Are Europe-based investors about to miss out on the supply surge in offshore bonds from Asian borrowers in the next few weeks? On the basis of distribution statistics from August activity, Europeans are being squeezed out in favour of regional money and global funds booking out of Asia.
Asian bond activity was relatively brisk in August as underwriters pushed borrowers into the market ahead of heavy forward supply and to steer clear around potential investor fatigue. Asia ex-Japan, Australia and New Zealand bond supply in US dollars in August hit almost USD 13.7bn from a couple of dozen borrowers, including the blockbuster heavily-oversubscribed USD5.5bn three-tranche affair from Macau gaming operator Sands China.
The bond market hasn’t always been easy over the course of 2018. It’s been treacherous at times and positive sentiment has turned pretty quickly, leading bankers to proceed with caution and navigate a year of window markets. But heavy demand on the Asia deals that printed in August, along with tighter credit and CDS index spreads point to positive investor sentiment.
The geopolitics aren’t optimal at present but sentiment towards Asia paper seems to be holding despite general EM wobbles and China-US trade tensions. That said, borrowers would be well advised to get their ducks in a row and move while the going is good.
Based on live mandates, borrowers on the road and regulatory registrations, the market should see Chinese borrowers leading a charge into offshore dollar markets in the coming month or two. But issuers from Singapore, South Korea, Philippines, Indonesia and Thailand are also represented in visible dollar supply, and there has also been talk of some more exotic frontier Asian sovereign names assessing their options.
Supply has run the gamut of investment-grade and high-yield; government agencies, banks, and corporates from a range of industry sectors offering paper along the maturity spectrum. August also saw dollar debt IPOs from the likes of Bank of the Philippine Islands (USD600m five-year) and Chinese local government financing vehicle Shanghai Lingang Economic Development Co (USD300m three-year).
Borrowers have by-and-large been able to get good execution. Underwriters on that Sands trade, for example, went out with price talk of +200bp, +235bp and +260bp over US Treasuries respectively on the fives, sevens and 10s; tightened to 175bp, 225bp (+/-5bp) and 250bp (+/-5bp); priced at the tights (175bp, 220bp and 245bp). That kind of tightening and more – upwards of 25bp-30bp in many cases – was achieved on many Asian dollar trades in August.
China Aluminium Corp (Chalco) and Shanghai Lingang both shaved 40bp+ off their price guidance; Chalco’s USD400m three-year outing pricing on August 30 at +235bp from initial guidance of +275bp; Shanghai Lingang’s USD300m three-year the day before going at 4.90% against guidance of 5.30% area.
With books that were heavily over-subscribed, that’s not so surprising. But what the Chalco trade in particular showed was there was some serious price inelasticity among the Europe-based investors who were shown the trade. So what started out with an 80:20 Asia:Europe demand split when it was five times covered ended up as 97:3 in final allocation as a big chunk of that excess demand out of Europe evaporated when the spread was tightened.
In an era of where many asset managers consider themselves global, it’s hard to gauge the true extent of non-regional demand when US and European asset managers located in Asia book deals locally and that demand is counted as local. But with that caveat, what distribution statistics show is that for Asian dollar deals pricing in August, distribution into Europe averaged less than 10%.
And even that small number was flattered by the 32% allocation to European investors in China Mengniu Dairy’s USD500m five-year on the back of the company’s European shareholders (Danone and Arla Foods). For China deals, European allocations are probably closer to 5%.
Which begs the question: why do Asian borrowers still bother to come through Europe on roadshows when they know, their banks know and, increasingly, the investors they visit know that they’re not going to get any paper because they lack pricing power and there’s a growing sense among investors that borrowers are wasting their time? One answer is because European cities are great places to go shopping and live it up a little at the expense of underwriters. Sounds cynical I know but I’d say it’s closer to the truth than many would care to admit.
Euro supply from Asian issuers (more or less split down the middle between Chinese and non-Chinese borrowers year-to-date) had a bit of run in March and April. Disadvantageous cross-currency swaps but more to the point a natural and long-run preference for dollars has seen over 90% of Asian issuance year-to-date sold in the US currency.
A fascinating gauge of European demand will be the fate of China General Nuclear Corporation’s return to the dollar and euro markets following a similar dual-currency trade in December 2017. The company has mandated four global co-ordinators, four joint bookrunners and two green structuring advisors for a benchmark dollar deal and a benchmark euro green bond.
It’s fascinating because of how the demand skew of the different tranches might end up; because of any impact the green slice might have on the nature and quantum of demand, and how demand emerges for exposure to a company that says it’s the largest nuclear power operator in China, the largest nuclear power constructor worldwide, but also a company focused on the development of clean energies. Which it lists as wind and solar power – and nuclear power and nuclear fuel. Watch this space for updates.