the market’s brief history, in October the CNH base – RMB deposits in Hong Kong – declined modestly. Deposits stood at RMB618.5 billion, down 0.6% from RMB622 billion in September, in a reversal of the often exponential growth in deposits over the last two years that has frequently hit 10% per month. That said, analysts had expected worse, with HSBC calling the decline “not as much as we originally expected” and saying “the fact that CNH deposits and trade settlement activity only declined modestly gives some comfort about the overall resilience of the offshore RMB system, as a vehicle for RMB internationalization.”

The deals follow last week’s RMB3.6 billion dim sum bond from Chinese state-owned steelmaker Baosteel, the largest corporate dim sum bond to date and a clear illustration that no matter how bad the global macro picture may become, there is stout appetite for the right Chinese names in RMB. That deal included three tranches from two to five years, all of them oversubscribed and all at the tight end of guidance. It attracted a total book of almost RMB9 billion from 200 orders.

Baosteel was the first example of a group that are expected to be regular issuers: PRC state-owned companies issuing in their own legal form rather than through an offshore company or vehicle.

GLP

Singapore’s Global Logistics Properties, a company backed by the GIC sovereign wealth fund, launched a S$500 million perpetual hybrid on Wednesday in a deal marketed carefully around its name appeal to Singaporeans.

The deal, which priced at a 5.5% yield, went mainly to Singaporeans – who took 92% of the paper – and within that, mainly private banks, who accounted for 78% of the deal, well ahead of fund managers and banks with 10% apiece. The coupon equates to 420 basis points over five-year swaps.

GLP is considered an exceptionally strong name in Singapore because of its GIC links; its 2010 IPO in Singapore was one of the biggest ever in the city state, despite the fact that its holdings are all industrial and logistical properties in China and Japan with little connection to Singapore. Those close to the deal claim the pricing was as much as 3% lower than would have been achieved in the dollar bond markets, if a deal could have been done at all. “If you look at an investment grade name like China Resources Power as a guide, then [for GLP in dollars] it would be very high single digits now, 8% plus,” says one banker. “In fact this deal couldn’t have been done in dollars at all a couple of weeks ago, or before this week’s central bank liquidity measures.”

From the local investor perspective, perpetuals offer much better yield than many fixed income alternatives in a low interest environment – Cheung Kong was another recent example of a Singapore dollar perpetual issuer. JP Morgan was sole global coordinator, with Citi, Goldman Sachs and DBS joining it as joint bookrunners.

“An insight gained from Cheung Kong was that it was clear private banks were going to be a dominant part of the distribution,” said someone close to the deal. “In this deal, we enhanced the appeal to the institutional investor base, which played a greater role in this than in Cheung Kong.” It was challenging to find a suitable comparable to price from; one approach was to calculate what the borrower would pay for senior debt in Singapore dollars, and then add suitable yield for the paper’s subordination. “Investors were looking for direction from us on pricing,” said one banker. “But Singapore accounts are very happy with 5%-plus yield and a good investment profile. They have money in the bank earning zero: if they want to earn 5%, they can take a flyer on a risky name, or buy subordinated paper from a name they are comfortable with.”

The deal cannot be called in the first five years but is very likely to be redeemed thereafter, as the bonds lose their 50% equity treatment from April 2017, at which point they will no longer be helping the issuer to reduce their debt to equity ratios.  After 10 years there is a 100 basis point step up, but the bonds are highly unlikely to be outstanding beyond that date.

Private wealth clients in Asia are facing intense market volatility and uncertainty for the second time in three years. The bad news is that almost all investment classes – equities both global and local, debt, property and commodities, everywhere from the US to Europe, Japan to China – face a deeply unclear and likely negative outlook. The good news is that compared to the global financial crisis of 2008, clients are much better prepared this time.

“There is a very marked contrast between what we’re seeing this time and what we went through in 2008 with private clients,” says Arjuna Mahendran, managing director and head of investment strategy at HSBC. “At the retail end of the market, they are going through the same experience as 2008: huge redemptions, forced selling, and a general state of panic. But high net worth clients are different. Because a lot of them used derivative instruments in 2008 and got burned, they learned their lessons and have deleveraged.” That leaves them less exposed this time, with more liquid investments and lower risk.”Most of them are looking at this as a guarded opportunity to pick things up fairly cheaply.”

Alongside the ructions of today’s market, there are other, longer-term trends at work in Asia private banking. Many of them stem from a key theme in Asia: the first generation who have built wealth approaching the end of their working lives and pondering how, or if, to pass the management of that wealth to the next generation. There are numerous knock-on effects of this trend, discussed in more detail in this report. Among them are an increasing professionalism in the way people manage wealth: corporate structures, family offices, more diversified portfolios, and a greater use of financial advice.

To see the report as it ran in the magazine, click here: Forbes Wealth Management v2

Another is an increased interest in estate planning, from straightforward wills and probate to training younger generations about wealth management – even including children. And a third is a more hands-on approach to philanthropy, often among newly wealthy individuals who have first-hand experience, and a clear memory, of genuine poverty.

One thing’s for sure: Asia is increasingly the engine of wealth generation, and correspondingly an important focus for wealth management. In October, Merrill Lynch Global Wealth Management and Cap Gemini released their closely-watched Asia Pacific Wealth Report, which found that Asia had overtaken Europe as the world’s second biggest market of high net worth individuals, measured either by population or combined wealth; on either measure, it’s only a matter of time before it overtakes North America for the top spot. One week later, the Credit Suisse Research Institute released its Global Wealth Report, finding that Asia Pacific accounts for 36% of all global wealth creation since 2000, and 54% since January 2010.

In this changing environment, there is a need for tailored, individual wealth management advice that does more than push a product. “The first question should not be: do you need life insurance, or a trust structure,” says Hugues Delcourt, CEO for private banking for Asia at ABN Amro. “It should be: what are your goals, your objectives, your constraints? What do you want to achieve? Then we can start talking about solutions.”

PART 1: INVESTMENT

Older and wiser, Asian private banking clients are approaching today’s market volatility with caution. But bankers say there is still a willingness to engage in markets and take a long-term view.

“Those with a strong opinion on a company or sector are seeing an opportunity to enter, in a gradual fashion,” says Arjuna Mahendran at HSBC. “But they don’t throw all their eggs in one basket.”

It’s largely a safety first environment. “With falling macro momentum and an expectation of choppy markets, UBS has recommended clients to position more defensively for quite some time,” says Alexander Kobler, Head of Investment Products & Services, Asia Pacific, UBS Wealth Management. “High dividend and high yield stocks are an ideal way to gain defensive equity exposure, with the security of a stable income stream in demand from investors right now.” He favours rebalancing cyclical exposure towards defensive sectors such as telecoms, healthcare and consumer staples, and focusing on companies with stable earnings, solid balance sheets and high dividends. “In addition, hedge funds can benefit in this environment,” he adds. “Given the current market volatility as well as the speed and magnitude of directional changes, we prefer trading strategies within the hedge funds space.” It is not a universal view: some are tired of hedge funds failing to deliver.

One particular challenge in this environment is working out where the safe havens are for investment. In some ways, the answer is simple. “The best safe haven is to be properly diversified,” says Hugues Delcourt at ABN Amro. “Yes, have a little bit of your wealth in gold, or treasury notes, but putting everything there? That would not be very wise. In these difficult times we ought to come back to the real fundamentals: risk profile, investment horizons and diversification.”

But it’s also arguable that safe havens have never been harder to find. “Safety is very costly nowadays, be it in terms of close to zero returns or high costs of protection strategies,” notes Kobler.

Throughout this year, the answer has typically been gold, but even that fell dramatically in October, albeit from all time highs. “Our advice is that gold was bound to have a bit of a correction, because it was becoming exponential in terms of price appreciation in the last few months,” says Mahendran. “But our basic advice is to start accumulating below US$1500 for another burst upwards. Gold remains in demand as central banks are debasing their currencies and facing inflation.”

Some felt gold had simply become too highly valued to be a sensible investment anyway. Speaking just before the major price decline, Lee Boon Keng of Julius Baer said gold was “somewhat overplayed” as a safe haven. “Gold and other precious metals are no longer safe havens but speculated commodities. Would I put gold as an important part of my portfolio right now? At these prices [$1800 at the time of the interview] probably not.”

