Asia’s retail bid is a tantalising proposition for DCM bankers, with around US$6.5trn sitting in the region’s private banks as a result of surging economic growth and an average savings rate of 14% per household. But catching that bid has not been straightforward and it has proved itself a fickle beast, with numerous pundits predicting its demise as Treasury yields head north. Jonathan Rogers reports.
A broad trend can be discerned since the Asian retail-targeted deal first emerged some three years ago: an increasing willingness to move down the credit curve and a steady increase in risk appetite, with the lower reaches of the capital structure featuring prominently.
FIG was the first sector to tap into the Asia retail bid, and with Swedish Export Credit pricing a US$200m perpetual non-call five deal in June 2003 that met the fabled wall of private bank and fund cash, attracting a book of US$1bn, it took full advantage. The bond’s subsequent collapse in secondary trading, presenting a 19% capital loss to investors, perhaps provided the region’s retail with a salutary lesson in the art of relative valuation. Certainly, the 5.40% coupon always looked pricey, and since then, amidst the fits and starts of the Asian retail bid, providing optically attractive coupons has been the name of the game.
The SEK deal left a wariness such that the region’s retail bid shut down for around 18 months, with the reopening coming via a US$300m WestLB deal via Merrill Lynch, Lehman Brothers and WestLB. The vanilla nature of that deal was a testing of the water for the Asian retail bid’s risk appetite and a string of deals in the months that followed showed that it was strong, much stronger than many regional DCM bankers had assumed it to be, in fact.
The bandwagon really started rolling when Mexico’s Pemex and Gruma sold into the region and were followed by a raft of Russian banks, including Bank of Moscow, Russian Standard Bank, Moscow Narodny Bank and Vneshtorgbank.
Brazilian credits then jumped in, with a major focus on perpetuals.
In May 2005, Brazilian bank Bradesco managed to sell 30% of a US$300m perpetual into Asian retail, with Braskem, the country’s largest petrochemicals company, also selling the bulk of a US$150m perpetual non-call five deal into the region’s private banks and funds.
The advantage of the Asian bid to these borrowers in pricing terms was substantial. For example, Bradesco managed to get its perpetual non-call five away at an 8.875% coupon, some way inside the initial 9.25% to 9.5% talk, largely thanks to the region’s demand.
In pleasant contrast to the SEK price collapse, the secondary performance of all this paper was stellar, with the Russian banks tightening on average 150bp–200bp in the months since launch. And the Brazilian names proved consistently liquid, with Bradesco up around five price points six months after it priced.
The bid pretty much dried up in November last year as the Asian private banks closed their books early for year end, although Tui sold a big chunk of its perpetual hybrid deal in early December into the region in what represented yet another landmark in the evolution of the retail investor base as a staple source of funds for high-yield issuers.
The transaction was part of a €1.3bn three-tranche transaction for Europe’s largest tourism and shipping company and also the first corporate hybrid capital issue to be marketed heavily to Asian retail. Leads Citigroup, Deutsche Bank, HVB and RBS targeted Hong Kong and Singapore private banks and funds via one-on-one meetings and plugged the euro angle as an attractive portfolio hedge, with plenty of customers buying into the view that the dollar was vulnerable versus regional currencies in the medium to long term.
A chunky €290m order came out of one Singapore private bank, with Asian retail accounting for around 90% of the subscriptions, although the region was scaled back considerably, ending up with an allocation of around 27%.
The B1/B+ (Moody’s/S&P) rated perpetual non-call seven paid a coupon of 8.625%, or Bunds plus 540bp, and steps to Euribor plus 730bp if not called in year seven. This generous step-up is around twice the level typically offered on Asian bank Tier 1 deals, representing the perceived premium required to tempt the region’s retail into an unfamiliar corporate risk.
Porsche then provided another milestone by issuing a blockbuster US$1bn perpetual non-call five subordinated transaction in January via sole lead Merrill Lynch, the first part of a three-tranche deal that also included five and 10-year senior euro notes. The deal was notable for the fact that Porsche is unrated and as such underlined the power of name recognition. Sole lead Merrill Lynch built a hefty US$5bn book that allowed punchy pricing at 7.20% versus earlier 7.5% talk.
