Only the best will survive

After a slow year for Asian Eurobonds, new issuance all but dried up following the Hong Kong stock-market crash in late October. With spreads for Asian benchmark issues widening dramatically, it was clear that confidence in Asian debt had suffered a dramatic decline. Only the most desperate, the most creditworthy or the best-known borrowers are likely to risk a return to the market in 1998.

The slow recovery of the Asian Eurobond market will be led by a small group of the region's most creditworthy borrowers: sovereigns, quasi-sovereigns and the very best of the region's corporates. Although most Asian companies will be able to issue only on highly unfavourable terms, a select few - those with export markets outside the region and solid management skills - may be able to draw on their past performance to make a successful early return to the market.

One of the best of Asia's corporate borrowers is Indonesia's Asian Pulp and Paper (APP). Eurobond arrangers in the region believe this is a company with the right people to stand head and shoulders above its peers. Under the guidance of finance director Hendrick Tee, both in its own name and through subsidiaries Indah Kiat, Tjiwi Kimia and Pindo Deli, APP has managed to issue the debt the group needs even in the most difficult of circumstances.

Even before the collapse of the Asian currencies, issuers from Asia were finding it more difficult to raise money internationally. Investors were becoming nervous as the Thai crisis began to loom. Yet despite this, APP managed to raise close to $3 billion in the first 10 months of the year through a diverse and innovative array of issues. "They were given the correct advice to segment the market," one banker explains. "Even in today's bear market they have been able to succeed."

Some people argue that the company gave away too much. "I would not call paying 400 or 500 basis points over US treasuries to get a deal away very sophisticated," notes a dissenter. But given the enormous widening of spreads on Asian paper in October following the collapse of the Hong Kong stock market, this strategy now looks prescient. It may be that APP slipped its notes through the window of opportunity just before it closed.

"The $750 million issue that Pindo Deli came out with in July showed how closely APP watches the market," a banker notes. "It was very, very good timing, and they managed to get it away just before things got really bad. I don't know if this was due to the arranger, Credit Suisse First Boston, or the issuer, but in any case the borrower must have thought very carefully about what it wanted to achieve." Not only was a large amount raised just as the Indonesian market was going into meltdown, but by using four tranches, APP managed to push the benchmarks out to 30 years.

Even in an easier market, many observers believe that the deals APP got away this year would have been noteworthy. In March, Peregrine structured an innovative deal for the company for a $638 million five-year FRN. A special-purpose vehicle was set up to issue the note, backed by a pledge of preference shares from APP. The borrowing vehicle then used the proceeds to acquire preference shares in an APP subsidiary. In this way, APP was able to use the debt market to raise equity, improving its balance sheet.

Other corporates with a long history in the markets are also well placed to survive the present crisis. Recent blockbuster issues from companies such as Hong Kong's Hutchison Whampoa and Malaysia's Petronas are unlikely to be repeated in the near future, but they provide a clear benchmark for future borrowing.

Hutchison's record deal

Hutchison Whampoa now holds the record for an Asian issue following its $2 billion deal this July and is praised by a number of bankers. Its issue was not only of immense size, it was also cleverly structured as four tranches, forming in effect an instant yield curve that went all the way out to 40 years.

"Hutchison talks to the banks regularly and finance director Bill Shinnick has a good sense of the markets, both fixed income and derivatives," says a head of syndication. "They are therefore very adept at waiting for an opportunity. And when it arises, they really use it." Another says: "The professionalism with which Hutchison approached this deal speaks volumes. We have never seen a deal of this size and diversity from a Hong Kong borrower. Hutchison allowed the correct amount of marketing time, made information available, chose the syndicate wisely and launched at levels that were sensible. Small wonder they saw good demand."

Another Hong Kong conglomerate well known to investors is Swire. The company produced few deals this year. But one, May's $300 million perpetual preferred devised by Merrill Lynch, is rated by many as the most sophisticated deal so far in Asia.

"Swire is a very canny issuer," says one Hong Kong-based syndicate head. "Their timing is very, very good and what they do is always very sensible. With the perpetual issues this year and last, the company clearly saw opportunities to raise capital much more cheaply than they could in the equity markets." As another banker points out, Swire is one of the only issuers in Asia to have utilized the perpetual-preferred technique, something the best US corporates are now using. The uniqueness of the instrument, the impeccable timing and the confident execution make the perpetual-preferred deal an important issue.

The biggest and most internationally focused of Korea's chaebols are likely to remain important users of the international debt markets. Many Korean corporates have been among the most regular issuers from the region and companies such as Samsung, Pohang Iron and Steel, and Daewoo are familiar names with international investors. Korea Electric Power Corporation is seen as the most sophisticated of Korean corporates. "The consistency of their transactions, both private and public offerings, makes them stand above the rest," one banker comments.