IFR Asia: Sean, what have you seen in terms of offshore issuance from South-East Asia this year, and how is it looking, going forward?
Sean Henderson, HSBC: Spreads have improved and rates have stabilised, so the underlying market tone has been very strong. Borrowers that have wanted to borrow have certainly had that option.
With regard to the volumes, we’re at around US$29bn year to date in G3, from just over 60 issuers, and that compares to about US$20bn from just over 30 issuers last year. The market has therefore been very positive, but it’s also worth putting that into context, as G3 volumes pre-Covid were more like US$60bn, so we’re still only running at about 50% of peak volumes. That’s a real challenge for investors looking to deploy cash.
When we look at why, the loans and local currency bond markets have been extremely liquid and pricing very efficiently. In addition, you’ve also got to factor in the higher US yields and cross currency risks. For example, if you’re a Thai borrower, and the local bond markets are offering attractive yields, why would you go offshore unless you can hedge it back efficiently? That’s why we’re not back to the peak volumes just yet, but at least we’re seeing a return to growth.
With regard to pricing, the Bloomberg Aggregate Index which tracks corporate spreads is as tight as it has been since 1998, but US rates are still over 4%, so while spreads are attractive, we’re still seeing a few clients who got used to the exceptionally low yields during the Covid period waiting for central banks to cut rates further. We are seeing issuers gradually adapt to the new yield environment however, and so we are expecting a further increase in G3 issuance volumes in 2025.
IFR Asia: Raymond, from the buyside, what are the challenges when you're looking at South-East Asia hard-currency bonds?
Raymond Chia, BlackRock: When I look at the market, especially in SEA, I always start on a positive note. Yes, spreads are tight, but there is money to be made.
So what are the areas that are worth noting? Within the region itself, the first thing is always liquidity.
SEA is a region where, on the way up, you find it hard to buy. And on the way down, you find it difficult to sell, so it’s a very gappy market. Liquidity is always the first key challenge.
The second thing to note is the lack of diversity as the markets today are highly concentrated on a few countries and sectors.
My third point is that, while diversity is a concern, you get names that are repeat issuers versus names that are maiden issuers.
With core yields at this level, investors may be sceptical to take on so much spread risk for a maiden issuer who is untested. So, diversity can be a double-edged sword.
A challenge for me, as a bond investor, is that we must always make sure that we get adequate covenant language and adequate structures, because technicals come and go, but the structure of the bond stays with you through the life of the bond.
And currently, structures are getting weaker and weaker. So we need to get better structures out from each deal.
IFR Asia: Murali, what can investors look for in terms of corporate governance or red flags around issuers?
Muralidharan Ramakrishnan, Fitch: We have seen quite a few corporate governance blow-ups in this region and South and North Asia as well.
If you look at SEA, I think one of the key challenges has been the complex group structures and the intercompany transactions, where we’ve seen cashflow leakages happening within the broader group, beyond the rated entity/restricted group. That has been one of the biggest challenges.
Obviously, these are some things which you look for during the rating process, but again there are certain aspects, which actually don’t come to light, because of the level of transparency involved. The level of financial transparency is the second-biggest item. If you look at China or India especially, we’ve seen the transparency of issuers improving as they regularly come back to the market, but this can generally be a challenge initially.
The next aspect is to do with the fungibility of cashflows. We’ve seen cash being reported as available on the balance sheet, for example in the Chinese property market, but is that cash really available for the entity to repay debt? That has been a common theme in the sector.
The other is the off-balance sheet liabilities. You have debts which are classified as payables. As a rating agency, we tend to catch most of them, but again there are exceptions. The grey funding channels, which you have seen in the Chinese property market, where debt is not on the balance sheet – it is sometimes very hard to figure these out.
The other key feature in this region is the number of family-owned businesses, which result in concentrated ownership or a key person risk; this can be a challenge. We’ve seen instances where there are charges or concerns at associated businesses, which are not necessarily part of the rated group and things can impact the rated entity as well. The contagion risk is a concern.
The last, of course, is fraud itself. Obviously, that’s something none of us can really find out. Broadly, these were some of the common corporate governance themes across the region.
IFR Asia: What are the red flags that you've learned to spot by now?
Raymond Chia, BlackRock: Many of us have heard the terms “standard market practice” right? A lot of bankers try to pitch this term to you, so I’ve never been a believer in that.
