Asia 100 1997: Waiting for the impact
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.
Malaysia also has its share of highly respected corporate issuers. Both Petroliam Nasional Berhad (Petronas) and Tenaga Nasional are seen as very professional and consistent issuers. This year’s $800 million 144A issue by Tenaga, brought to the market by UBS, was the first to be done out of the country’s new offshore financial centre of Labuan. By careful preparation, the issuer was able to increase its size from an original $500 million. It also achieved a 10-year term by the use of a 10-year tranche and a 10-year tranche with a five-year put.
Petronas is praised by syndicate heads for its careful behind-the-scenes activity. The $1.9 billion yankee from last year was then the largest ever from Asia. Its ¥40 billion ($330 million) five-, seven- and 10-year samurai issue brought to market by Industrial Bank of Japan in late October was successful, despite great turmoil in the Asian markets. It was priced to sell, thus avoiding any possibility of a cancellation. “When it came out, it looked very cheap,” one financier notes. “It took a lot of guts and a lot of intelligence to do it that way – to make it immediately attractive – rather than to call up and ask for some prices when sentiment was dismal.”
Less visibly, the company has been assiduous in securing its financial position. “It has a very, very strong treasury team,” a banker says. “This shows not only on the borrowings, but in the company’s highly active use of derivatives for risk-hedging purposes, not only on cash but also on commodities.”
India’s pioneer
In less well developed parts of Asia, corporates are also seizing the initiative from sovereign borrowers. Reliance Industries is regarded by many arrangers as being responsible for putting India on the map for international fixed-income investors. “It was the first Indian issuer to target the US,” notes one banker. “Those running its financial operations are well informed, adventurous and very intelligent. They have been prepared to issue using a wide variety of formats, which has helped them establish a convincing series of benchmarks in a relatively short period of time.”
Another commentator goes further. “You have to give them enormous credit for what they have done in the past two years,” he says. “Although it can be argued that many of the things they have done when viewed individually have been small and not very definitive as financing exercises, when taken together they have established a solid investor base and moved out the yield curve not only for Reliance itself but for all of India.”
Reliance has been innovative as well as consistent. In 1996 it issued a century bond in the US. It was the first Asian corporate to do so, a particular achievement from one of the worst-rated countries in the region. In fact, in view of its record, most bankers believe that Reliance should by rights trade well above the sovereign credit of BB+.
This year Reliance has continued to issue in a timely and efficient manner. In January it added to its benchmarks with a $314 million issue from Merrill Lynch and Morgan Stanley that offered a 10-year and a 30-year tranche. In July there was an important diversification into sterling – a £150 million ($250 million) 10-year deal brought to the market by HSBC Markets and Merrill Lynch.
Especially if India maintains its isolation from the turbulence sweeping Asia, Reliance could be one of the region’s most enthusiastic issuers in 1998. “They are always hungry for new ideas,” a banker notes. “You can show them anything – a zero-coupon bond or a Swiss franc deal – and they will ask for a price. And if it makes sense, they’ll go for it.”
Hard-working sovereigns
Like Asia’s corporates, Asia’s sovereign and quasi-sovereign issuers will face a difficult environment for new issuance in the immediate future. Those countries that have been hit hardest by the financial crisis may be unable to get big deals away for some time. Their prospects will depend not only on the credit perception of different countries in the region, but also on the profile they have established as borrowers over the past few years.
China’s ministry of finance is one issuer which has worked hard to improve its profile in recent years. “They have done simply a fantastic job of re-establishing credibility after their disastrous global in 1994, when the aggressive pricing alienated investors,” says one Hong Kong syndicate head. “Their credit and their name is now very, very strong.”
With the restructuring of China’s loss-making state-owned enterprises and ambitious infrastructure projects such as the Three Gorges dam creating enormous demand for capital, China may well be Asia’s foremost sovereign borrower in coming years. “They have become much more sensitive, have improved their market understanding and have really listened to what the market wants,” a financier says. “And as a result they are now seen in the US as a responsible borrower.”
But the ministry blotted its copy book in October when it went ahead with a $500 million dual-tranche global in the face of the Asian currency crisis and even as the Hong Kong dollar was being attacked. “The whole thing was poorly done,” one banker says. “The mandate was awarded, then delayed, and finally went ahead with very bad timing, so that the spreads widened from day one. And China has such huge reserves – they did not even need the money.”
One borrower that may benefit in the long term from a consistent and thorough approach to the market over a number of years is Korea, the largest source of Asian debt issues outside Japan and a pioneer of the Asian bond markets. The country’s two big state-sector issuers, the Export-Import Bank of Korea (Kexim) and the Korea Development Bank (KDB), are rated particularly highly by syndicate heads in the region. “They are the most sophisticated not just in Korea, but in Asia,” one banker feels. “Of course, they have the advantage of a higher credit rating and are effectively government surrogates. But they also use the markets creatively and responsibly. They look at different currencies; they tap the maturity spectrum; they go to different markets.” In the face of a looming credit crisis in Korea, both of these heavyweights realized the importance of simply paying what was demanded to get the funding they required.
Kexim, in particular, is praised for its pioneering approach. “They did the first Deutschmark deal,” says one syndicate head. “They have done a lot of structured trades. They were working on credit-linked issues before Kepco [Korea Electric Power Corporation] jumped the gun on them.” Another banker says: “In all the turmoil, they have listened to investor feedback and have understood that they should not tap the market too frequently,” he explains. “They have not thrown paper at a market not really willing to take it.” Kexim has also been involved in some very innovative transactions which, because privately placed, are still under wraps.
Meanwhile the KDB is seen as taking a balanced and realistic approach to the market. Its long-term approach was demonstrated with its last major deal in September. Lehman Brothers and JP Morgan arranged a $1.5 billion four- and eight-year global issue which reopened the Korean market in the wake of the recent credit problems. “It showed a great maturity on the part of the KDB that they readily accepted the need to price to the market,” says an observer.
But some doubt that the KDB will maintain its sophisticated approach in 1998 and beyond. “In typical Korean fashion,” one says, “Duck Soo Kim, the former general manager of the finance department, who deserves a lot of praise for making KDB what it is today, has been shoved off to some domestic post.” Perhaps he opposed the government’s use of the KDB to help in the nationalization of Kia Motors, a move that many feel will be a drag on the KDB in international markets in the future.
