Asia’s $US-bond boom is just getting started

Sustained expansion in Asia’s US-dollar denominated bond markets looks set to continue, with a recent record-breaking run expected to push the size of the Asia-ex-Pacific dollar bond universe to a total value of $US1 trillion by 2020.

Australian bond issuers will be among the beneficiaries, as they seek to tap into new pools of liquidity. Asian investors seeking stability, diversity and the potential for alpha – performance in excess of benchmarks - in the world’s fastest-growing region are another key force.

" [The run is] expected to push the size of the Asia-ex-Pacific dollar bond universe to a total value of $US1 trillion by 2020."

Often referred to as the ‘Regulation S’ market (or, ‘Reg S’ for short), Reg S provides a ‘safe harbour’ exempting security offerings from some registration requirements, allowing global and regional corporates to offer US dollar denominated debt securities outside the US, issued from an EMTN programme allowing issuers to be flexible and capture demand with minimal disclosure requirements.

Deal volumes in the Reg S market in Asia broke records in 2017, up 67 per cent year-on year to $US257 billion through November and heading toward $300 billion. In the year to that time, 11 Australian corporate issuers had sold bonds in excess of $US10 billion combined.

The market

The issues span a range of industries across investment grade, high yield and unrated names, and have access to tenors of five-, 10-, 20-year and even perpetual bonds.

Today, even as local Asian governments from India to Indonesia encourage the development of their own bond markets, the region’s expanding pool of investors want more exposure to US dollar assets as they search for diversification, higher yields and lower risks.

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This has, in turn, provided issuers with a larger funding alternative at competitive costs relative to the local currency markets.

While Asia may be home to rising currencies such as China’s renminbi (RMB), it’s obvious the US dollar markets will continue to play a major role in the region’s transformation for the foreseeable future.

Driving force

Asia’s Reg S market has not always been so robust. In the past, if Australian corporates wanted US dollar funding, the first and only real choice was to sell through the 144A market, which is for US-based investors.

This emerging market was a major topic of discussion at the recent ANZ Aussie Day conference in Hong Kong.

At the event Farhan Faruqui, ANZ’s Group Executive, International, said “this year the demand for increased duration, diversification and the rise of liquidity has been the biggest driving force in Asia’s bond market and as we head into the end of the year we are confident these trends will continue in 2018”.

“We’ve also seen an increase in the number of Australian issuers as they diversify their funding sources into Asia and there is increased demand for Australian credits which offer diversification, relative value and tenor,” he added.

Incitec Pivot General Manager Capital Management and Chief Risk Officer Geoff McMurray said heading to the Reg S market makes sense. 

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“Eight years ago we needed to raise US$800m of 10 year money and as a freshly-rated triple-B credit we didn’t have confidence in the Reg S market so we had no choice but to go to the 144A market,” he said at the event.

“But when we last issued in July, it made more sense to go the Asian Reg S market. It was more mature, could price our credit accurately and there was tenor and size available.” 

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Asia’s Reg S bond investors have also shown an appetite for non-rated Australian credit, which was an important factor when looking where to fund, according to Edward Collis, Group Treasurer at recruitment website Seek.

“We recently set up a Reg S only EMTN programme and as we don’t have a rating, we are pleased to see there is significant appetite for unrated Australian names,” he said.

Insatiable appetite

The benefits of diversification and the range of tenors on offer are clearly two of the main reasons Asian investors are piling into the Australian credit markets. Asia’s growing pension and insurance liabilities means there is increasing demand for longer-dated notes.

“Australian credit belongs to one of our favoured asset classes of the last few years,” BOC HK Asset Management Chief Investment Officer, Fixed Income Ben Yuen, said

“It offers a very important source of diversification for our portfolios.”

Investors view Australian issuers as offering both the lower risks associated with a developed market and a strong regulatory regime, as well as the potential to deliver alpha as issuers seize the growth opportunities Asia offers.

All but one of the US dollar bonds from Australian issuers have traded up this year, with many of the high yield names recording double-digit spread tightening, according to ANZ data.

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The only real complaint Asian investors have about the Australian credit market is there are not enough issues to meet the demand. Increasing the number of issuers will have benefits for market development and investors, according to PineBridge Investments Co-Head of Emerging Markets Fixed Income and Head of Asian ex-Japan Fixed Income Arthur Lau.

“We need more names, not just in high yield but also in investment grade. If the Australian universe can expand, it will improve the understanding of the asset class and be positive for Asian investors.”

Paul White & Jimmy Choi are Co-Heads of Capital Markets at ANZ