Asia DCM is too hot to handle

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Asian bond issues are attracting levels of over-subscription that are taxing bankers already squeezed by inflation in bookrunner numbers.

The soaring debt capital markets of Asia are posing practical difficulties, with oversubscribed deals becoming the norm and large bookrunner syndicates, in recent times the scourge of equity deals, starting to squeeze returns for banks.

The recent $3.5 billion bond issued by China’s Sinopec had 12 bookrunners, a record for a G3 Asian bond. Sinopec broke its own record, having previously used eight bookrunners on a slightly smaller issue last year. The situation means that maximizing the economics on a particular deal is more important than ever, with a bookrunner role no longer any guarantee of decent revenue. There is, understandably, growing frustration among bankers with this. This again echoes the equity market.

Oversubscribed deals are also becoming more common across the region posing difficulties in the book-building process. Last month, a $4 billion, four-part bond from CNOOC attracted orders of $23.8 billion just hours after it was launched. Bleary-eyed DCM bankers are becoming a regular sight in Hong Kong as they emerge from allocation sessions in the wee small hours.

Oversubscription is not limited to jumbo deals. Citic Pacific’s $800 million RegS subordinated perpetual deal attracted $8.5 billion from 220 accounts. Investors were chasing initial guidance of 9% and the order book was over 10 times covered.

Oversubscribed and ground-breaking deals are coming thick and fast from across the region. Vedanta recently sold India’s largest-ever offshore bond, raising $1.7 billion, largely from US and European investors. Over this year to date, Indian groups have already almost doubled the record full-year amount of debt raised offshore in 2011.

India broke into high-yield with issuance from software company Rolta, and Indonesia provided a complex deal with a five year non-call three global from Bhakti Investama.

The boom in Asia debt capital markets is policy led, with monetary easing by the world’s leading central banks helping drive yields on sub-investment-grade debt to their lowest on record.

Standard & Poor’s says that more is to come. In a recent report, the ratings agency predicts that corporate debt outstanding in the Asia Pacific region will overtake that of north America and Europe by 2017.

S&P adds that Chinese corporate borrowing is likely to surpass that of US companies within the next two years. Non-financial institutions from China will need $18 trillion of debt from this year to 2017. That constitutes 34% of the $53 trillion of loans and bonds S&P estimates will be sought globally and compares with a $13 trillion forecast for US companies

Asian economies are increasingly relying on debt to fuel growth, in sharp contrast to the west where the hard lessons of the financial crisis appear, for now, to have sunk in.

Debt-hungry companies in Asia-Pacific should be chastened by these memories of the recent past in foreign climes. A credit crisis, or at least a brake on growth, could result, with China and Japan, the region’s two largest economies, continuing to give most cause for concern.