Just because something is a standard market practice, doesn’t mean that it’s always necessarily good. We should always push to do better than that.
If we can’t get around the financials, can’t reconcile certain numbers or don’t understand certain numbers, we seek clarification from the company and the bankers. If it is only to hear that it’s “standard market practice” we should just walk away. If we can’t convince ourselves or our clients, we shouldn’t be convinced.
The second thing is that I’m usually very sceptical about companies with very complex shareholding structures.
The third one is that if the ownership structure has some form of a sovereign wealth fund or government entity that provides certain comfort for us.
Last but not least, we believe that a company’s access to banking lines is very important. The reason is that if a company solely relies on its bondholders when interest rates are very high and they do not have banking relationships, that’s when liquidity can run dry for them.
So, having an exit, in terms of bank lending, will always provide certain comfort for us, as opposed to looking at a company and wondering, “Why is it that this company does not have a single bank backing this person, and yet they want to come to the bond market?”
IFR Asia: From the sellside Sean, how do you put together a deal that's going to tackle those issues and address the risk of an emerging market issuer, especially for a debut deal?
Sean Henderson, HSBC: I think the first thing to acknowledge is that it’s a very complex and diverse region. On one deal you might be dealing with a highly professional Double A or Triple A issuer, and on another deal, you might be dealing with a debut from a privately owned company from a jurisdiction that may not have the same standards on reporting, accounting, or governance. So, trying to strike the right balance across the region is hard and I agree the term standard practice doesn’t always apply.
We also try and focus on names that we know well. To your point about banking lines, the majority of issuances we do will be for clients that we’ve banked for a number of years, where we’ve got a history.
The next piece is then around preparing for a specific transaction, and we will make sure we have KYC, and that we’ve due diligence on the credit and the financials, including audited accounts. There is all sorts of diligence that into goes into a bond deal, but at the heart of it, it’s about making sure that the disclosures in the document are accurate and up-to-date to the best of your abilities, and that the risk factors fairly reflect the potential challenges.
The market will then ultimately take a call on whether investors are happy with the risk, and what price it needs. I’m not trying to dictate risk appetite for the market, but the disclosures should be accurate, and we should at least be comfortable that the company can afford the debt barring any changes or unforeseen events.
Then it comes down to the more complex area of setting covenants and the capital structure. These are very important but are subjective and commercial terms and subject to negotiation between issuers, bankers, and investors.
I’ll give you an example. We were talking about a covenant once with an investor out of North Asia, and they said, “Don’t put too tight a covenant on it because if it trips and goes into default, then my boss is going to come to me and tell me that I set the wrong covenant level”. They would rather have had a looser covenant but a tighter security structure, so that if the issuer got into trouble they could and try and work out a solution without having to go through a default or a restructuring. So, market practices and preferences can vary across the region, and that investor had a completely different perspective to someone in the US or European high-yield markets.
The other element that’s also frequently overlooked is the mix of debt on the balance sheet, and people often underestimate the importance of having a robust capital structure. Many less sophisticated clients look at short-dated loans and think, “That’s really cheap, why should I issue bonds?”, but the benefits of investor diversity, longer tenors and incurrence-based covenants can be even more important than pricing in the long run. For example, if an issuer is in a cyclical industry, and there is a downturn in their business that trips up a set of loan covenants, which tend to be maintenance-based, and it puts them into default, then that will destroy significant equity value and it could be argued that it’s a failure of governance.
Companies need to have a robust capital structure that allows them to survive through a business cycle, ideally including a balance of bank and institutional investors; maintenance and incurrence covenants, and a blend of short and longer dated financings to match the tenor of their assets.
Raymond Chia, BlackRock: I think sometimes it’s difficult, from a banker’s perspective, to manage the relationship between the issuer as well as the investor.
Having said that, we have seen many companies in the BBB– range come to the market and we don’t think that it’s too unreasonable to ask for a step-up in coupon, should they go into the BB+ fallen angel range.
Even if rating agencies have them on positive outlook, which means that they are on a deleveraging path, when we ask them, “If you’re so confident to be meeting your financial targets, why would you be so concerned to have a step-up?” They give all sorts of reasons, and the bankers will say, “It’s not standard market practice.”
