Australia is, as some of its natives say, a quarry and a breadbasket. Mining and farming have been two of the main drivers of its economy for decades and will only grow in importance as Asian industrialisation and wealth brings greater demand for resources and crops.

Both also represent natural asset classes for investment. But, while Australia’s mining industry is within easy reach of investors through the dozens of listed resource companies, getting exposure to the agricultural and pastoral theme has been harder. AWB Limited, which is active in grain trading, rural businesses and financial services, is a rare example of a large-cap listed stock in the agribusiness sector.

Instead, two very different themes have emerged around Australian agriculture as an investment class: the tax-effective managed investment scheme, and institutional products.

The first class has a very mixed reputation in Australia. The Australian Taxation Office, among the more draconian of the world’s tax bodies, has long granted a tax deduction on interest when investors borrow to invest in, among other things, agriculture. This fact has led to a wealth of managed investment schemes being developed – collective investment products which put money into a dazzling range of livestock and horticultural possibilities, including vineyards, ostrich farming, truffles, timber, cricket bat willow and macadamia nut plantations.

The form with these schemes has typically been that the investor participates in a lease of some land that is used for a crop or plant (or, in the case of livestock, animals themselves). A fee is then paid to a manager who would, in the case of a horticultural scheme for example, be responsible for planting, maintaining and harvesting the crop, and for finding a buyer. To make the best of the tax benefit, the structure is usually that the sponsor (or an affiliated bank) lends the buyer the money to make the investment, charging interest, which then becomes a tax deduction.

Even in the best of times many of these products have had a very bad name. Fundamentally, financial planners have felt that too many investors have got so caught up in the tax exemption (natural in a place where many people lose half their income to tax) and completely lost sight of the question of whether the underlying investment is actually any good. While there are reputable players involved – Macquarie has become a major player in this area – the ground is fertile for disreputable players, and when that happens, there can be a double hit: investors can not only lose their money if the scheme fails, but might also find the tax exemption revoked if the ATO decides there was never any realistic chance of it making viable income in the first place. One experienced financial planner tells Cerulli he only knows of one investor who has ever held one of these investments to maturity and received a return on their capital.

Through the 2000s the sector did appear to raise its game and improve transparency, performance and professionalism. For investors who could live with the fact that the schemes, even if successful, would take between five and 20 years to generate income, and that in almost all cases they didn’t own but leased the land, they might even have made sense. But things turned really sour in the financial crisis. 

Then, the two largest managed investment schemes in the country, the forestry schemes Great Southern and Timbercorp, collapsed, affecting 61,000 investors who had put $3 billion into them. These were supposed to be profitable and environmentally sound schemes which would help reduce reliance on old growth forests and support the plantation of millions of hectares of plantation timber. It’s hard to see an obvious way back into the mainstream for managed investment schemes.

There is, however, another field: institutional funds. Macquarie, for example, has a business arm called Macquarie Agricultural Funds Management which manages assets from beef cattle and dairy to grains, oil seeds, wheat, canola, sorghum, barley, almonds and wine grapes for institutional clients. The most visible expression of this is the Macquarie Pastoral Fund, which has raised A$800 million in investments and commitments and invested over A$500 million of it, mainly for institutions. All told Macquarie manages more than three million hectares of agricultural assets in Australia, and manages about A$1 billion in the sector, making it one of the largest agribusiness groups in the country.

For groups like Macquarie land ownership is only part of a broader range of businesses: another line would be agricultural risk products, if for example Cadbury wanted to hedge its cocoa exposure. Shipping finance and advisory services to agribusiness companies, and agricultural commodities research, are part of the same overall business.

But the ownership of land, cattle and crop is the most visible part of it, and it rests on a straightforward macro theme: giving investors exposure to the increasing protein consumption in emerging markets, particularly Asia, and more particularly China. Australia is ideally placed for export to these markets; it is acknowledged worldwide as a green, clean, disease free provider; and it is among the world leaders by volume in terms of exports of things like beef and grain.

Customers for this exposure tend to be institutional, partly because any product that gives exposure to farm production tends to be long-term by necessity, often a closed-end, lock-up fund with a five to eight year maturity. Superannuation funds are among the potential buyers: in July three super funds, the Catholic Superannuation Retirement Fund, AustralianSuper, and Auscoal, alongside AMP Capital Investors, raised about $200 million to invest in Australian farms through the Sustainable Agriculture Fund. The premise here was a sustainable, diversified farming product rather than any kind of tax minimisation scheme, and was developed with Melbourne University’s Land and Environment Faculty. The fund will invest in wheat, cattle, dairy and crops. Elsewhere, First Super announced it would invest in agriculture and would look at purchasing distressed Timbercorp assets; others that have either engaged institutional funds or invested directly in agriculture include Telstra Super, AMP Future Directions and Victoria Super. AMP as an overall entity was long considered one of the largest pastoral landowners in Australia, although it’s difficult to quantify.