But it does have good fundamentals. “Right now, strategic investors are still encouraged to build up exposure to gold as a means of diversification and portfolio insurance,” Kobler says. “Compared to the Swiss franc and Japanese yen, gold does not have a central bank that tries to prevent further appreciation. Thus, the metal can be viewed as the purest-play hedge against prevailing sovereign and currency risks.” Corrections in the gold price simply provide good opportunities to enter, he says.

In terms of currencies, two in Asia stand out: the Singapore dollar and the Chinese RMB. The Singapore dollar is expected to benefit from the fact that the Swiss franc, the traditional safe haven currency, has now been capped against the euro. “We are telling our clients that amidst all these uncertainties, we need to focus on the things that are the least uncertain,” says Lee. “One is that after the SNB fixed the Swiss franc, we will see the establishment of a replacement as a safe haven currency, and that is likely to be the Singapore dollar. The make-up of the economy is fairly similar, both have the rule of law, they are key financial centres and have similarly high governance standards. That is going to make the Singapore dollar a very attractive currency to have over the course of the next couple of years.” What to do with the Singapore dollars is a different question: Lee advises clients to look at high yielding Singapore stocks, including real estate investment trusts (REITs).

The RMB is a different story. While still not fully convertible, it is becoming an increasingly internationalised currency, with the so-called dim sum bond market thriving (with a few dips and glitches) in Hong Kong, and RMB bank accounts appearing both there and increasingly in Singapore. “Our clients have been building positions in RMB,” says Mahendran. Lee at Julius Baer argues that problems in Europe and the US will prompt China to increase the speed of the internationalization of the currency, which ought to mean it will appreciate steadily; over time, as investment products for offshore RMB develop, they are likely to prove extremely popular with overseas clients. Julius Baer itself is launching a China equity fund, and has combined with Singapore’s DBS to create a product investing in dim sum bonds. And a host of mutual funds for offshore RMB have sprung up in the last 18 months, including big asset management names such as HSBC, UBS, Schroders, Barclays Capital, Singapore’s Fullerton Asset Management, and – soon – BlackRock.

One problem with assessing a client’s risk tolerance is that it’s one thing to explain a possible decline, another to experience it. “Risk tolerance is not a discussion that takes 20 minutes and then you fill out the forms,” says Delcourt. “It’s very different to say to a client: ‘can you take a 20% decrease in your portfolio?’ and then the decrease actually happening. Nobody likes losing money, but when you are confronted with the reality of losing 20% of your portfolio, you may realise there were a few things you were hoping to do and can’t do anymore.”A proper understanding of a client’s true risk appetite is key.

That said, the dangers for private wealth clients do not seem so acute this time. “2008 basically pointed out the perils of leverage and derivatives: those were considered the two most toxic elements,” says Mahendran. “So everything else is considered relatively safe.” Within that, clearly emerging markets appear to have the better economic prospects, so advisers tend to suggest allocations to Asia on both the debt and equity side. While Asian equities tend to be hit with those in the developed world – unfair as that might seem – Asian debt has remained more resilient. “Asian debt in general is managing this volatility quite well,” says Mahendran. “Spreads haven’t widened as much as in 2008.”

Hedge funds, he says, are out of favour since they have not performed well; long-only funds are fine, but clients have a greater need to understand exactly how they operate. “The client wants to understand intrinsically what a long only fund is investing in, rather than plunging in.”

But no matter how bad the markets, investors have to do something. “You can’t remain uninvested when Asia is running at historically high levels of inflation,” says Mahendran. “In Singapore inflation is running at 9.5%. Clients realise they can’t just keep their money in cash; they’ve got to make their assets work for them to keep pace with inflation so they don’t lose the value of their wealth in real terms.”

And as Kobler says: “The time will come over the next months where the higher risks will also be rewarded with higher returns.” Timing is everything.

PART 2: FAMILY OFFICE/ESTATE PLANNING SECTION

In recent years many banks, such as UBS, Credit Suisse and Citi, have launched dedicated family office business units; others, whether or not they have separate units, report an increase in the amount of business in this segment. It’s no surprise: family wealth drives Asia.

In October Credit Suisse launched a comprehensive study of family-owned companies (not family office wealth management, but the corporate growth at a family level that drives the trend). Everyone knows the heavyweights – the Mittals, the Tatas, the Samsungs, the members of Li Ka-Shing’s family – but in fact across Asia’s 10 major markets there are more than 3,500 family-owned companies with a market capitalization of more than $50 million. 1,279 of them have a market cap of greater than $500 million. All told, family businesses account for 34% of Asian nominal GDP, and 32% of market capitalization, but in some markets the figure is far higher: 83.2% of the Philippines market cap, for example, with Singapore and South Korea both over 50% too.

“An interesting difference to Europe is that these are businesses that are relatively young,” says Nanette Hechler-Fayd’herbe, head of global financial markets research for private banking at Credit Suisse. “38% of them were listed after 2000. Many of them are first-generation led, whereas in Europe there have usually been several generations. They are at the early stage of their life cycle compared to their peers in Europe.” That in turn means more family office investment structures. “As family businesses grow and create wealth for the family, there is a movement towards a more professional investment approach as well. It goes hand in hand.”

Naturally, this is all linked to the succession theme too. “Succession from one generation to the next will accelerate over the next decade,” says Agnes Au-yeung, Head of Family Wealth Advisory, HSBC Private Bank. “The new generation of family offices will have to adapt to the needs and values of the baby-boomer entrepreneurs, who cherish new ideas and values, and who are concerned about continuity and leaving a legacy.”

Amy Lo, Head of Ultra High Net Worth for Asia Pacific at UBS Wealth Management, agrees. “One of the main reasons for this change [growing interest in family offices] is generational transition,” she says. “While we see many family businesses being successfully handed over to the younger generation, some families decide to divest and continue the legacy in the form of investments of philanthropic activities, transforming from a business family into a wealth management family, while staying entrepreneurial and continuing to look for new opportunities.”

But it’s not an area where many people appear satisfied with what they’ve done. A recent UBS Family Advisory study surveyed 120 ultra high net worth families globally, finding that 76% were concerned about protecting their wealth, but only 25% considered the way they approached the issue to be sufficient. “32% said that lack of know-how was the biggest show-stopper in putting a structured approach to family wealth protection in place,” says Lo. Good estate planning, she says, should involve not just the senior generation but junior ones too, “in a dialogue about the core values of the family and what the family wants to achieve in the long run. Many families make the mistake of limiting their efforts to the legal structuring, while missing the point of the true reason of such a structure. Successful legacy building involves a clear long term family strategy and thought through governance system,” which might include the drafting of a family constitution or the creation of a family council, she says.

A big part of family office advice is structural. “For those that want to get started, we help them with the structure and definition of governance,” says Marcel Kreis, head of private banking for Asia Pacific at Credit Suisse. “That is crucial to the success of the operation. We discuss issues of legacy and asset protection, help them with the formulation of investment policy if that’s required, and provide any financial services they need.” Kreis’s colleague Hans-Ulrich Meister, CEO for private banking globally, adds: “All over the world, with family offices, you have to push them on succession. If succession is not timely you can lose everything you built up in the last 30 to 40 years. It is such an important part, especially in companies who might need years preparing for a successful transition.”

But investment advice is naturally crucial too. Banks report that with more formal structures, risk management becomes more sophisticated and time horizons for investment tend to grow – perhaps allowing people to invest in illiquid asset classes like infrastructure, which improve diversification. That said, many family offices did lose a lot in the financial crisis from illiquid alternative investments. “Form these lessons many families have started to define risk buckets,” says Au-Yeung. “They may set aside a bucket as a nest-egg, or the start-over-again fund, while managing another bucket with a higher risk level or a thematic focus so that that combined buckets meet the aggregate needs of the family.”

For banks, this is growing business, as more and more institutions broaden from a traditional focus on investment management to a far more rounded sense of partnership with family wealth. “I look at the relationship manager as being a conductor, being able to play with a number of musicians,” says Hugues Delcourt at ABN Amro. “An orchestra without a conductor plays a cacophony. A conductor without musicians doesn’t entertain his audience. I believe in a private bank that is a partner to our clients: not only to advise on whether an investment should or should not be made, but to structure wealth in a way to achieve their objectives.

