Ruling the roost
What’s in store for the Year of the Rooster?
It may well be a bumpy ride for issuers and borrowers in the capital markets in 2017, but deals can get done for the right credit and well-structured transactions. While the G3 bond market started the year where it left off in 2016 with a virtual stampede of issuances leading to the Chinese New Year in late January, it will be interesting to see what’s in store for Asia in the Year of the Rooster

Date

9 Feb 2017

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For the Republic of Indonesia (RoI), the G3 bond market was a reliable funding avenue in 2016, raising over US$10 billion across different currencies as it diversifies its funding sources and broaden its investor base.

Rooster

The sovereign started the year with a dual tranche global sukuk totalling US$2.5 billion, which generated a robust demand of US$7.7 billion. It then returned to the euro bond market in June with a E3 billion (US$3.19 billion) offering – its largest ever issuance in this market.

About a week later, the RoI accessed the Samurai bond market to raise 100 billion yen (US$870 million) through private placement to institutional investors. It capped the year on a strong note when it priced in December a three-tranche issue totalling US$3.5 billion to pre-fund its 2017 budgetary requirements

Indeed, the G3 bond market was accommodating to issuers such as RoI in 2016 that it ended the year in a record-breaking fashion. After a slow start, total issuance in Asia-Pacific, outside of Australia and Japan, amounted to US$218.06 billion, according to figures supplied by Thomson Reuters, up 19.3% from US$182.74 billion in 2015 and exceeding the previous record of US$209.65 billion in 2014.

Not even the black swans in the form of Brexit vote and the election of Donald Trump to the US presidency were able to derail the momentum for long as issuers continued to take advantage of the low interest rate environment amid the robust liquidity.

The market initially appeared to be heading for another low volume when the issuance fell 30.8% in the first quarter of 2016 to US$34.2 billion compared with the same period of 2015 amid an economic slowdown in China, which accounts for a large chunk of annual issuance activity. The availability of strong domestic market liquidity, coupled with tighter pricing following the strong local bond market rally also fuelled a shift of issuance to the Chinese onshore bond market and away from the US dollar bond market.

One of the themes that underpinned the issuances in 2016 and likely to continue in the new year was the demand for sustainable financing, which saw several issuers tapping the green bond market to fund their projects and investments. Bank of China led the way with a US$3 billion equivalent multi-currency offering as it accessed the US dollar, the euro and CNH bond markets in pricing the largest ever international green bond issuance globally.

The market also saw a rising demand for offshore funding from Chinese local government financing vehicles (LGFV), even as investors say those issuers could benefit from improving their transparency as better disclosures could result in greater access to the bond market over time. The LGFV universe expanded in 2016 with the likes of Tianjin Rail Transit Group, Yunnan Energy, Shanxi Road & Bridge Construction Group Company and Zhenjiang Transportation Industry Group Company tapping the market for the first time.

The expectations of further US Fed rate hikes following the 25bp increase last December – for only the second time in a decade – loom over the issuance activity in 2017. But bankers remain positive, with the issuers still taking advantage of the constructive credit environment in January to continue to print deals as the market headed into the Chinese New Year break.

2017 kick-off issuance
The Republic of Korea (RoK) kicked off the issuance among the sovereigns with US$1 billion offering on January 12 that achieved its lowest coupon and spread ever. This deal marked the return of the RoK into the US dollar bond market after more than two years, having printed a 30-year issue amounting to US$1 billion in June 2014.

Singapore lender DBS continued to diversify its funding sources and broaden its investor base as it tapped the euro bond market for its third covered bond amounting to E750 million, having accessed the US dollar and Australian dollar in its previous forays.

Graph 1

What should help underpin the issuance activity this year is the continuing liability management exercises as issuers are looking to extend their credit curve. The activity should include both high yield and investment grade, which issuers can exchange or tender for new issuances as they pro-actively manage their balance sheet.

Liability management was already a big theme in 2016 with both sovereigns and corporates undertaking diverse transaction formats, including tender and exchange offers, one-day switches and consent solicitations. The Republic of the Philippines undertook in February 2016 another accelerated one-day switch tender offer for 16 series of US dollar bonds maturing from 2016-2037, which was launched in conjunction with US$2 billion new 25-year bond offering for the sovereign.

Poly Real Estate Group of China launched in June 2016 a reverse modified cash tender offer that targeted two series of 2018 bonds and 2019 bonds, while Sri Rejeki Isman (Sritex) of Indonesia effectively employed the five-day accelerated tender offer for its US$270 million senior notes due 2019 to extend its debt maturity profile and reduce its overall financing costs.

Meanwhile, the bigger issuance in the G3 bond market did not impact the activity in the Asian local currency bond market, which also recorded a rising trend – thanks to cheaper borrowing costs and the monetary easing measures adopted by the central banks across the region.

And despite the weakening of the renminbi in the wake of a stronger US dollar, which contributed to the slowdown in cross-border transactions, it remains relevant especially with the further opening up of the onshore bond market, particularly the Panda bond market. This has been described as the most important development in any local currency bond market globally in 2016.

Several new issuers accessed the Panda bond market during the year, including the Republic of Poland, which printed in August the first ever issuance by a European sovereign amounting to 3 billion yuan. Another debut issuer was the province of British Columbia, which priced in January the first Panda bond offering out of North America amounting to 3 billion yuan, while Chong Hing Bank priced in May a 1.5 billion yuan bond representing the first onshore financial bond issuance from a Hong Kong incorporated financial institution in 2016.