It is not, though, anything like as much as some think it should be, which suggests room for greater engagement of the A$1 trillion superannuation industry with this asset class. Australian Agribusiness Group put out a report in November saying that less than 0.01 per cent of superannuation funds went into Australian agriculture, yet that international pension funds had put in more than $1.5 billion, or three times the local total. AAG argued that doing so would have protected Australian super funds from the global financial crisis. AAG also claims that the top 25% of Australian agriculture provided 11.2 per cent annual returns over the last 12 years with one third of volatility of the All Ordinaries index.

Some feel that the Australian agricultural sector has not helped itself by failing to promote the fact that it is at the cutting edge of agricultural technology, and indeed has had to be in order to thrive without the government protection afforded to farmers in other countries. Australian farmers have had to improve efficiency to compete and today export five times more food than Australia could consume, Macquarie says.

While Macquarie is the biggest name in the industry, some boutiques have sprung up too and more are likely to follow. Rural Funds Management, for example, is an agricultural fund and farm manager with $300 million under management, and manages a portfolio of large-scale farming and agricultural enterprises in land, water, infrastructure, poultry, viticulture, cotton, almonds and cut flowers. Established in 1997, it is the responsible entity to seven managed investment schemes, one tax-deductible scheme, and is the manager of an unlisted public company and two unit trusts. It was acquired by Great Southern in 2007 and briefly changed its name, but for obvious reasons has since changed it back again.

For the future, there is certain to be evolution of commodities as an investment class, and soft commodities – those you can eat – will inevitably be part of that even if the trend is initially driven by metals. This is partly because there’s a strong case to be made for their merits as a diversifier in a portfolio, and partly because it is such a clear area of strength in Australia. Whether this comes through mutual funds, structured products or exchange-traded funds, or a combination, remains to be seen.

December 2009

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

December 2009

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

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

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

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

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

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

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

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

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

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

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

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

BOX: Deal profile: San Miguel Brewery.

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

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

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

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

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

December 2009

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

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

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

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

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

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

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

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

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

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

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

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

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

Box: The MAS

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

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

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

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

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

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

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

December 2009

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

December 2009

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Deal profile: EVN

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

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

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

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

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

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

December 2009

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

BOX: KEY DEALS

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

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

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

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

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

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

To see this article in a PDF form, click here: stock software (2)

There has never been greater choice for consumers wanting an online broker than there is today. The data provider Infochoice now tracks data from 17 different providers who make trading as simple as logging on and keying in an order – no phone call, no real broker relationship required.

And in fact, the choice is bigger than even that range of providers suggests. That’s because over the years more and more providers have decided there’s room for two or even three offerings each: one doing the basics, one with lots of bells and whistles for the professionals, and perhaps a version in between for the day trader. So it is that E*Trad runs its standard platform, a Pro model and a Frequent Trader Discount fee that is different again. NAB OnLine Trading has casual, premium and professional versions. In fact, it’s getting pretty rare to find providers who only have one platform on offer.

What’s the difference? Let’s take a look at E*Trade. The basic E*Trade package has everything you really need – access to research, stop loss orders, and the ability to trade options, warrants and managed funds, among other things. But E*Trade Pro offers real-time market information, a more customisable display, and more charting options. The E*Trade model is that by trading often enough on the basic version (10 times a month) you get access to the Pro system too.

Similarly at NAB Capital, the Casual platform offers access to basic tools, company profiles, live quotes and email trade confirmations; the premium package brings access to trading tools such as live data, analyst reports, charting facilities and SMS trade confirmations; and a professional version gives still more trading tools such as streaming dynamic data, advanced charting, integrated portfolio services and analyst recommendations. As with E*Trade, the service fee for these more specialist platforms is waived if you trade enough; you only need two trades a month to avoid the $9.95 monthly fee on the premium service, but must trade at least 15 times a month to avoid the $77 monthly fee on the professional model. On many platforms, the brokerage costs come down with frequent trading too.

This trend means that in truth there are about 30 options to choose from for the investor wanting to get started with online broking. Picking the right one depends partly on what sort of trader you are: most people aren’t watching the market like a hawk, waiting for exactly the right moment to pounce; they might look at the markets at the end of the day and then decide what they want to do and put an order in to be carried out the following day. For this sort of trader, the basic version will probably suffice – and that’s what’s covered in the main table from Infochoice, attached.