“The private banking model of the recent past in Asia was much more transaction-oriented,” he adds. “It still is, to a large extent. We ought to move to a more client service approach, and wealth structuring is fundamental part of that advisory scope we need to provide.”

Family office structures can take a variety of forms, “ranging from a trusted assistant to a virtual family office managed by an ex-senior banker, and in more mature cases to an entity with an independent legal status and staffed by well-qualified professionals,” says Au-Yeung. Such professionals can be in high demand: Credit Suisse’s most significant private banking hire this year was Bernard Fung, who formerly managed the wealth of the UK’s Sainsbury family.

Lo at UBS distinguishes three separate groups. There are ultra high-net worth families in Hong Kong and Singapore, who are sophisticated and have reached a natural point where it makes sense to separate business interests from financial assets; they use investment specialists who coordinate sourcing and screening of investment opportunities. Then there are clients in China and India. “They are quickly picking up in terms of professionalizing their wealth management and are very active in enhancing their knowledge as well as seeking ways of adapting the western family office concept to their business driven, high growth environment,” she says. “One of the main challenges for UHNW families in these countries is the fact that most of the family wealth is tied to a family business. In such a situation, the first critical step in creating a family office usually lies in diversifying this concentration risk and adopting an asset allocation approach to managing their wealth for the long term.” And the third group is European family offices establishing a presence in Asia in order to be in a better position to gain suitable exposure to the Asian growth story, typically through a Hong Kong or Singapore hub.

It can be a tricky market to service. “In our experience, single-family office clients require a much higher level of service and attention,” says Au-Yeung; HSBC services them through its HSBC Private Wealth Solutions business, which manages over US$100 billion of these assets worldwide. “Family members can be quite hands-on, especially with investment decisions.” There is perhaps a suspicion that needs to be addressed too. “Our advisers need to continually validate our objectivity to client families. To assure their independence, our advisers are not incentivised by product sales, nor measured by asset gathering.” And advice has to be customised – it’s not a one-size-fits-all sort of market. Lo says: “Due to the highly personal nature of the work, we have found that most families prefer to set up their own, bespoke, family office with a combination of their own trusted employees (often having served the family business for many years) and external experts with specialist skills,” including lawyers, accountants and tax advisors as well as investment professionals.

That said, it’s still an industry in its infancy. “The family office is a relatively new concept, with many still studying, comparing, developing and evolving their models,” says Au-yeung, who adds that family offices in Asia typically follow a US and European-style pattern. She says more and more families are using this approach, but says it is unclear how widespread they will become. “The definition is vague, and family offices tend to be very private,” she says. “We expect families to lean towards single-family offices as they prefer their affairs to be managed internally and separately from other wealthy families.”

Another theme that often comes from family wealth management is the impact on the family itself. “As an administrative centre supporting the family’s governance structure, the family office provides a unique platform to improve and promote communication and harmony among family members.” Perhaps this is one reason that multi-family office structures are relatively rare in Asia. But they do have some merit. “Rising costs, a difficult investment climate, and a desire for a breadth of services tend to drive families to partner with larger multi-family offices,” says Au-Yeung. Lo says multi-family offices serve the needs of, at most, six or seven families; this sort of model is more common than third party-owned commercial service providers branded as family offices (multi client family offices, as Lo calls them), which can serve as many as 50 families – a model that is common in the United States.

Above all, though, Asia is characterised by a stronger sense of possibility, and of momentum in new wealth generation. Delcourt summarizes it like this. “Europe has a tendency to look at tomorrow as a zone of risk. Asia has a tendency to look at tomorrow as a zone of opportunity.”

PART 3: PHILANTHROPY

Like family office structures, philanthropy is professionalising in Asia. “There are increased expectations of transparency and accountability and evidence of social impact,” says Cynthia D’anjou-Brown, senior philanthropy and governance advisor, HSBC Private Bank, which manages more than US$1 billion in assets and handled US$50 million of donations on behalf of clients in 2010. She says the definition of what constitutes philanthropy is broadening, from informal charity to structured grant-making, to investments with social value. The young generation is having an impact here. “There appears to be a high engagement of donors at a younger age and a trend towards working with family members,” she says.

Philanthropy in Asia differs from the rest of the world in some crucial ways. One is the dominance of education in giving programs. A recent study by UBS and INSEAD found that education is likely to account for 35% of giving in Asia in 2011; the next biggest cause – poverty alleviation – accounts for just 12%. “These are strong cultural roots that support education, tied to Confucian, Hindu and other Asian traditions,” says Jenny Santi at UBS Philanthropy Services. And many who have risen from poverty recall either their lack of education or the gift of being the first in their family to receive it. “One of the most deep seated reflections they have is that they were deprived of a high quality education, so want to give back in that sector; or they recall that the only reason they were successful was because somebody gave them a handout and made a difference in their lives,” she says.

Other banks confirm this: D’anjou-Brown says nearly half of the donations HSBC administered on behalf of charitable trusts and foundations in Hong Kong over the period from July 2010 to June 2011 were allocated to educational projects, compared to one fifth for social services and one tenth to health and medical services. Few philanthropists in Asia donate to environment or conservation themes, animal protection or culture.

One can argue that the Asian cultural emphasis on family is also relevant to the way people give, and distinguishes it from more individualist approaches in North America. “In Asia the older dominant religions, the social structure of the clan, and collectivism breed a culture of caring for the large extended family and community,” says D’anjou-Brown.

The UBS study found that giving was chiefly domestic, although D’anjou-Brown says there is a trend towards giving internationally – particularly what she calls “diaspora giving”. In particular she sees a growth in donations to mainland China.

As with estate planning, much of the important advice given around philanthropy is structural: choosing the legal entity for giving and ensuring it is properly set up in terms of succession, flexibility, tax advantages, liability, privacy and compliance. “A charitable trust or foundation managed by a professional or corporation trustee is an excellent choice because it provides better succession arrangement and need not rely solely on individual directors as in the case of a company,” says D’anjou-Brown. It is vital to be clear on what a donor wants to achieve, and how to measure it. Measurable results are a renewed focus in Asian giving.

The rise of governance also has an impact on philanthropy. CSR Asia says that 87% of family businesses participate in CSR activities, though only 53% have a policy and 39% have clear CSR goals and targets.

Many banks report an increasing insistence on direct involvement in charitable initiatives. “Rather than ‘I donate so much to such and such an organization’, people want to be able to help advise on a  philanthropic project, and to get involved,” says Delcourt. “It’s not just about a financial return, but for people to get their own return – to see that what they do has a positive influence, and a multiplying factor. We continue to support a number of institutions which are applying the private equity way of thinking to philanthropy.”

Where asset markets grow, mutual funds follow. As the CNH, or dim sum, bond market develops around offshore issues in RMB, an increasingly well-diversified asset management industry is taking shape alongside it.

Hard data is difficult to come by, but Asiamoney is aware of almost 30 separate mutual funds or similar investment structures investing mainly in offshore RMB bonds. Already, there is a market with several clearly defined strategies: some focus on credit, others high grade, while some combine bond exposure with deposits and futures, and still others bolster their portfolios with Asian dollar high yield deals which they swap back into RMB.

At one end of the market are the big international names one would expect to see in any new debt market: HSBC, Schroders, UBS, Barclays. Alongside them are a host of home-grown Hong Kong or Chinese names: Haitong, Hang Seng, Citic, Ping An. Some are on their second or third funds. HSBC already has a US$500 million Cayman-domiciled fund, the HSBC RMB Bond Fund, and has just launched a UCITS-compliant fund domiciled in Luxembourg to broaden the reach to a wider audience, particularly clients in Europe. It is launching an RMB currency fund in North America and will look at other structures too. “It’s fair to say that Hong Kong is the home of the offshore RMB, and the home market of HSBC,” says Geoffrey Lunt, director and senior product specialist for fixed income at HSBC Global Asset Management. “For other fund managers this may be a peripheral activity; for us it’s at the very centre of what we do.”

Any discussion about offshore RMB quickly reaches the subject of the supply and demand imbalance: RMB deposits in Hong Kong reached RMB609 billion at the end of August and have at times routinely grown by 10% per month. The need for these assets to be invested in more yield-producing assets has created an imbalance that has, in the past, allowed some very average credit to raise money at very low rates. But every fund manager spoken to by Asiamoney described a relatively easy time allocating the funds they raise, and getting access to the bonds they want.

