Explosive growth of USD Fixed Income demand in the Asia-Pacific region

By Andrew Duncan

Leading the local team across Australia and New Zealand, Andrew has a wealth of experience from working in London, Hong Kong and Singapore with HSBC in all aspects of DCM.

In retrospect, 2017 was remembered in Australia as the year of a constitutional crisis and Richmond breaking their AFL drought, but for the bond markets, it’s the year Asian investor’s fully embraced Australian and New Zealand corporates as part of the Asian capital markets construct. This delivered volume and diversification across the credit spectrum and currencies in an unprecedented way. Against a strong macro background, despite North Korean sabre-rattling, Japanese elections and an insurgency in the Philippines, Australian corporates delivered. New prints from Telstra, Incitec Pivot, Santos, Mirvac and SGSPAA added to issuances in previous years from Ausnet, Lendlease, Yancoal and Optus. SGSPAA, as one local example, has USD1.5bn of RegS-only denominated debt outstanding across three bonds, demonstrating the significant market capacity available.


So what makes the RegS-only market different?

Typically, corporates looking to access USD are advised to access the USPP or USD 144a/RegS market, and no doubt these markets work very well for certain issuers. However, the RegS-only market has some distinct advantages:

  • It offers a smaller minimum deal size than the 144a/RegS market, at USD300 million, versus the USD500 million in 144a
  • It is more flexible in terms of issuance documentation than USPP, typically requiring no covenants for an IG corporate
  • It allows for forms of liability management, including on-market buybacks and consent solicitations, in order to reduce outstanding indebtedness, whereas the USPP market makes that more difficult
  • It typically has lower transaction costs than the 144a/RegS market, as the roadshow and documentation costs are both markedly lower.

The growth in the Asian capital markets has been propelled by the vast growth in the savings and wealth of high net worth and middle classes across the Asia - Pacific region, particularly in the likes of China, Korea, Hong Kong, Singapore, Japan and Taiwan, with USD (but also AUD, CNH, SGD and JPY) being managed by a range of life insurance companies, asset managers, private banks, hedge funds, commercial banks and sovereign wealth funds. These investors continue to invest locally, however, given their surging funds under management (FUM), they have been directing a greater amount of time and energy to understanding and buying foreign credit. Australia, as a developed market in the region, is an attractive home for fixed income purchases.

The Incitec Pivot USD400 million 10 year and Telstra Limited USD500 million 10 year, both printed in RegS-only format, speak to this bias. For Incitec, investors were attracted to the fact that this credit was ‘new’ to Asia – there was no similar company in the region with a blend of explosives and fertiliser manufacturing expertise. The fact that Incitec’s physical operations and offices are mainly in Australia and the US didn’t seem to concern investors, as they bid strongly for the new issue, with the order book almost nine times oversubscribed. Incitec was also able to utilise the new Asian Bond Grant Scheme run by the Monetary Authority of Singapore, and now being introduced by the Hong Kong Monetary Authority (‘HKMA’), to reduce its documentation costs.

For Telstra, the decision-making was slightly different. As one of the highest profile Australian corporate issuers with over AUD16bn of debt capital market issuance outstanding, and an experienced issuer in both EUR and USD144a/RegS format, Telstra chose to head down the RegS path for three key reasons. Firstly, the refinancing needs were relatively small and finite, at around USD500 million. Secondly, the execution cost of printing a new USD RegS trade was significantly less than the 144a option – Telstra could leverage its existing EMTN programme and simply conduct a roadshow in the Asia-Pacific region.Finally, this allowed the company to engage and allocate to Asian investors, generating new relationships that will serve the company for years to come. The end result, a bond priced at T+95bps for a 10 year, was the most efficient 10 year USD bond issued by an Australian corporate for the year.

Snapshot:

Asian Bond Investor Survey

HSBC has partnered with S&P Global Ratings for the fourth time to deliver a semi-annual research paper, for which 176 institutional fixed income investors with a combined USD742.7bn AUM were surveyed across North America, Europe and Australasia.

Key findings:

  • Asian markets are set to break the all-time G3 issuance record despite the tension in the Korean peninsula, showing strong resilience and investor appetite for Asian credit
  • Investors are in search for yield in an environment where interest rates have been at historical lows for longer than most predicted
  • Rising interest for Asian credit markets as 84.7% of investors are planning to increase their exposure
  • Investors’ main concern is an equity market correction over the next 12 months as major indices in the US have broken new record highs
  • Investors have expressed their intention to buy more green bonds and, although Asian investors are tracking behind, we see a gradual improvement.

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