Differentiating between them is tricky and comes down to things like cost, availability and quality of research, the types of securities you can trade, and the ability to set conditional orders like stop losses, which we’ll discuss more below.

Generally speaking, online brokers have been raising the bar considerably over the years – that’s competition for you – and providers are frequently revamping their existing platforms. The most topical example is Macquarie, whose Macquarie DirecTrade product has been in widespread use for several years and is now being replaced by a new online trading platform, Macquarie Edge, launched at the end of August. (Macquarie DirecTrade clients will be migrated to this new platform between now and the first half of next year. Incidentally this is the reason Macquarie does not appear in the main Infochoice table.)

Macquarie Edge features the usual array of services – news and analyst commentary, company profiles and financials, access to a range of products, charting tools – with access to Macquarie’s own research and one other distinctive feature: a community function, inspired by the rise of social networking in Australia. This allows you to “engage with a group of trusted contacts to discuss market and stock insights and view trading activity,” says Macquarie. In truth one can do this perfect well with whatever method of communication you normally use, be it Facebook, the email or the phone, but the function is an example of the ways online providers are trying to differentiate themselves from one another in an increasingly competitive market.

Macquarie also allows you to link to a cash account in order to continue to earn interest when you’re not invested. Generally, the online accounts linked to the banks tend to have versions that work better for those who already have accounts there: for example, Westpac Broking has an Integrated Accounts version which receives interest and brings preferential brokerage rates, as well as giving access to the BT margin lending product range. Many investors like the transparency and ease of having all their money in one set of linked accounts so for people who already have cash accounts and are thinking of opening an online trading account, it’s worth starting by looking at what your existing bank offers and how it all links up.

Let’s look in more detail at some of those areas where there is divergence in the type and quality of service you get.

One important one is the stop loss: the ability to tell your broker to bail out of a stock if it falls by a certain amount. (See the article on page xx for more on how to use stop losses, and the various types of trade involved.) This gives peace of mind – you don’t have to keep your eye on a share price the whole time – and is increasingly a recommended component of any investment strategy. According to Infochoice, providers who offer these include AmscotOnline, E*Trade, Bell Direct, CommSec, St George directshares, Morrison, Interactive Brokers, NAB, OneTrade, Suncorp and Westpac; those that don’t are Easy Street EasyBroking, Macquarie DirecTrade (although the new Edge product will), BankWest, CMC, Goldman Sachs JB Were and NetWealth.

Another area of difference is the securities you can trade: some providers (like E*Trade, Macquarie, CMC, CommSec, St George, Morrison, Interactive Brokers, NAB, NetWealth, Suncorp and Westpac) allow you to buy and sell ASX exchange-traded options, while the others do not. Most allow you to trade ASX warrants, although a handful, including one Morrison platform, Interactive Brokers and (for endowment warrants) EasyStreet do not, according to InfoChoice. Rarer are services that allow you to trade world markets as well as Australian ones: some that do are Macquarie, CommSec, St George and Interactive Brokers.

Other areas that distinguish one provider from another include access to managed funds and floats. Very few offer access to futures, with Macquarie, Morrison and Interactive Brokers products exceptions. Some products allow for online margin trading, typically by linking into a separate margin account; this is naturally common with platforms launched by the banks.

The arrival of contracts for difference (CFDs) in this country has had an impact on the online broking industry too. CMC Markets, for example, is one of the most powerful CFD groups in the country, but it can also be used as a straightforward online broker using CMC Markets Stockbroking. This offers access to shares, options, warrants and managed funds like many mainstream competitors, but also CFDs. This has a number of effects: it allows you to go short, which means making money from a falling market; it means you can hedge your portfolio against volatile markets; and it also gives you access to global markets, since CMC Markets offers CFDs on over 3,000 products including all major stocks and stock market indices in the US, UK and Asia, without having to open a separate overseas account. In addition, it’s another way of using leverage and margin trading without going through the usual banks. In the other direction, some mainstream online brokers, like CommSec, allow you to trade ASX CFDs.

If you’re a chartist, you’ll find the availability of tools to help you varies quite widely from platform to platform. The majority allow you to do candlestick charting – bars illustrating the highs and lows, and the opening and closing prices, of a security in the course of a day – and some allow you to export charting data into another program. Chartists tend to be quite personal in their aesthetic preferences so it’s hard to call a leader in this field; most of the providers have free demos that will give you a sense of what can be done (the only ones that don’t offer charting are Easybroking, OneTrade Basic and NAB Online Trading, although if you upgrade to one of NAB’s more frequent trader models you do get charting tools). Be aware, though, that none of them are going to offer quite the range of facilities that a specialist technical charting programme like Bullcharts will. If charting and technical analysis is that important to you, you’re probably going to want to buy separate software.

