The Asian Bond Markets
In 1999, who would have guessed that issuance from China would come to dominate the Asian G3 bond markets or that the global banks would be nudged out of local currency fixed income by domestic players?
30 Apr 2019 | Sarah Sargent
In parallel with the economic transformation across Asia in the past two decades, the developments in the region’s fixed income markets have been remarkable. In 1999, who would have guessed that issuance from China would come to dominate the Asian G3 bond markets or that the global banks would be nudged out of local currency fixed income by domestic players. Back then, when Asset Benchmark Research conducted its first Asian fixed income survey, the markets had just emerged from the Asian crisis and still bore the signs of a cowboy mentality.
From California to Connecticut and many points beyond, investors are protesting against low standard of disclosure and the lack of transparency in corporate Asia. “It is a real problem. Unless they make steps to improve their disclosure, we will never see the strides forward that the region deserves,” warns one US investor. “It has been a shock for me,” says a US fund manager who has recently started covering Asia. “I am used to having everything opened up in front of me. I am surprised how vague Asian managements can be. Many won’t even answer the really easy questions.”          
Shape up, or lose out
The AssetApril 1999
Not only were corporates opaque in their disclosures, but also the leading banks were providing next-to-no credit research. This was partly because the bond market had been spawned from the bank loan business in which relationships and knowing the client were key. Publicly available financial statements were not central to the process. Yet the inaugural Asset Bond Benchmark Survey found that the majority of institutional investors regarded research as important.
“Ratings tell you where, research tells you what and intuition tells you when,” one survey respondent was quoted as saying.
Shape up, or lose out
The Asset April 1999
John Woods, who was one of the first credit analysts to operate in Asia, created the first compendium of G3-denominated bonds for the region in the mid-1990s covering some 100 issuers. Backed by Stuart Gulliver, then head of markets for HSBC in Asia, whose idea was to establish a fixed income and treasury operation centred in Hong Kong in the mid-1990s, Woods created the credit research desk for the bank in Asia. “I covered all the credits in the report I called, The Issuers,” Woods, who is now CIO, Apac for Credit Suisse, recalls. It covered something like 100 issuers, which I wrote individually by hand one-by-one. I had to scrabble around Indonesian newspapers, balance sheets published in Thai newspapers. I had to look so hard for company data, it was ridiculous. There were a lot of 100% government owned non-listed companies that did not publish their financials. It was frontier stuff,”
Issuance Growth Over
the Past 20 Years
Turn the clock back 20 years and the G3 bond market was represented by only about 100 names mainly from Hong Kong, Korea, Singapore, Indonesia and the Philippines. Apart from the sovereigns, the dominant issuers were the utilities such as Kepco and Tenaga, the telcos PLDT, Singtel, various banks not least the Koreans, including KDB and Kexim, and a range of other corporate names like MTRC, Hutchison Whampoa and Ayala Corporation. There was a smattering of property companies but nothing like today. Nor were there toll-roads or green bonds. And apart from the ‘itics’ (various municipal international trust & investment corporations), Bank of China and the sovereign, China was on the sidelines.
The origins of the Asian G3 bond story were laid in 1991 when the Asian Development Bank first issued US-dollar denominated Dragon bonds both to raise funds for its own activities and to broaden the capital markets in the region. Until then, financing opportunities had focused on the equity markets, bank loans and the local currency bond markets. Tomoo Hayakawa, the ADB treasurer at the time, is widely credited for creating the Dragon bond concept in 1990 in a bid to bolster the region’s capital markets and increase participation of its investment banks in the international arena. “The Asian market used to be an appendix or supplemental market, now it is changing to an independent market,” Hayakawa was quoted as saying. Dragon bonds helped build an appetite for Asian credit among global investors.
In the 20 years since The Asset’s foundation, the number of new issues in Asian G3 bonds has multiplied almost tenfold from 78 in 1999 to 734 in 2018, according to data from Refinitiv. In parallel with the new issue growth, the secondary market became more and more valuable drawing the attention of the world’s investment banks, not least Lehman Brothers which was particularly attracted by the high yield segment for which a young salesman, Andre Lee, became a legend. In 1994, Lee was lured to Peregrine, a boutique operation founded by racing car driver and former Citibanker, Philip Tose, and Francis Leung (who went on to serve as Citi’s chairman in Asia). Under Lee, Peregrine’s fixed income business increased dramatically. But it also became its undoing. Lee convinced the bank to underwrite a bond issue by the Indonesia taxi company, Steady Safe, but was left with a large inventory of unsold bonds. When Steady Safe suffered the effects of the Asian crisis, the bonds bankrupted Peregrine.
While Peregrine faded into obscurity, Lehman Brothers climbed to even headier heights. Yet today, it is the name bar none other that sends shivers through the credit markets. Its collapse in September 2008, heralded the cataclysmic collapse of the global credit markets from which, some would argue, the world has not yet fully recovered. But in 1999, it was still riding high. Throughout the early 2000s, the US “bulge bracket” firms were exporting their fixed income recipe from the US to Asia. Among these were Salomon Smith Barney, Bear Stearns and Morgan Stanley Dean Witter; the Europeans HSBC, CSFB, Warburg Dillon Read, Paribas and Deutsche Bank were present as were boutique houses such as BT Alex Brown. Citibank, as it was then, was nowhere to be seen.