It was worth noting, though, that while volatility could easily shut down the bond market, the syndication loan market was always open for the right credit. The volume, however, from Asia-Pacific, outside of Japan, fell in 2016 for the second consecutive year to a three-year low of US$463.8 billion, compared with US$471.3 billion in 2015. This was the lowest annual figure since 2013 when the volume amounted to US$462 billion.

Graph 2

Larger local currency lending
But amid such continuing decline, one bright spot in the loan syndication market was the rising trend in the local currency lending fuelled by the domestic currency easing measures adopted across the region, as well as the US dollar appreciation and rising US dollar Libor rates. In China, which dominates the loan activity in Asia-Pacific, these factors have discouraged many borrowers from raising or maintaining debt offshore and are instead borrowing in the onshore loan market.

The shift in lending from major currencies into local currencies had benefited the regional and domestic banks, and made it harder for the international banks to compete.

While the bond market still thrived despite the market volatility, it was a different story in the equity capital markets, whose volume fell 8.2% to US$216.45 billion in 2016 from US$235.67 billion in the previous year. The game has changed for IPOs with issuers now heavily relying on cornerstone investors – or the so-called friends and families – to ensure certainty of execution, such as in the case of Postal Savings Bank of China (PSBC), which raised US$7.4 billion in September 2016.

In the world’s largest IPO since Alibaba Group’s US$25 billion listing in 2014, six cornerstone investors accounted for US$5.7 billion or 77% of the total fund raising, with China Shipbuilding Industry Corporation taking US$2.1 billion, Shanghai International Port Group US$2.01 billion and HNA Group US$1 billion. It was interesting to note that Shanghai International had to take a HK$6.8 billion bridge financing to support its cornerstone investment.

Having large investments by cornerstone, however, is impacting on the IPO liquidity once the stock commenced trading as the shares are locked up for a minimum of six months. Incidentally, the largest share of cornerstone investment in a Hong Kong IPO last year was arranged for China Development Bank Financial Leasing Company, which sold 78.6% of its US$800 million share sale to cornerstone investors.

One deal that stood out in 2016 was Samsung BioLogics, whose US$2 billion IPO was priced at the top of the range and performed in the secondary market with the share price rising 5.9% in its first day of trading. The largest healthcare IPO since 2014, the deal garnered US$13.3 billion of international demand from a good mix of high quality global long only funds, sovereign wealth funds and hedge funds, as well as US$336.8 billion equivalent of domestic demand.

The deal that defined the equity-linked market was Softbank’s US$10 billion monetization of Alibaba, which involved the first ever mandatory exchangeable from an Asian issuer. From a US$5 billion launch size, Softbank ultimately issued US$6.6 billion of mandatories due to strong demand.

China outbound M&A
2016 was a watershed year for China’s outbound M&A, which rose at a rapid pace led by private sector corporates in pursuit of technology, brands and new markets. The past dominance of Chinese state-owned enterprises (SOEs) in overseas acquisitions are moderating and Moody’s Investor Services expect this trend to persist. It notes that elevated corporate leverage – particularly at SOEs – could pose an increasing constraint on their overseas ambitions because they rely mainly on debt to fund such acquisitions.

The key deal last year was the US$43 billion bid by China National Chemical Corporation (ChemChina) to acquire Swiss agrichemical company Syngenta, which has taken a bit of a time to secure regulatory approval from the European Union.

Announced in February 2016, the transaction, which already received the nod in the US last August when it was cleared by the Committee on Foreign Investment in the US (CFIUS), was the largest overseas acquisition ever by a Chinese company. It was also the largest acquisition in the chemicals sector and largest public takeover in Switzerland.

Another deal the caught the market’s attention was the US$5.4 billion acquisition by Qingdao Haier of General Electric’s appliances business, which creates a global leader in the home appliances industry. The largest ever cross-border M&A in household appliances sector globally, this was a landmark deal for a Chinese household brand to take over a US premium brand with over 100 years heritage.

In other significant M&As elsewhere in the region, Groupe Casino of France sold in February its majority stake in Big C Supercenter (Thailand) to Berli Jucker of Thailand for US$6.3 billion – the second largest transaction ever in Southeast Asia food retail sector. Then in April, Casino announced the disposal of Big C Vietnam to another Thai company Central Group for US$1.1 billion in a further step to reduce its indebtedness and enhance its financial flexibility. It was a highly competitive auction process that attracted a number of leading strategic and financial buyers, and the transaction represented the largest ever retail M&A in Vietnam.

These large transactions have no problem in terms of funding as banks were more than willing to write big cheques to provide bridge facilities. The ChemChina-Syngenta deal was partly funded by a US$12.7 billion acquisition bridge loan facility provided by eight mandated lead arrangers and bookrunners. As one of the bank arrangers points out, ChemChina sought a mix of Chinese and international underwriting support to the financing to minimize execution risk and to prove its ability to obtain backing from the international financing market as a standalone credit.

To fund the Berli Jucker bid for Big C Thailand, 16 banks signed a financing package of about E5.6 billion, split into E3.2 billion bridge loan facility by nine international and domestic banks to finance the acquisition and a baht-denominated bridge loan of E2.4 billion equivalent by seven domestic banks to finance the tender offer. The financing arrangement was required to be completed within one month in order to meet the tight acquisition timeline. 

Date

9 Feb 2017

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