Asia Loses U.S. Yoke in Bonds With Aid of Rich: Credit Markets

Apr 28, 2014 10:39 pm ET

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April 29 (Bloomberg) -- Asia’s swelling ranks of millionaires are helping local companies reduce their reliance on investors in the U.S. to the least in almost three years.

The region’s corporates cut dollar-denominated offerings under rules allowing their sale inside U.S. borders to just 25 percent of issuance in the first quarter, the least since the three months through Sept. 30, 2011, data compiled by Bloomberg show. The declining dependence on U.S. funds comes even as Asian borrowers increased debt sales to $64.3 billion this year through April 25, up 5 percent from the same period in 2013.

With net wealth among Asia’s richest forecast to exceed that in the U.S. as soon as this year, according to a Cap Gemini SA and Royal Bank of Canada September report, local appetite for debt investments has soared. Companies in the region are choosing to forgo the cost and paperwork involved in gaining regulatory approval to sell into the U.S. and turning more toward the convenience of having creditors closer to home.

“Local wealth is growing, not only from private bank clients but from insurance companies, pension funds and even central banks,” Peter Lee, the Hong Kong-based head of Asia fixed income at Societe Generale AG’s private banking unit said in an April 16 interview. “That’s why we see robust demand for Asian bonds.”

Asian Returns

Dollar bonds in Asia may return more than local debt for a fourth consecutive year in 2014, Manulife Asset Management senior fixed-income director Neal Capecci said April 14. Securities from the region gained 0.98 percent on average for each of the three months through March, HSBC Holdings Plc indexes show. That compares with 0.63 percent for local-currency notes. The debentures denominated in the U.S. currency yield an average 4.24 percent, about the least since June 2013.

Booming regional economic growth, five times that of the so-called G10 countries, has expanded companies’ capital needs. Local millionaires are helping meet that demand, highlighting the area’s expanding clout in global capital markets. Dollar sales from Asia will rise to about $150 billion this year, Viktor Hjort, Morgan Stanley’s head of Asia fixed-income research, said this week, exceeding the record $126 billion sold in 2013.

Asian issuers, excluding sovereigns and government-related companies, offered just $6.7 billion of their dollar bonds to investors in the U.S. last quarter, registering them with the U.S. Securities and Exchange Commission or selling under regulations that permit marketing to qualified institutional buyers. U.S. accounts weren’t eligible to buy most of the $26.5 billion of issuance.

Bigger Sales

Local demand supported an increase in the average size of these deals to about $560 million this year, from $471 million in all of 2013, according to data compiled by Bloomberg.

Money managers from Indonesia to Hong Kong and Singapore took 76 percent of dollar bonds sold by Asian issuers this year, up from 49 percent in 2009, according to a JPMorgan Chase & Co. report dated April 15. By contrast, the percentage of notes placed with investors in the U.S. has dropped to 6 percent since Dec. 31 from 29 percent five years ago, while for European investors it’s gone from 22 percent to 18 percent.

Bank of East Asia Ltd., Hong Kong’s largest family-run lender, placed 92 percent of its $700 million of bonds with regional accounts this month, a person familiar with the matter said. Chinese developer Poly Real Estate Group Co. sold 95 percent of its $500 million in debt securities to Asian investors April 16.

‘Important Segment’

Chinese investors are contributing much of this demand, according to Krishna Hegde, the Singapore-based head of Asia credit research at Barclays Plc, this year’s top-ranked arranger of international bonds globally.

“Chinese asset managers and banks weren’t a significant part of the market two years ago but now they’re an important segment, especially for deals from Chinese issuers,” he said April 16. “Private banks also still play a big part, although more so for high-yield bonds.”

The number of ultra-high net worth individuals in China is forecast to surge 80 percent to 14,213 by 2023, the third- highest national concentration after the U.S. and Japan, Knight Frank LLP wrote in a March report. By then, the nation will have over 300 billionaires, more than the U.K., Russia, France and Switzerland combined, according to the report, which cited data from research provider WealthInsight.

Insurers Buy

Insurers and pension funds are also getting more business from Asia’s rich as wealth increases and life expectancies become longer. According to United Nations data, the proportion of Chinese above the age of 60 will increase to about 33 percent of the population by 2050 from 12 percent in 2010. That ratio is forecast to more than double to 18 percent in India and rise to 22 percent from 8 percent in Southeast Asia, the data show.

The China Insurance Regulatory Commission, the nation’s industry regulator, in February loosened curbs on insurers’ investments, scrapping ceilings on fixed-income holdings.

“There’s been substantial growth in the insurance industry in Asia,” said Desmond Soon, co-head of investment management for Asia at Western Asset Management Co. “These investors, which are long-term investors, usually look to buy Asian bonds as a way of immunizing their liabilities,” he said in a briefing in Hong Kong on April 8.

U.S. Benefit

A continued boom in issuance may start to exhaust demand and lead to companies relying less on the Regulation S market, where bonds are marketed exclusively to European and Asian investors, according to Bank of America Corp. Corporates may then turn back to sales under Rule 144A of the U.S. Securities Act, which restricts offerings to qualified institutional buyers in North America, according to the lender.

“The Reg S market has reached, or is reaching, its finite capacity,” said Hital Desai, a Hong Kong-based director in the Asia debt syndicate at Bank of America’s Merrill Lynch unit. “Adding 144A is the way to go.”

U.S. investors bought bonds sold by Tencent Holdings Ltd. via Rule 144A last week. Asia’s biggest Internet company allocated 79 percent of its three-year notes to North America, 13 percent to investors in Asia and 8 percent to investors in Europe, a person familiar with the matter said, asking not to be identified because the details are private.

“Issuers have to make a judgment as to what the incremental benefit of having U.S. demand is versus the cost,” Barclays Asia bond syndicate head Ken Wei Wong said April 16, referring to the added expense of selling bonds in America.

China Petrochemical Corp. completed Asia’s biggest dollar bond offering in a decade earlier this month, raising $5 billion in a four-part transaction April 2. The Beijing-based state- owned enterprise known as Sinopec Group, sold notes with three-, five- and 10-year maturities, matching the amount issued in November 2003 by Hutchison Whampoa Ltd., the Hong Kong conglomerate controlled by Li Ka-shing, Asia’s richest man.

“Asian high net worth individuals used to be very equity- focused but all that started to change post the global financial crisis,” Wong said. “People started to see the benefit of diversification, and of having bonds in their portfolio.”

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