“We have not had significant trouble investing that money,” says Lunt of HSBC’s $500 million fund. “We are very happy with the way the market has developed and we’ve been able to cope with a lot of the demand we’ve seen for the product.”

Chris Faddy, Head of Distribution at Barclays Capital Fund Solutions for ex-Japan Asia, says fund managers on Barclays’ Renminbi Bond Fund – launched in Singapore in April – have had no problem getting the securities they prefer. “We are extremely aware of the discussion around liquidity,” he says. “However, our experience has been that we have got a full or 80% allocation of every single primary issue we have participated in. The key to participation is relationships: either the fund managers like ourselves that are part of an investment bank, or those with strong relationships with the key brokers, will get the better access.”

Similarly at Singapore’s Fullerton Asset Management, Patrick Yeo says Fullerton’s offshore RMB fund – with US$245 million under management – “could easily go up to $400 or $500 million” without running into problems with allocation. Again, it’s about relationships, he says. “One of our strengths is that we have pretty good relationships with our counterparts,” he says. “Temasek [which owns Fullerton] is an investor in a lot of the Chinese banks such as Bank of China, which is one of the major players in the CNH market, so if they bring in deals and we participate, we tend to get very good allocation.”

And the many local Chinese players report a similar experience. Ben Rudd is executive director and head of overseas investment at Ping An Asset Management (HK), which has seen its RMB fund climb from RMB205 million at inception to RMB1.55 billion, with precisely one day of net redemptions along the way. “Although competition is quite intense in the new issuance market, based on existing relationships with both Chinese and international banks and our strong brand and team, we are normally able to get a high allocation for our issues in primary deals of 80 to 100% of the desired size,” he says in written responses to questions from Asiamoney.

Getting in at the primary market level is crucial, because demand is pushing the secondary markets to much less appealing levels, where there is liquidity at all. “We can’t be buying on the secondary market all the time – that would reduce yield,” says Faddy at Barclays. “The difference between primary and secondary on an issue could be over 1, 1.5%. We picked up Air Liquide on the primary market; those types of securities are trading 100 points under on the secondary market.” That said, secondary market activity is improving; where average ticket size in secondary trading was around $3-5 million at the end of 2010, it is now more like $10-30 million, Rudd says, and in some cases as high as $75 million, a function of increased issuance and the appearance of new trading desks. “Clearly liquidity has surged dramatically for the last nine months,” he says.

There are three reasons concerns about allocation and liquidity have eased. One is that many funds have been smart about the amount of assets they are prepared to accept. “At no stage did we want to compromise our clients by promising too much capacity to them,” says Lunt. “We have been very careful about the growth of our funds in this area.” Faddy makes the same point: “We have been very deliberate in building our asset base slowly. To actively participate in the primary market we need to make sure we don’t grow our assets too quickly.”

Another reason is that the market has now reached a decent size: just over RMB200 billion at the time of writing. It has become reasonably diversified by industry, credit quality and geography – though not yet really by maturity – and this has made life easier for managers trying to pursue a particular strategy rather than just having to buy assets in order to get something. “It has not been too difficult to diversify the portfolio,” says Rudd. With size has come a certain resilience; Lunt notes how encouraging it was to see two-way pricing maintained in the market throughout the recent global volatility. And there’s little reason to expect supply to fade. “In the last few weeks of market disruptions, this [offshore RMB] was one of the few that was effectively still open,” says Suanjin Tan, portfolio manager at Blackrock, which invests in offshore RMB for its regional products and plans to launch a dedicated RMB fund. “We’re quite comfortable with the supply pipeline in this market. The expectation is for RMB30-40 billion in the last quarter of the year: there are lots of Chinese banks, Chinese quasi-sovereigns and multinationals planning to issue.” Others think the figure could be higher.

But the third, and perhaps the most important, is that investor attitudes towards offshore RMB have changed. Where once investors appeared to be prepared to buy anything regardless of cost, quality or investor protection, times have changed, and clearly for the better.

“Initially the market was characterized by some poor quality issuance, given the excess of demand over supply,” says Lunt. “I don’t necessarily mean that the companies were bad, just that the covenants on the bonds were not tight and the yields were far too low, with disclosure below what you would hope for in developed markets.”

Investor patterns have been of particular interest to BlackRock as they prepare their fund. “Most participants looked to the market just for FX appreciation until recently,” says Tan. “There was not a lot of differentiation on the credit quality of companies in the market. But with volatility investors have started to realise that one credit is not necessarily the same as another, and have tried to work out what is the correct premium for that level of risk. That is a very healthy development.”

Changed expectations about currency appreciation are one reason for this shift, but there’s also perhaps a realisation among issuers that they need to pay more for their money in a difficult global environment. “Fund managers like ourselves are more cautious, worrying that if investors get jittery about this market they might pull funds out,” says Yeo at Fullerton. “We are adopting a wait and see attitude. But things have settled down: it’s a matter of issuers coming to terms with having to offer a higher yield to the market.” When Khazanah priced a RMB500 million deal in October, for example, it initially sought to pay a 2% coupon on its three-year deal, but accepted it would have to pay closer to 3% in the end. “When the market started, ICBC was issuing a two year bond at 1.1% and the market was lapping it up,” he says. “That will no longer be the case. Otherwise investors like ourselves are prepared to look away, buy in the Asian dollar space, and switch it back to RMB.”

Fund managers have taken a number of different approaches to the RMB market. Many of the earliest players were local, and these have tended to be more comfortable with credit. Haitong International Asset Management, for example, launched the first RMB fixed income mutual fund in Hong Kong in August 2010, following it with a private placement fund and has announced a dedicated high yield bond fund, with classes in RMB for Hong Kong investors and dollars for overseas, targeting a yearly return of 7-8%. (Haitong did not respond to requests for an update on the fund’s progress before Asiamoney’s deadline.)  Citic Securities International launched a hedge fund structure in this area, the CSI RMB Fund, which takes on multiple strategies including foreign exchange, interest rate and fixed income securities in RMB.  Earlier this year it was talking about 15-20% annual returns, including the currency appreciation; however Citic told Asiamoney it was no longer allowed to talk about the fund for regulatory reasons.

Some internationals have opted to go to the other end of the spectrum and stick with high grade. Barclays is an example: its UCITS-compliant fund will always be investment grade, on average. “There were a lot of funds launched between November 2010 and March of this year, many of them out of Hong Kong from onshore Chinese managers with a presence offshore,” says Faddy. “A lot of them are credit funds, looking to pick the eyes of the high yield market. There was a time when a lot of companies who were finding it difficult to source funding onshore could do so offshore – you could get almost anything you wanted away at a price – and several funds were set up around what was happening in the market at that time. We took a different route.” In his view, the opportunity is among deposit holders who want to get a bit extra without risking the lot. “We are really looking to provide depositors with an alternative,” he says. “Depositors have been attracted to the letters RMB, but the bank deposits carry low rates; the next iteration for those depositors in their investment life cycle will be looking for yield. A high quality portfolio of the bonds is the best alternative for depositors.”

Still others will venture into high yield, but with strict criteria around what they buy. “We would consider any bond that comes on to the market,” says Lunt at HSBC. “There are very good high yield issues available in CNH.”  But “We are absolutely determined not to invest in anything we don’t fully understand. Unrated issuance isn’t necessarily of a lower quality, but it’s very important in this market to have a very strong credit analysis platform and process.”

That will also be the attitude of the BlackRock fund when its new fund arrives. “It’s less that we feel that every high yield issuer is going to face problems; it’s more that there are some names that offer good value, and others that are less compelling,” says Neil Weller, portfolio manager.

Some internationals have taken the approach of mixing RMB bond exposure with other opportunities. In this respect, the UBS RMB Fixed Income Fund is interesting. The fund can only invest in investment grade bonds, and must maintain an average duration below three years. “Based on these two investment restrictions, we can cut down the credit and interest rate risk in the portfolio,” says Ben Yuen, head of fixed income for pan-Asia, at UBS. But against these restrictions, it can put up to 20% of its assets into US dollar Asian investment grade credit, and hedge it back to RMB. “Why? Because the market is quite green, and the universe is small for the offshore RMB bond market.” At the time of writing 18% of the fund’s NAV was used in this way.

