A market that has been devoid of issuance for one and a half years reopened last month when Aberdeen Asset Management successfully launched and priced a 7.9% $400 million perpetual non-call five tier 1 bond via Merrill Lynch. The asset manager was swiftly followed by transactions for BNP Paribas and Lehman Brothers. There are others in the wings, namely an upper tier 2 style deal for International Securities Trading Corporation, via Merrill Lynch and HSBC, and a tier 1 offering for IKB via Deutsche Bank.
"There is lots of money in private banks, and current coupons in the range of 6.5% to 7.5% are attractive," says Martin Egan, head of primary markets at BNP Paribas. "Fortunately the market is reopening in a very controlled fashion so it’s coming back as a potential option for issuers although it does not offer the dramatic cost saving that it did several years ago. It is very much on the radar screen, especially from a diversification of investor base perspective." BNP Paribas managed to raise $600 million with a 6.5% coupon on a perpetual non-call five-year bond.
Coupon-driven
Over the years Asian dollar retail investors have offered borrowers extremely attractive terms for financing deeply subordinated securities. These investors are purely driven by coupon levels.
"What is interesting is that for the last couple of years issuance by high-grade financial institution issuers in the Asian retail market has been fairly quiet," says Siddarth Prasad, head of the European financial institutions group at Merrill Lynch. "Back in 2002/03 there were a lot of high-quality names, such as Lloyds, HBOS, RBS and Crédit Agricole. At that point the coupons achieved were in the high 6% area, very comparable with the US retail market but with the added bonus of investor diversification."
Until Aberdeen’s reopening, the last deal in this market was for Porsche, an unrated corporate hybrid bond, also led by Merrill. Before that, most transactions were from Latin American corporates, which were able to offer much higher yields than European banks.
"The regulated entities got priced out of the market with their coupon levels in the high single digits/double digits," explains Prasad.
But now the market is back and if names such as ISTC can get away then the bandwagon might well start rolling. Asia is still not as attractive as US retail but of course only SEC-registered names can easily sell to the latter investor base, meaning Asia is the best option for many borrowers that want to sell non-step securities.
"The growth in financials could well come from non-traditional asset managers. Many of these institutions have never thought about debt as part of their capital structure," says Prasad.
Another highly notable aspect of May’s Asian retail flurry was the structure of Lehman’s 6.9% $500 million bond. This might be the first hybrid to qualify as Basket E with Moody’s. To obtain equity credit with Moody’s, issuers have been using either mandatory deferral triggers or replacement capital covenants. It appears that Lehman used both of these features, which should allow it to receive 100% equity treatment.