That is something I find hard to reconcile. For instance, if you tell me that you’re really hungry and we bring you to a place that has all the food you want and you refuse to eat, it’s the same logic, right?
The second thing is that in terms of the due diligence, it’s advisable to bring the issuers to have regular dialogues with bondholders after they print.
In this market, we get sceptical when a bank decides to bring an issuer. Immediately, we think that there’s something up. We need to abolish that kind of mindset. Regular dialogue will alleviate the concerns, especially on corporate governance.
If you meet this company every quarter or every six months, you get more comfort as well, and you know what’s going on. I think that is how ongoing dialogues should be.
Sean Henderson, HSBC: I think that’s fair. We do have a lot of discussions with issuers about doing an annual investor outreach, or maybe joining our annual credit conference, because I think that regular contact and a positive relationship between issuers and their investors is very important. Particularly so in a market which can be less transparent or liquid, like this.
IFR Asia: How has China’s relative absence in the US dollar bond market affected the dynamics for SEA bonds, Raymond?
Raymond Chia, BlackRock: If I put it all together, year to date, the total supply would be about US$120bn. At the peak, before Covid, it was anything between US$250bn to US$300bn, which is about half.
In the primary market, China used to be about 60%-plus of the overall primary market. Today it’s about 33%. Meanwhile, Korea is now about 25% of the primary market, when it used to be 8% to 10%.
The last metric I want to leave you is in terms of the stock flow in the market currently, China is 30%-plus to 40% of the entire market. At the peak, it was nearly about half. So, this is where we are today.
The points I want to make after all these statistics is that firstly, I don’t think it’s a function of just China decreasing. The entire market is coming down purely because the cost differential is causing companies to go back onshore.
Because China used to be the largest, hence it looks optically that China has come down a lot. Second thing to note is that, yes, while China has come down a lot, so have other markets. For example in SEA, a lot of companies are doing liability management exercises. So, it looks as though there is a lot of demand for certain companies because they are terming out debt. Companies are extending their maturity profile. Hence, it looks optically that there is a lot of demand.
Thirdly, is that there when select companies in hard-to-abate industries come to the market, investors then gravitate towards other industries, such as renewables, because you can’t buy all these ESG-unfriendly sectors.
IFR Asia: Sean, would you agree with that, and what happens as Chinese issuers start to return?
Sean Henderson, HSBC: Two notable events impacted China supply. The first was obviously the US dollar rates move versus the renminbi. As renminbi borrowing costs have gone from 5% to 3% and US dollar costs went from 3% to 5%, it naturally pushed a lot of issuers to look to onshore bonds.
Then we saw the challenges in the China property sector, which was more of an investor risk appetite question. In high yield and real estate, we saw a shift from investors to allocating more towards South-East Asia and India. The problem was most that issuers in those jurisdictions didn’t need the funds and so replacing the volumes has been hard.
I’d agree with your point that China supply is coming back. You can see this in the return of the China Ministry of Finance, or the Meituan transaction for example. Of course, China property remains very challenging, but demand from investors to buy China risk more broadly remains. That is structural due to the negative net supply in the region and so the question is not about China versus SEA, but more about which sector and credit.
So, to your question of what happens when China comes back? I don’t really see that as an issue because the market is well supported and will remain so while we see net redemptions. Volumes would have to increase significantly before we see a change in the supply/demand imbalance.
IFR Asia: Murali, how has the US rate outlook affected issuers' choice of whether to go onshore or offshore?
Muralidharan Ramakrishnan, Fitch: Markets like Thailand and Malaysia have always had deep local currency markets. It was always the attractive US dollar yield which brought some of those issuers into the offshore market, but we’ve seen that changing even in markets like Indonesia. The local liquidity there has improved quite significantly, especially given the current rates, domestic funding is very attractive.
Obviously US rates are expected to come down. We will have to wait and see how rate cuts move from here on, but the other important aspect is also the rate decisions of the central banks in the region. For example, we’ve seen the Indonesian central bank cut rates. So how regional central banks’ rates decisions go forward will be a key element as well.
The other aspect is the FX risk, where rates obviously have an impact. There are issuers who continue to issue in this region despite the current rates scenario, mainly entities who have US-dollar denominated cashflows — largely commodity players and a few others. But for a majority of issuers FX is a key consideration.