Another distinguishing factor is that the fund can invest in RMB deposits, allowing it to invest in futures when they provide a better potential return for the portfolio. This is useful because of the way the market has been behaving: the spread between a five-year government bond in CNH and CNY is about 1.8%, but as recently as July stood at 3.4%. That sort of movement creates opportunities in futures markets.

This approach is helpful when there is high demand for primary securities. “We are not going to force ourselves to invest all our assets in bonds,” says Yuen. “We are holding short term paper to allow us to pick up higher CNH interest rate opportunities in futures. Our short-duration strategy seems quite effective in this market environment.”

Not everyone is sure these arbitrage gyrations are the right place for fund managers to be. “It’s something you’ve got to be very careful with,” says Weller at BlackRock. “The positioning is prone to get very stretched, and at times of illiquidity we’re all aware of what can happen when everyone is positioned the same way around.”

UBS’s approach of allowing some investment in Asian dollar paper is also used at Fullerton. About 25% of the fund is invested in this way. “It gives us a bit of enhanced liquidity, as I the dollar market is more developed,” Yue says. Unlike the UBS product, though, Fullerton can and does invest in high yield, and even unrated bonds; like HSBC, Fullerton assigns a credit rating to any security, and will do so through internal credit work if external ratings are not in place.

The market continues to face teething problems; one widespread complaint is that there is no investable benchmark available. But as the market develops, issues like this will be ironed out. The next characteristic is likely to be a growth in UCITS structures, reflecting increasing demand for these assets progressively further afield from Hong Kong. RMB is, increasingly, a global story.

BOX: RMB and gold

As the offshore RMB bond market has developed, more and more investment classes have grown around it. In October another was added: gold.

The Chinese Gold & Silver Exchange in Hong Kong launched the world’s first offshore RMB-denominated spot gold contract in order to attract some of the RMB circulating outside mainland China. “This product will help with that circulation, rather than the money having to stay in deposits,” says Haywood Cheung, president. Trading has to go through an exchange member – of the 171 members of the exchange, 27 had registered to trade this new contract as of late October – suggesting that initially much of the interest may be from people who physically need the gold, such as goldsmiths and jewelers. That said, there is an electronic platform for trading too, with leverage available of up to 20 times – and the ability to leverage RMB may prove the most attractive element to mainstream investors.

Part of the appeal is that both gold and RMB are perceived as safe investments. “Investors recognize gold as a safe haven, and if the gold is denominated in RMB they are double safe-guarded, because the RMB at this moment is a stable currency,” Cheung says. “It’s a win-win case.”

KNOC

Korea National Oil Corp (KNOC) launched a US$1 billion five-year bond early Thursday morning (Asia time), which some billed as a market re-opening deal, and others as an opportunistic use of a brief window.

This was the first dollar benchmark from Asia for more than a month, since fellow Korean borrower Kexim raised US$1 billion. Its reception was closely watched, and considered successful, though some in the market suggested the issuer may have overpaid.

The deal, led by Barclays Capital, Bank of America Merrill Lynch, HSBC, KDB and Royal Bank of Scotland as joint bookrunners, was about eight times subscribed during a 12-hour bookbuild with bids from more than 400 accounts. It priced at 310 basis points over Treasuries, which was inside initial price guidance of 330bp over; yield was 4.137%, based on a 4% coupon and a re-offer price of 99.387.

KNOC is a powerful, closely-watched and state-backed institution, but not a truly top-tier borrower in terms of rating; it is rated A1 by Moody’s and A by Standard & Poor’s. Nevertheless, any state-backed investment grade name borrowing in size is an influential trade, particularly since investors tend to see KNOC as exposure to the Korean state in general. “With the strong credit profile and strategic importance to Korea and the Korean economy, KNOC was able to successfully access the US$ market while a number of other Asian issuers in the pipeline remain sidelined,” said someone close to the deal.

Rival bankers were pleased to see a deal of this size get away, though there was some carping about whether the initial price guidance was wider than it needed to be, and opinions varied on the true significance of the deal.

“This is a market re-opening trade for Asia,” said someone close to the deal. “It was the first trade in benchmark size in hard currency for about six weeks and it has provided a lot of confidence to the market. It left a positive taste in everyone’s mouth.” Another added: “The transaction marks the reopening of the Asia ex-Japan US$ public primary market.” One bookrunner said that there was “certainly a good number of issuers looking at the markets” in light of the deal’s success, while noting that the timing was key. “Today’s market was on the back foot again,” he said, speaking on Thursday afternoon, Asia time. “The transaction would not have worked in the same shape or form today.”

But others were not so sure about its long-term impact. “It is good to see this get away, but the problem is you still don’t have any certainty about what is going to happen next in Europe, and one bad headline can destroy any confidence in the market,” said a banker. Another said: “I wouldn’t go so far as to say that this reopens the market for everybody.” Bankers both on and off the deal agreed that the outcome of Sunday’s summit on the eurozone would be key to subsequent issues.

On pricing, KNOC’s existing bonds due 2015 were trading at around 270 basis points when the deal priced, meaning that the initial guidance in particular – if not the final price – constituted a considerable new issue premium. “That initial guidance was a new issue premium of 60 basis points – that’s very, very wide,” said one banker. “That’s a no-brainer for investors. A book of $8 billion for $1 billion of issuance is insane. So could they have got away with starting out at a tighter price?” The deal tightened in the aftermarket and was trading at around 298 bp over Treasuries, a tightening of 12 points, on Thursday afternoon.

Those close to the deal defended the pricing, noting that a tightening of 20 basis points from guidance was impressive given the market conditions. “The initial pricing point was partially based on investor feedback, and partly based on what we have seen in the markets globally in terms of new issue premiums, in the 144a space and global emerging markets as well,” said someone close to the deal.

The deal sold chiefly to Asia (44%) and the USA (40%), with European investors more subdued (16%). More than half the book went to fund managers (57%), with the remainder being taken up by insurers (18%), banks (14%), retail (6%) and central banks and other public institutions (5%). The senior unsecured deal carries a put at par if at any stage the Korean government’s level of ownership drops below 51% of the company. The transaction formed part of KNOC’s global MTN programme, recently expanded from US$4 billion to US$6 billion. It followed a non-deal roadshow in September that took in global fixed income investors in Asia, Europe, the Middle East and the US.

Investors continue to show interest in commodity-related businesses, seeing them as resilient to market shocks; last week Standard & Poor’s issued a note saying that “the recent downturn in crude prices may be discomforting for Asia-Pacific oil and gas companies, but it’s unlikely to affect credit ratings.” Many oil and gas companies achieved solid earnings in the first half of the year, the report said, creating a buffer if cash flows decline over the next 12 months.

S$

The Singapore dollar bond market enjoyed a flurry of activity this week, with new or tap issues from Wharf and Cheung Kong (Holdings), and a third issue underway from Standard Chartered. The deals reflect the relative stability of the Singapore dollar as a funding market despite global volatility.

The Cheung Kong deal, one of two from Hong Kong heavyweights during the week, was a tap of an earlier S$500 million perpetual issue launched in September. The tap raised a further S$230 million through DBS and JP Morgan, who were also joint bookrunners on the original deal.

The tap attracted S$300 million in a one-day accelerated book-build. In keeping with many Singapore issues, the largest part of the buyer base was private banks, accounting for 75% of the allocation, followed by asset managers with 11%, insurers 10% and banks 4%. By region, it was overwhelmingly locally placed, with 92% staying in Singapore.

Bankers are turning to the Singapore dollar as its safe haven status and a steady investor base protects it from turmoil in the US dollar markets. “After the initial Cheung Kong deal [in September] there were a number of negative events out of Europe, and the credit market by and large shut down for new issues,” said someone close to the deal. “But I would say the Sing dollar perpetual from Cheung Kong was one of the securities that held up reasonably well. Since late last week the market has staged a rally in credit, and the perpetual is back up to par. So it was very opportunistic, from the borrower’s perspective, to see market stability and to go back to the bond again.”