Diversification plays
Certainly, European corporates interested in issuing hybrid capital securities have an interesting distribution strategy precedent in the Tui transaction, with the senior part of the deal predominantly driven by the European institutional bid, and a complementary bid out of Asian retail for the hybrid capital tranche.
“That introduces you to a broad range of investors on an international basis and creates price tension,” said Citigroup’s Paul Au, noting that Tui’s perpetual printed inside the 8.75% area official guidance as a result.
“Asia’s high savings rate has contributed to a massive increase in the region’s liquidity, and wealthy individuals are trying to beat low deposit rates by shopping around in the fixed-income markets,” said Jack Gunn, head of Merrill Lynch’s Pacific Rim debt syndicate.
This yield hunger is enabling these issuers to leverage their capital structures with consummate ease, and subordinated and hybrid borrowing volumes are on the rise as a result. Moreover, the ongoing mania for perpetuals has allowed them to take full advantage of the flat US dollar yield curve, with the spread between 10 and 30-year Treasuries at a five-year low early this year and looking even more advantageous when the curve inverted.
Also reducing borrowers’ weighted cost of capital is the ability to raise perpetual money without needing to offer a step-up after the call date, as is usually the requirement with institutional investors. Equally beneficial is that, whereas European institutional investors price perpetuals from European issuers to the call, with borrowers assumed to call for reputational reasons, Asian retail investors have tended to just look at the coupon and the pick-up it provides them over other interest-bearing instruments, thus providing a huge advantage for issuers in the prevailing yield curve environment.
French savings bank Caisse Nationale des Caisses d’Epargne (CNCE) proved the increasing adventurousness of Asian retail in January with a €350m Tier 1 perpetual non-call 10 deal, of which more than half was booked by the region’s private banks. The hybrid deal for the A1/A+/AA– borrower offered a generous mid-swaps plus 135bp or Bunds plus 149.8bp via CIB, HSBC, Merrill Lynch and UBS.
A Hong Kong DCM banker provided a reminder that the Asian bid is not quite as undiscriminating as it possibly seemed to have become in the wake of the ultra tight Porsche print and the deal’s vast book, however. “There is a degree of name and sector sensitivity and the market is finicky,” he said. “Porsche got done because of name recognition, but I’m not sure unrated, unknown names could. Incremental yield is the key, hence the interest in perps, hybrids and subs for the right names.”
Indeed there was recent evidence that the Asian retail bid for Latam perpetuals had lost its spark, with Mexico’s Metrofinanciera forced to print a planned US$100m 10-year callable deal at just US$75m, despite the generous 11.25% coupon and hefty step up to Libor plus 865bp. And Brazil’s Gol had to cut a planned US$200m non-call five deal by US$50m on reduced demand, with the bond dropping to 97.00 from par in the aftermarket.
“[The Asia retail bid] is built on upbeat assessments of interest rates and systemic and idiosyncratic credit risk. There’s a bullish assumption allowing a full-on search for relative yield value further out on the curve and down the capital structure. But if rates back off and credit wobbles, the bid could disappear overnight,” said a Singapore syndicate official.
It remains to be seen if increased stress in the Treasury market and a less sanguine view of credit proves the death knell for the Asia retail bid, but plenty of DCM bankers remain, unsurprisingly perhaps, resolutely upbeat about ongoing demand from the region’s funds and private banks. This will be put to the test when Philippines brewing and food conglomerate San Miguel prices it impending US$500m dual tranche perpetual via Citigroup, Credit Suisse, Deutsche Bank and HSBC.
“The Asia retail bid is founded on a vast pool of liquidity, and that is not going to plummet any time soon. It might be trickier to get certain names done but the bid will not shut down, it will become more price conscious and demanding on step ups. Name recognition might be crucial, but once you’ve ventured into credit it is unlikely you walk away completely,” said a Hong Kong DCM banker.