One other factor is that local markets are limited by the tenor, size and depth of the market. So whenever you have issuers who want to raise a large debt, then they do come back to the offshore market.
Finally, some of the issuers have been communicating that they are conscious about ensuring their funding diversity. They are cognisant that they need to have a balanced mix of funding to support their balance sheet, which also helps diversify tenor in the capital structure.
IFR Asia: Are local currency markets becoming deeper, with longer tenors, or is there still a need to go offshore to do something a bit more complicated?
Sean Henderson, HSBC: The local markets continue to deepen and develop. It’s largely driven by demographics, with regional GDP growth creating a growing middle-income base, and then regional savings are making their way into local asset managers, insurers, and pension funds.
A big part of the growing sophistication of the local markets is down to these growing assets under management in institutional money. It’s very important to have professional investors in the markets who can manage credit risk, more complex issuance structures, and invest in longer tenors.
There is still a lot of variation country by country, however. For example, the Singapore market is very sophisticated, with ultra-long-dated tenors and a deep corporate market. The Malaysia market can also do complex project bonds. But some of the other regional markets are still quite bank investor driven, which tends to limit issuance to shorter tenors, and limits the potential for issuance in subordinated debt or project bonds.
Another important factor in the region is retail demand, but it is important to have a robust regulatory framework around the retail market, because there have been challenges in this space before. If retail can buy weaker corporate credits, particularly without public ratings, then you can end up in trouble. The regulators have gotten better at managing this, but still worth keeping an eye on in the smaller regional markets.
Overall, local currency markets are clearly deepening, developing, and getting more relevant, yet there is still more to be done on developing the institutional investor base in some jurisdictions.
The second challenge is local issuance regulations and derivatives. You might have a highly developed Malaysian ringgit market, but if it’s not accessible to Indonesian or Thai borrowers, or they can’t hedge their FX risks back to their home currencies, then each country is limited largely to their domestic market or G3.
That’s where the regulators can do more but we’ve been talking about this for decades. It’s all very well each market develop, but if they’re not set up to allow cross-border issuance, then effectively it’s only going to support domestic growth rather than regional success.
IFR Asia: Is the increasing maturity of local currency markets being reflected by more foreign investor interest in those markets?
Sean Henderson, HSBC: We’re seeing a little bit of a pick-up in cross border demand, but ultimately most investors still want to invest in their home currency rather than take significant FX risk. For example, it’s hard to see Thai investors coming into Singapore to buy Singapore dollar bonds if they can’t swap them back to Thai baht. Why would they do that if they don’t have any Singapore liabilities?
There are a few exceptions to this. For example, the offshore participation in Singapore dollars has gone from about 6% to about 12% in the couple of years, but it’s still off a low base.
IFR Asia: How is the project bond market in SEA and what it the potential?
Muralidharan Ramakrishnan, Fitch: We’ve seen issuances from the region but not that frequent. We definitely expect this market to grow quite strongly over the medium term, but capital structures and cashflows are impeding supply.
If a company doesn’t have US-dollar denominated cashflows, then obviously the entity has to hedge. Given typically the long-dated tenor, hedging instruments in this region are not easily available for that duration, which is a big challenge.
We have seen structures from India especially, where entities with local-currency cashflows issue dollar debt. Again it comes back to the covenants, how entities structure the deal and what kind of safeguards are put in. We have not seen that kind of evolution happening in the SEA market yet, but we are confident, that it’s just a matter of time, especially given the level of infrastructure funding required.
If you look at issuances from SEA, it has largely been for utilities with stable and non-volatile cashflows that are also dollar denominated.
It’s also to do with the capital management philosophy of the group in terms of how they’re funding their capital and what their growth plans are.
Some entities prefer a corporate style of debt because they reinvest all their existing cashflows to grow, whereas some entities take a balanced risk appetite resulting in a stable growth plan, I think we have seen such entities coming back to issue project bonds. It’s an evolving function – as companies grow and reach scale, we are likely to see more entities adopting project finance-style bond structures.
Unique to Vietnam, especially on the utility side, is the bankability of power purchase agreements (PPA). I think we have some of those regulatory issues in certain markets, but it is very market specific. The bankability of the new-generation PPA in Vietnam is still a concern. There have been regulatory developments, but we’ll have to wait and watch how those change, because that could potentially open up a huge amount of issuances from the power generation companies in that country.