Earlier in the week fellow Hong Kong group Wharf Holdings had priced a S$250 million issue of seven-year bonds, increased from an initial target of just S$100 million after the books were three times covered. The deal, also led by DBS, paid a coupon of 4.3%, representing the low end of guidance. This deal was even more heavily dominated by Singapore buyers than Cheung Kong, selling 96% locally, although in this deal banks were the biggest part of the book at 41%, followed by 27% insurers, 20% private banks and 12% asset managers.

And on Thursday, Standard Chartered was in the market for a 10-year non-call five Singapore dollar benchmark, although the size of the bond was unclear as Euroweek went to press. Guidance was around 4.25%. Investors said they considered this as equivalent to a 35 basis point new issue premium versus fair value, and therefore attractive.

Why the activity? “Between the major markets in the Asia credit space – primarily the Singapore dollar, CNH and US dollar – the markets that are functional are the CNH and the Sing dollar,” says one banker. “There, you are still seeing trades getting done at the right price. It’s a contained market, anchored by strong local bids from private banks or insurance money; there are not many investors but it’s resilient.”

Dim sum

The CNH “dim sum” bond market sprung back into life this week after a three week hiatus. A RMB3 billion two-tranche raising by China National Petroleum Corp (CNPC), which owns PetroChina, was the most significant deal and is likely to herald a round of new issues.

The CNPC deal was made up of a RMB2.5 billion two-year tranche and a RMB500 million three-year. The two-year had a 2.55% coupon to yield 2.6%, and the three year 2.95% to yield 3%. HSBC and Bank of China were joint global coordinators, joined by Deutsche and ICBC as joint bookrunners.

CNPC was seen as an ideal name to reopen the market after a brief hiatus; it is rated Aa3/AA-/AA- and is the highest-rated Chinese corporate to have sold RMB-denominated bonds in Hong Kong. “It’s viewed very much as the next best thing to the sovereign,” said someone close to the deal. “It’s about as good a name as you’re going to get in Asia to start the market off again.”

The market had become slightly becalmed in previous weeks following a flurry of issuance from names including BP, Tesco, Air Liquide and BSH Bosch und Siemens. “At that point, the CNH market suffered what G3 markets had been suffering,” says one banker. “You had had a couple of weeks where the CNH market was working when other markets were not; at that point investors said ‘enough’s enough’ and took a big step back.” The CNPC deal had to move quickly when markets improved: a decision was made on Monday, then two roadshow teams presented simultaneously on Tuesday, one each in Singapore and Hong Kong. Work began on Wednesday with a 6.30am call with the issuer before bookbuilding began, concluding late on Wednesday night following lengthy debate on allocations. The deal was almost three times covered and received almost 100 orders.

While the deal was a success, those close to it notice that a change has taken place in investor sentiment towards CNH bonds, partly because of changed expectations about the likely performance of the currency itself. “Investors were previously saying they don’t mind a very low coupon and bond yield because they were expecting 3, 4, 5% of currency appreciation. That was a generally accepted view of the markets in the first half of the year,” said one banker. “It’s not the case now.” Alongside that, investors have become more cautious. “It’s a good thing for the market, because it means investors are starting to look at credits and comparing one against another: they like this name at this level, don’t like that name at that level. Earlier in the year, it was: I’ve got loads of CNH I need to put to work so let’s buy loads of credit bonds, because something is better than nothing.”

The CNPC deal followed a landmark dim sum sukuk from Khazanah Nasional, covered in Euroweek’s daily coverage on October 14; it raised RMB500 million in a three-year deal. The question now is what other issues will follow, since many bookrunners report a full pipeline representing a variety of credit quality.

First impressions are that strong and familiar names will appear soonest. For example, approvals have been passed for up to RMB40 billion of RMB-denominated subordinated debt by China Construction Bank, although clearly not all of that would be expected to appear in the dim sum markets; and Baosteel Group has received approval to issue up to RMB6.5 billion of dim sum bonds. But bankers suggest a range of potential issuers. “Will the next issues just be the good quality names? The first one or two, maybe, but there’s quite a lot in the pipeline at the lower end of investment grade,” says one DCM banker.

Another adds: “I don’t think this is a fully reopened market. I don’t think the floodgates are open and the whole pipeline will pop out in the next two to three weeks. But having had a correction, and with levels readjusted, investors do have money they are willing to put to work.”

Covered bonds
The long-awaited Australian covered bonds market has reached the starting line. Key legislation is now in place, with two of the country’s biggest banks preparing to hit the road to market landmark new issues.

Last week the Australian Banking Act Amendment, the enabling legislation for covered bond issuance from Australian deposit-taking institutions (ADIs), passed through parliament, receiving Royal Assent earlier this week. This concludes the legal side of the process. “The legislative approvals have now happened,” says Pierre Katerdjian, global head of credit markets at Westpac. “It basically means that Australian ADIs are able to issue covered bonds.”

That is not quite the whole picture, however. “The other leg is the prudential piece: APRA [the Australian Prudential Regulatory Authority, Australia’s banking regulator] has to amend APS 120, to create a framework for banks to issue,” says Katerdjian. “There will probably be a draft out in mid-November with a formal release in the new year.” But the fact that APRA’s prudential standards are not yet out is apparently not enough to stop issues beginning. “What APRA has said to the ADIs is basically: you can issue, but be mindful that we’re still finalizing the new APS rules.”

Banks have taken this to heart, and National Australia Bank and Commonwealth Bank of Australia are already preparing to market new issues. Both are expected to travel to the US and Europe, raising the prospect that they may make their maiden issues with tranches in both euros and dollars. NAB is understood to have arranged meetings starting from October 31, through Deutsche Bank, JP Morgan and NAB itself; Commonwealth Bank of Australia will be one week behind it, led by BNP Paribas, Morgan Stanley and CBA.

Neither is yet clear on the likely launch date for a deal, nor the size or currency. But the market expects to see them sooner rather than later. “I expect lawyers are drafting program documents and you will probably see the first deal launched in mid- to late November, subject to market conditions and regulatory approval,” Katerdjian says. “Into which jurisdiction they [CBA and NAB] issue is not yet clear given the early stages of the roadshows, but you would expect ADIs to issue covered bonds in both currencies over time.”

Both banks, and Australians generally, are likely to find a warm welcome in markets that have otherwise become somewhat cynical about the health of the banks who try to borrow from them. “It is very significant, first of all because the Australian banking system is in good shape and one of the safest banking systems in the world,” says Ted Lord, head of European covered bonds at Barclays Capital. “At a time when you have extreme market volatility and talk about a forced recapitalization of certain banks, it is nice to have a potentially large market open up where these issues are not the focus of attention. Investors are very keen, and Australians have a history of tapping into different capital markets around the world.”

Legislation limits covered bond issuance to 8% of total assets by any one Australian bank, but that still represents an extremely large potential pool of capital raising. “It depends on how successful the first issues are,” Lord says. “If you add up the assets that could potentially be raised, you have a potential issuance volume of around A$125 billion before you reach the ceiling – there’s a lot of scope there. Also the Australian covered bond market offers one of the few markets with the potential to build full curves in a variety of currencies.”

However, Katerdjian adds that Australian banks will have to make careful considerations around their volumes of issuance into a new offshore market, since that is already an area of scrutiny in a review of the Australian banking sector underway by rating agencies. “The expectation is, given market dynamics and liquidity treatments offshore compared to domestically, that we will see most ADI covered bond issuance go offshore. Balancing this has to be the hot topic of the offshore vs onshore wholesale funding mix for ADIs, particularly given the pending ratings agency reviews,” he says.

In the market’s favour is the fact that the Australian government is likely to support it if it means a better outcome for the local consumer.  “This is a market that should not only have legs but continue to grow,” Lord says. “It should be seen not just as a strategic move for banks who want to issue covered bonds. The government is realising that this is a viable market that could help with funding, and hence help the Australian population with lower mortgage rates.”

When the Swiss National Bank set a ceiling on the Swiss franc-euro exchange rate earlier this month, there were two key questions. One, does that mean the end of the Swiss franc as a safe haven currency? And two, if it does, then what takes its place?

On the first question, some big names are already calling a reversal in the Swiss franc’s fortunes beyond the 9% decline it experienced on the day of the SNB’s intervention; Goldman Sachs Asset Management chairman Jim O’Neill, for example, has said the Swiss franc may well fall back to parity with the US dollar before the end of the year, and drop well below its new cap against the euro.

