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September 2000

Asia’s capital markets revive


As Asia's markets emerge battered and bruised from three years of crisis and recovery, the region’s shell-shocked bankers and issuers are starting to pick up the pieces and look towards a brighter future. Bond and loan markets are showing signs of tentative recovery, equity markets are alternating between bewilderment and elation, and the samurai bond market remains intent on defying conventional economics. Gill Baker reports




       
Tokyo: increasingly Asian sovereigns
and corporates are funding themselves in Japan

"The debt markets have been particularly interesting from the yen perspective," says David Russell, executive director for debt capital markets at Nomura International in Hong Kong. "With the zero interest rate policy in Japan there have been a lot of good reasons to look at borrowing in yen," he adds. "We have seen a few yen issues coming, but more important we have seen a really strong appetite in Japan for A credits, particularly driven by the post-1997 currency crisis. The big problem we have is bringing issuers to the market - there are not enough issues ready to come to the market."
The samurai market died in 1998, with total volume thinning to around ¥52 billion ($477 million), but so far this year volume has surpassed that for 1998 and 1999 combined and has already gone through the ¥1 trillion mark. "It is only recently that the market has started to come back to life," says Russell, explaining that the First stage was sovereign issues, followed by quasi-sovereigns and the top 10 corporates.
The renewed interest in the samurai market is being driven by several factors, says Aamir Rahim, debt capital markets director at Salomon Smith Barney. With yields on Japanese corporates at yen Libor plus 5 basis points or 10bp, the yield pick-up for sovereigns issuing at 65bp to 95bp is attractive to Japanese investors. "Investors are Flush with cash and have no place to put it," he says. "The perception is it is very cheap, and in yen terms it is because of the Bank of Japan's interest rate policy. The differential is huge and people are rushing to the market," he says.
Alex Kam, treasurer of Hong Kong Airports Authority, is less convinced of the samurais' attractions. "Some of the proposals I have received are not that attractive. I work on a swap basis, and I have no particular natural requirement for yen. If you are a marginal investment grade then there is apparently a marginal pricing advantage, but if you are investment grade there is none," he says. "We like to manage our currency exposure conservatively. When I go for a hedge transaction I go for a hedge, I don't take a view. What we are good at is how to run an airport, that is our core business. I am not a trader."
The Hong Kong Mortgage Corporation is another government-owned issuer that has been approached by banks extolling the merits of a samurai issue. So far it has not borrowed outside the Hong Kong dollar market, but has plans for a multi-currency EuroMTN programme, says senior vice-president (Finance) Philip Li. On the samurais he says: "That market is quite interesting. We have been looking and studying it, but have no immediate plans."
So far the samurai market's re-emergence is still at that First stage, with China and the Philippines recently issuing sovereign bonds and the Kingdom of Thailand tipped to be next to the market.
       
Korean steel company Posco, maybe one or two other Korean corporates and a China corporate deal are among the other potential yen issuers bankers are now expecting, and quasi-sovereigns in Hong Kong such as the MTRC and Kowloon Canton Railway Corporation (KCRC) are also potential candidates.
"Whether the market is ripe for the next round of corporate issuers has not been answered," says Russell. "We are targeting the next phase of issuance - top-tier quasi-sovereigns and corporates - but there are a lot of factors and if the deals come it will prove there is a market. If these deals can come to the market there is no reason why a big telecoms company cannot come to the market. It is a question of very carefully targeting the demand and starting the ball rolling."
Russell maintains that the funding costs of samurai deals are genuinely attractive, citing the Philippines deal as an admittedly rare example of the yen costs pricing through the equivalent dollar funding curve. Another reason to launch a samurai issue is to diversify the investor base.
"For issuers coming to the market with heavy issuing targets they can really diversify. In the past that was not always cost-effective, but that has changed," says Russell.
Part of the reason for the increased attractiveness has been a decline in the yen to dollar basis swap cost, now at around 12bp over Five years, says Russell. That is coupled with Japan's ultra-low interest rate environment. "How long it will remain attractive will depend. There is a window of opportunity now and it is compounded by the fact that in Japan corporate bond issuance has really dried up. There is no demand for credit for the domestic corporate sector and issuance is at a record low. However, there is a demand for yield and there is a general Japanese conservatism and lack of desire to take any real risk, while a lot of private investors are looking for a home to park their life savings," says Russell.
Japanese retail investors are the prime target for from overseas issuers. The retail market is coupon-driven, and anything offering a 3%-plus coupon is particularly attractive, says Russell, who adds that China's sub-2% issue, lead-managed by Nomura and Merrill Lynch, was not considered enough for retail investors.
"Those guys up there are yield-hungry as rates are so low. The yen market seems to be quite hot for Asian credits," adds another banker.
For the right name, Russell is convinced of the opportunities: "There is an amazing amount of appetite - the question is Finding the right deal to bring."
From an issuer's perspective, a view needs to be taken on the yen and the swap into local currency. According to Russell, the implied forward foreign exchange rates on Five-year yen/dollar should be around ¥81. "I have never seen a piece of economic research that believes the yen will strengthen to that rate, and if anything the yen over the next three to four years is likely to weaken. There is a divergence in what the market is telling us and what people actually believe."
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