IFR Asia: Sean, do you see a big pipeline of these kinds of deals?
Sean Henderson, HSBC: Fundamentally, most investors like project bonds because they are anchored by long-dated infrastructure assets. A good project bond therefore tends to deliver stability, so I don’t think we have a problem with regard to selling the product, but there are a few things that you need to make a good project bond structure.
The way I tend to think about when a project bond makes sense is this, if you’re relying on sales or profits to repay debt, then you’re most likely looking at a corporate bond style issuance.
If you’re looking to the underlying asset value to give you comfort on repayment, then you’re more likely to consider an ABS, or a secured bond.
A project bond tends to be the best solution when you’re looking to a set of contractual cashflows, and the quality of the offtaker, for comfort. To structure a good project bond, you therefore need a strong contractual agreement, high visibility on the cashflows, little or no FX risk, and a reputable and preferably rated offtaker.
This is why we tend to see project bonds issued from certain sectors, for example utilities, where you tend to find large infrastructure assets with strong PPAs, often with state-owned enterprises. This is what has made the renewables project bonds in India so successful, or the project bonds that were issued for power plants in Indonesia and Vietnam.
The challenge in some parts of the region is that the quality of the PPAs is variable, with some jurisdictions still having notable curtailment or termination risks. So if we can increase the quality, and standardise the PPAs more, that would help institutional investors confidence.
The other important factor is currency risk. It’s all very well having a 30-year PPA in IDR, but if the domestic rupiah bond market won’t buy a 30-year bond, but USD investors will, then you’ll need to hedge the cashflows to manage the cross-currency risk. Many of the regional swap markets still need to be developed further to allow local currency PPAs to issue USD project bonds, and this is why most of the project bonds to date have been from projects with USD cashflows. Alternatively we can look to develop the project bond markets in local currencies, but that will take time.
Raymond Chia, BlackRock: Probably just a couple more things to add, but it’s along the same lines of, “What can be better from here?”
Project bonds, to start with, are at an infancy stage in Asia. But over time, currency rates, PPAs and all these will be fine-tuned. And we will find out whether these deals can make it or break it. But to start, referencing certain success stories with other jurisdictions will always be a good check.
It’s the same as how our covenants were actually structured based on US deals in the past. We didn’t have covenants in Asia, so we took covenants from the US and adjusted it to suit Asia.
The second thing within a project bond is that even with the Fed cuts next year, I don’t think we are ready to take a complete greenfield project. I still think that as an investor base, we would still want something that is at least ring-fenced or supported by other project cashflows that are already generating profitability, as opposed to just outright financing something that is totally green.
In 2005 we had the first Macau casino bond where the use of proceeds was to finance an expansion phase in Cotai, Macau. At that point, Cotai was an underdeveloped stretch. The bull market back then allowed such greenfield deals to be done with a lot of sponsorship.
Fast-forward to today: the market will not have an appetite for that, because the dynamics are very different. Interest rate cycles are different. The growth paradigm is also different. But what we can infer from those cases is that, if the asset base currently is exactly what you said with stable PPA, as we develop, we will be able to, inch by inch, take a little bit more risk outside of the stable type of companies. But for now greenfield is 100% no.
IFR Asia: Murali, one possible interesting thing for project bonds is what's happening north of the border with data centres. Is that a potential for underlying assets?
Muralidharan Ramakrishnan, Fitch: It definitely is. We’ve seen a lot of activity across the globe on data centres. What is interesting is we have seen structures which span from a standard corporate on the one end, to project finance structures, and structured finance like ABS on the other end.
Obviously, most of these bond issuances happened in North America and Europe with some activity in Australia as well, but not much in the rest of APAC. We do expect activity to pick up on that front.
Within SEA, much of the activity has been in Malaysia. What is interesting is the region is also catching up, both in terms of the scale and size of data centres. A couple of years back, it was always small data centres looking at either retail or wholesale colocation services. But recently, we have seen hyperscalers come in, and larger and bigger data centres as well.
Most of them feature a pass-through for the electricity cost, which is the key operating expense and pretty long-dated contracts with large customers. So, it makes them a good asset class, especially for project finance bonds, and, of course, other capital structures, depending on how each company looks at it.
To see the digital version of this report, please click here
To purchase printed copies or a PDF of this report, please email shahid.hamid@lseg.com