But in Asia, it’s the second question is particularly interesting. Clearly the yen, somewhat bafflingly given Japan’s economic challenges, has already served something of that haven role, but Japan’s central bank has already taken efforts to alleviate the strength of its currency and is likely to do more. Instead, the currency that has received the most attention in this region is the Singapore dollar (one of O’Neill’s favourite alternative safe haven currencies). And this is of particular interest to the private banking community.

Lee Boon Keng is an example of a Singapore-based private banker who believes there are good times ahead for the Sing dollar. Look out for the private banking report in our October edition for more on his theme, but in summary he believes the Singapore dollar will become the new safe haven currency due to similarities in the two economies, and factors that give international investors comfort such as Singapore’s rule of law and its familiarity as a world financial centre, with good governance. He considers a strong Singapore dollar “one of the things that is least uncertain” in an otherwise endlessly uncertain world. Singapore is, after all, a AAA-rated economy, which can no longer be said of the USA.

Not everyone sees it that way. UBS’s chief investment strategist in the wealth management team in Singapore, Kelvin Tay, says the government bond market is too small and illiquid for Singapore to have meaningful safe haven status – plus, he thinks the inflows would be problematic for the Monetary Authority of Singapore, which manages monetary policy through the exchange rate, and could well be resisted. Even before the Swiss franc’s cap, there were murmurings of unrest at the MAS, which had already allowed the Sing dollar to rise 6.5% against the US dollar in the year up to August; it never comments on interventions but was believed to have stepped in to currency markets that month to prevent the US dollar falling below US$1.20 (it’s at US1.23 today).

Others say the correlation between the Singapore dollar and investor sentiment makes it riskier than safe haven investors would like – a claim that is also made about other safe haven candidates, the Norwegian krone and Swedish krona. But there’s little doubt that, whether investors call it a safe haven or a leveraged bet or a play on the relative strength of emerging markets, the Singapore dollar is going to receive more inflows; and even if the MAS intervenes to stop the currency soaring, it doesn’t look at all likely to deteriorate. In a difficult market environment, that’s enough for many investors. The next question: what to do with your Sing dollars once you have them. Don’t be surprised to see strong-yielding, stable REITs start to attract more interest.

Singapore remains a vibrant market for financial professionals seeking to move onwards and upwards.

“The hiring market remains strong,” says David Webbe, head of financial services for southeast Asia at Korn Ferry International. “Market volatility over the last 12 months has made hirers a little more cautious, but there are still key drivers that mean banks will continue to hire in southeast Asia.”

One of those drivers is location. Singapore is a coverage hub for southeast Asian emerging economies, particularly Indonesia, whose economy has not looked this vibrant for a decade, but also Malaysia, Thailand and even India. The growth of these economies creates clear opportunity for the banks and accountants that service them, and for qualified staff.

“The most significant issue facing southeast Asia hiring today is a relatively tight talent pool,” says Webbe. “If you are trying to make impactful hiring there is still a lot of competition for the best people – and from the search industry perspective, pressure to source the best people.”

Banking headhunters report widespread demand: investment banking, particularly M&A; global markets; private equity; commodities; and in sector terms, coverage for metals and mining, oil and gas, and consumer.

This time last year private banking was the area of greatest demand, and it’s still resilient. “Private banking will remain a growth area because you have an increasing number of high net worth and ultra high net worth people in southeast Asia,” says Webbe, while the arrival of European-based private banks in greater force – Julius Baer being a prime example – has also created demand. “But I think a lesson learned over the last few years is that the experienced private banking professionals make the biggest impact rather than out-of-the-box hires. This has only increased pressure on the existing talent pool.”

In accounting, the latest annual survey for Hong Kong and Singapore financial services recruitment from consultancy Ambition reports particular demand at the junior and middle management level, “rather than at the senior level where hires have been more strategic and lower in volume.” Ambition found accountancy hiring to be strongest in IT&T organizations, as well as offshore oil and gas, services, and healthcare or biotech businesses.  “Skill shortages exist for candidates with excellent technical accounting knowledge and equally candidates with genuine business partnering experience.” Ambition also noted demand in tax and treasury. “Treasury and cash management continue to be a key focus for a number of businesses where healthy cash flow is critical. High caliber treasury candidates are notoriously difficult to find.” The global financial crisis has also increased focus on audit, risk and compliance.

Professionals can expect to be well paid. “Compensation packages remain competitive,” says Webbe. “The best bankers are paid more or less in line with the pay they’ve seen in good years before.” It is easier to negotiate a good package if you are multilingual. “Language skills are still very strongly sought after. The talent pool in Asia is tight; even tighter are highly capable bankers who are fluent in Mandarin or Bahasa.”

Outside banking, the Ambition survey found that a head of audit with 12-15 years experience could expect an annual salary in the range S$180,000-$350,000; a group or regional CFO $250,000 to $500,000; and a head of tax, $180,000-$350,000.

A senior investment banker, a well-established managing director running a sector or coverage for southeast Asia, would probably be getting total compensation of around US$1.5 million. “But there is a real spread on what bankers get paid,” says one headhunter. “$1.5 million is for a mid-ranking MD, not a superstar, but a solid producer.  A regional business head based here would probably be looking at about $3 million or thereabouts.” Mid-ranking bankers below the MD level are likely on around $500,000 to $750,000 per year, and entry level of associates at investment banks is around $125,000, with bonuses which might add $25-50,000 on top of that depending on how good the year is.

“Singapore is not the most highly paid area for investment bankers: Hong Kong is much more highly paid, driven by China primarily,” says one headhunter. He says 2010 bonuses were typically down 10-20% on the  previous year. “We’re still a long way down from 07 in most cases. But nobody’s starving on the back of those numbers. Lots of people are earning $750,000 to $1 million a year, which for normal people in the real world, is a lot of money.”

Singapore’s institutions were cagey about the prospect of a new Qantas-backed airline yesterday, while analysts raised questions both about the state’s willingness to approve such an airline and the logistics of making it work.

Singapore Airlines declined to comment, saying that it would be inappropriate to do so when Qantas itself had not confirmed the new venture. However, the airline is thought to be sanguine about the idea of increased access, feeling that it already faces intense competition from Asian or global airlines on almost every route it flies.

Changi Airport spokesman Ivan Tan said it would be “premature” to comment, saying that any application for an Air Operator Certificate would be handled by the Civil Aviation Authority of Singapore; the CAAS had not responded to phone and written inquiries by press time.

But Singapore state insiders said they did not expect any major hurdle to Qantas setting up provided that it followed the same ownership structure as applies to Jetstar Asia, in which 49% of the airline is held by Qantas and 51% by a Singaporean. It appears that the structure would be identical right down to the Singaporean partner: Jetstar’s major shareholder is Westbrook Investments Pte Ltd, which is wholly owned by Choo Teck Wong, widely known as Dennis Choo (see box), and it is understood the same vehicle would be used in the new full-service airline.

But analysts added that Singapore would likely expect something in return for an approval. “The Singapore government has said that its priority is to promote Singapore as an air hub,” said Siva Govindasamy, the Singapore-based Asia managing editor of Flightglobal Group. “A few years ago that marked a slight change in tack. While Singapore Airlines is still an important part of the strategy, it is not the main part – that is Changi [the airport].”

Consequently Singapore could be amenable to such a new airline, but approval “I think would lead to objections from airlines based here, chiefly Singapore Airlines,” Govindasamy said. “And that could lead to a quid pro quo where Singapore Airlines say: we allowed you guys to set up here, why can’t we do something in Australia?” In particular, Singapore Airlines has long coveted greater access to trans-Pacific routes.

CLSA aviation analyst Robert Bruce said “the Singapore government would be supportive of any new airlines that are going to be based out of Singapore.” He said the government’s support for new low-cost carriers over the last five years “have assisted in Singapore’s major strategic focus of growing as a tourism hub and making Changi one of the most successful airport hubs in the world.” He said Singapore is increasingly aware of the risk of losing its hub status to long-haul carriers in the Middle East, “which have developed an ability to overfly Singapore”, and that fear would fuel support of new Singapore-based airlines.