Another key point is the quality of research and reporting tools available to you. Numerous groups offer broker research, but who’s the broker? How many stocks do they cover? Do they include buy and sell recommendations? The second Infochoice table shows you what the various providers offer, but in all cases you’re going to want to dig a bit deeper into what you’re really getting.

Let’s take a look at CommSec, for example. There is regular market update news from people like chief economist Craig James and market analyst Juliette Saly. What about on specific stocks? All stocks have a main view screen, offering key measures like P/E ratio, dividend yield and stability, risk ratios, total shareholder return in recent years, earnings and dividends forecast, and growth rates. You can also see a summary of current analyst recommendations, sourced from EL&C Baillieu Stockbroking, Intersuisse, Morningstar and Shaw Stockbroking. Another screen gives you a sense of whether the company has a history of earnings surprises. There are summaries of recent news stories in Fairfax newspapers; announcements; and in some cases analyst research from CommSec brokers themselves, while for $449 a year you can also get access to reports from Aegis. As a quick straw poll of how widespread the coverage of the CommSec analysts is, we keyed in Telstra, IAG, Sonic Healthcare, ABB and Incitec Pivot; we found recent research available on all but Incitec Pivot and, surprisingly, Telstra.

For some investors, the quality and breadth of research may be the single most important decision in selecting a broker, and it varies from place to place. E*Trade, for example, sources its research from AspectHuntley, aap, Fat Prophets, the Intelligent Investor and Wise-Owl – mainly investment commentators. NAB offers Aegis research, and gives market commentary twice a day from Reuters and RWE. Macquarie Edge will give access to Macquarie Research – wide ranging and well regarded. 

Brokers emphasise cost, although we suspect that’s not the differentiator it once was, particularly for occasional traders. Pricing has settled in the $15-30 range, whereas old-fashioned phone broking was always much higher than that and even today is typically around $70 per trade. According to Infochoice the cheaper providers are Interactive Brokers, Amscot Online Stockbroking and Bell Direct. Macquarie’s new platform starts at $23.95 a trade and can go as low as $18.95, CommSec’s internet preferred pricing is $19.99 up to A$10,000 and $29.99 above, and E*Trade starts out at $32.95 coming down to $21.95 depending on the number of trades. In all cases, beyond a certain point (such as $30,000 for E*Trade) the brokerage fee is replaced by a percentage (0.11% in this case).

And remember: it’s easy to migrate stocks from one provider to another so if you don’t like your broker, try another. One consequence of the shift from the human broker to the machine is that there’s no need for loyalty.

BOX: How we choose 

How do we choose our brokers? A detailed study by the research group Investment Trends, based on responses from 5,100 current share traders, gives us some answers.

 The biggest single reason people select an online broker is because of an existing relationship. 40% of people consulted in the Investment Trends survey named this as a consideration. This clearly supports the online platforms of banks, particularly those where you can combine a bank account with your online broking account. Examples are NAB, Westpac, Macquarie and CommSec (part of the Commonwealth Bank group), while E*Trade is now linked with ANZ.

 The next biggest reason is cost and value, mentioned by 31% of people, and then the trading platform itself, at 17%. This suggests that the actual merit of the system ranks only third in the list of considerations people have and is mentioned by less than one person in five. Smaller numbers mention trust (9%), service (8%), research (6%), range of investments (just 2%!), advertising (2%) and only 1% mention conditional orders.

 The ranking changes considerably when the data is cut to show how frequent traders behave. Investment Trends defines a frequent trader as one who trades at least four time a month. Among that group, the trading platform is more important and mentioned by 27%; service, at 12%, is also more important, as is the range of investments (5%) and conditional orders (3%).

 Investment Trends also noticed that the reason given depends on the broker. 46% of CommSec’s clients cited fees as a driver of their selection. At E*Trade, price was mentioned – which is odd, since it’s far from the cheapest online broker – and a link with existing accounts (26%). At both NAB Online Trading and Westpac Broking the link to an existing account was especially important – 65% of NAB clients cited it, and 49% of Westpac. At Bell Direct, 78% mentioned fees, while at Macquarie Prime, 21% said they chose the broker in part because of the availability of leverage. 

 Three other interesting facts from the Investment Trends survey:

• The number of active traders grew by 20% to 600,000 since the group last did this survey a year earlier.
• For participants in this survey, the average person has 1.5 open online broking accounts
• One in six share traders said they were at least somewhat likely to change their main broker within 12 months.

 So, in summary: more of us are going online; and while we don’t feel especially loyal to our brokers, it’s simple things like convenience and cost that attract and keep us there.