Others were less sure. “The only bit of it that’s surprising is that the Singaporeans would allow them to do it,” said Peter Harbison, chairman of the Asia Pacific Centre for Aviation, who described the method of getting in by staying under 50% ownership as “a side door”. “Allowing a flag carrier in would be quite a substantial step up in terms of the liberalisation process.” He added: “When that Qantas Asia, or whatever it’s called, aircraft is flying out of Singapore, it’s operating on Singapore bilateral rights and designated as a Singapore carrier – something that Singapore Airlines won’t like at all. The new airline will be up against Singapore Airlines in bidding for slots.”

One could also argue that the Australian government’s rejection of Singapore Exchange’s bid for the ASX could influence the Singapore state’s decision on a new airline, although the situations are different: Singapore Exchange proposed a takeover (subsequently re-aligned as a merger), while Qantas would simply be launching a business within which it is a minority shareholder. Additionally, the fact that Qantas is not state-owned removes a potential objection, as does the fact that Singapore has no equivalent to the Foreign Investment Review Board.

“They’re apples and oranges,” says someone who has worked closely in Singapore-Australia trade. “Frankly Singapore was very happy to entertain Jetstar, to get involved in it and to spin it off, because it was part of the strategy to develop Singapore as an aviation hub. And if this [new Qantas airline] is only planning on running 20 planes out of here, it’s not going to be anywhere close to competition for Singapore Airlines.” This person says the key to Singapore’s satisfaction will be “how much Singapore equity is in it. But they can always see where the long term interest is.”

BREAKOUT

Who is Dennis Choo?

When a new shareholder structure was hammered out for Jetstar Asia in 2009, Australian investors and aviation commentators became acquainted with the name of Dennis Choo. Choo Teck Wong, to give him his full Chinese name, is the owner of a Singapore company called Westbrook Investments Pte Ltd, which in the 2009 restructuring became the 51% shareholder of Newstar Investment Holdings Pte Ltd, which in turn is a holding company for Jetstar Asia.

Though Choo became chairman of the Newstar holding company in 2009, he keeps a low profile. “He’s fairly unassuming, fairly low key,” says one who knows him.

Qantas, though, has known him for years through his travel agency, Tour East Group, which was formed in Singapore in the 1970s. It has a long relationship with Qantas in Singapore, one that got closer when Tour East Australia was launched in 2007 as a joint venture with Qantas. Choo is Group Managing Director of Tour East out of Singapore. “He has been a long-serving Qantas travel agent in Singapore, and has a good relationship with Qantas build over the very long term,” says CLSA analyst Robert Bruce.

Choo will now also be a 51% shareholder in the new Qantas full service airline in Singapore; Choo’s participation as the local partner is what allows Qantas to set up, just as it was with Jetstar. It’s not clear, though, if Singaporean parties are responsible for committing all the capital to these ventures, or if the bulk of it has originated from Australia.

This week the Australian Treasury did what most in the market had seen as inevitable for months: it nixed the Singapore Exchange’s bid for its Australian counterpart, the ASX. Today, in a somewhat forlorn statement, the SGX sad that “the parties have agreed to mutually terminate the merger implementation agreement entered into on 25 October 2010.” No revisions to the bid, then; it’s over.

The fact that the SGX won’t try again reflects the fact that the bid was rejected because of something it could do absolutely nothing about: Australian political sensitivity. Partly this was about the tricky question of the Australian national interest, which has always been a somewhat nebulous concept. But also it was the fact that there could never – literally never – have been a worse time to get a politically dicey development through an Australian parliament. The government has no majority; it is only in office at all because of the assistance of a couple of independent parliamentarians who must be kept happy. In such circumstances, nobody was ever going to expend the political capital required in order to change the law and allow the national stock exchange to be taken over by a foreigner. Who gets re-elected on a platform like that?

The odd thing is that everybody seemed to know all this from the start. SGX CEO Magnus Bocker – who has completed more exchange mergers than anyone – built his pitch from the outset on efficiencies, logic, technology, liquidity; the nuts and bolts of an exchange merger in a new world of capital flows. And he was right on all of that, as the ASX could clearly see, hence the fact it backed the bid from the outset. But that was never the point on which the deal would thrive or fail. Bocker thought the force of this logical argument would be enough to get it through Australian politics and public opinion, and in that he miscalculated.

In the short term, the only people to have benefited are the banks who made a great deal of money in M&A advisory fees on a deal that they must have suspected from the outset could not go through. But what has it done to Bocker and the SGX?

It may not all be bad. It has certainly raised the profile of the SGX at a time when global exchange mergers are once again the flavour of the month. If Bocker has successfully represented Singapore as the best possible hub through which to bring Asian liquidity – current and future – into an international alliance, then it may be well placed to tie up either with Bocker’s old employer, Nasdaq OMX, or a mooted suitor like the Chicago Mercantile Exchange. If so, then everything will depend on the terms through which SGX enters such a deal. SGX being bought outright by a US institution would be politically difficult in Singapore. And if Bocker is right in thinking Asia will make up half of the world’s financial markets within a decade, then its role in any merged global group ought to reflect that. But some sort of partnership, or a stakeholding allowing Singapore access to a global network while retaining some autonomy, might work well. Market chat is about CME, but our money’s on Nasdaq.

If none of that comes to bear, though, Bocker’s reputation will unquestionably have been dented. The ASX bid was the signature flourish of a new CEO in his first year. If all it did was cost a ton of money in advisory fees, that’s not such a great way to start.

So what now for Magnus Bocker and the SGX?

The first thing the exchange did on Tuesday was to work out whether the coded language from the Treasurer’s office was a flat no or an invitation to revise the terms of the deal to turn it into a yes. SGX insiders say there will be no further move until a more detailed final decision is made by the Treasurer and communicated officially to the SGX. But it doesn’t look good: Bocker noted on Tuesday evening that the objections did not appear to be structural, and if that’s the case, it moves the problem into territory he can’t do anything about. Tweaking the deal with board seats and governance structures is fine, but it’s not going to make a difference when the substance of the problem is political expediency and the national interest.

Some who have worked with him believe that, from day one, Bocker will have pitched up in Singapore with a list of potential deals for SGX upon which the ASX just happened to be number one. They feel that he’ll simply turn to another target to bring about the exchange consolidation he sees as inevitable in Asia.

But it’s not really that simple. There are not obvious combinations among Asian exchanges in the way that there were in single-currency Europe. Tie-ups and alliances, yes – why not cement ties between Singapore and India, in order to make Singapore a safe and steady entrepot for capital into that vast market in the same way Hong Kong has done with China? But in terms of full mergers, the candidates are not so compelling. Hong Kong is a competitor. Tokyo and Seoul are too far away, physically and culturally, to have much relevance as a combined entity. And any sense of Singapore taking over a southeast Asian peer such as Kuala Lumpur or Jakarta would be politically nightmarish, as Singapore’s sovereign fund Temasek found out some years ago when buying a majority stake in Thailand’s Shin Corporation (the resulting political fallout was a large part of the reason the Thai government fell). If anything, dark pool liquidity providers like Chi-X, seen as competitors to exchanges, would be an easier route of combination.

Instead, Bocker is likely to look on a different scale altogether: integrating Asia into global capital flows, and making Singapore the hub through which that happens. And the most obvious way to do that is to go back to his old employer, Nasdaq OMX, where he was president before moving to SGX.

Bocker has seen first-hand the benefits that can come from binding a smaller partner in with a global network of capital infrastructure, because that’s exactly the deal he secured for the sundry Scandinavian and Baltic exchanges that were folded into OMX under his watch.

Singapore is no Finland or Latvia, though, and would expect a central seat in any global exchange alliance: as Bocker has consistently pointed out, Asia could account for half of all global financial markets within a decade, so simply being eaten by a global exchange will not be an option. So if this is the way that Bocker wants to pilot the SGX, the first thing he will have to do is see how the dust settles on the Nasdaq OMX, NYSE Euronext and Deutsche Borse farrago; and then to work out the best possible deal that could be struck in this new world of global exchanges. In this respect, he is in somewhat more familiar territory: helping a smaller exchange to punch above its weight within an international alliance.

In the meantime, he will wait for the Treasury to spell out formally just what its problem is with the SGX bid, in the unlikely event that the situation can be retrieved. But Plan B will already be gathering pace.