The core recipe was vanilla: wean corporates off their dependence on the equity and loan markets to encourage them to issue bonds and simultaneously boost the number of institutional investors. This conventional and desired development of the financing and investment alternatives took place.
But the party also began to experiment with more exotic flavours. Maths geniuses were employed to model new instruments and investors were introduced to the new synthetics. Enthusiastic salespeople were working to convince institutions in Asia – particularly the banks – to achieve better yields by investing in Asset Benchmark surveys of investors started to hear pleas for more education and training in the products they had started investing in.
Even though Michael Lewis had published Liar’s Poker, the semi-autobiographical account of the excesses he had witnessed as a bond salesman at Salomon Brothers in 1989, no one heeded the warning signs as the party started in full swing in Asia.
Lehman Brothers was not the only bank to go up in flames or to end its days in ignominy. From one year to the next, Asset Benchmark Research’s annual survey catalogued the carnage.
Since our last survey was conducted, the credit markets have experienced an unprecedented upheaval. Lehman Brothers, Bear Stearns and ABN AMRO have been lost or engulfed and, most recently, Merrill Lynch has been taken over by Bank of America. Many on the buyside do not view the concentration in the market positively. “Every time you take a brick away from the wall, the wall becomes weaker,” one major investor suggests. “The fewer counterparties you have, the greater the concentration risk among fewer hands. Counterparties may become bigger and stronger but that means far more concentration in a smaller number of hands, which is not a good thing.”
Giving credit where credit is due
The Asset March 9 2009
While the large US and European investment banks were rejigging their businesses, others such as Michel Löwy saw an opportunity in the chaos.
Michel Löwy remembers the days of “working like a dog” when he was at Deutsche Bank. But it also laid the foundation in 2009 when he and his colleague, Soo Cheon Lee, decided to quit and set out on their own. Eight years since establishing SC Löwy, a boutique fixed income trading house with a focus on high-yield bonds and distressed loans, Löwy says the firm is on track to recording a turnover of US$15 billion in 2017.      
Man in the middle
The Asset August 30 2017
S.C. Lowy’s arrival was part of the growing acceptance of high-yield corporate names among investors. This also helped pave the way for the growth in China issuance and the emergence of the China bid, the largest structural changes in the market since its formation.
China issuance accounted for 63% of the Asian market in 2017, up from 24% five years earlier, according to data from Bloomberg. For Chinese bond issues, onshore investors can command up to 90% of the participation at times, and syndicates now also look to them for an indication of interest on new issues, market participants say. 
Where next for the growing China bid?
The AssetJanuary 25 2018
After the Asian financial crisis, the region had become a magnet for overseas investors in fixed income. “There was a growing interest among international fund managers based in the US, London, and continental Europe because they could see value there,” recalls the former credit analyst, Damien Wood, who is now with Spectrum Asset Management in Sydney. “You were getting high yields for what was sovereign or quasi-sovereign risk.” One such pioneer was Global Asset Management (GAM).
“Asia risk assets were becoming in vogue in America. So we knew we had to get back in early in order to reap any of the opportunities arising from the crisis, and we knew we had to move quickly,” explains Kevin Colglazier GAM’s investment director in charge of Asian fixed income. […]
An Asian hedge fund manager at a Spanish bank in New York says it is all about timing. “Right now, Malaysia is the best choice in Asia, or emerging markets for that matter. In terms of pricing discrepancies, it is the best buy, and that is because the country is so misunderstood, especially in New York.”
All the right moves
The AssetApril 1999
In the early 2000s, according to The Asset’s Astute Investor rankings, the leading investment managers in Asia were mainly Western firms including Metlife Investments, Deutsche Asset Management, Erste Bank and HypoVereinsbank. In among these were some well-established Asian institutions, such as GIC and the homegrown Income Partners and a few Asian banks including DBS and UOB. Fast forward to today and the Astute Investor rankings reflect the localisation of the investment management expertise.
No sooner had Asian investment professionals made their impact on the market and Astute Investor rankings than another wave begun. The growth in the “China bid” was spurred on by the depreciation trend of the renminbi relative to the US dollar that started in August 2015. Chinese investors have also been looking to diversify away from traditional renminbi-denominated assets, though their activity represents a small portion of overall onshore investment.
Chinese investors have been the biggest buyers of assets globally from resources to technology and even property. Now that flow of Chinese money is streaming into another sector, Asia’s G3 bonds, heralding what could be the start of the biggest change in the market not seen in decades.
The emergence of Chinese investors is palpable. The latest survey of Asia’s G3 secondary market conducted by Asset Benchmark Research, which drew the participation of over 300 institutional investors, indicates an increasing need for the best individuals in research, sales and trading ranked in the survey to be conversant in Chinese credits. In turn, the survey is showing the rise of ranked individuals who have strong insights into these Chinese names.
Not surprisingly too, among the biggest buyers of Chinese credits are Chinese investors. Name familiarity, among others, is what has been driving interest. While ten years ago, much talk is about the Asian bid in the region’s G3 market – local investors buying Asian bonds – these days, the Chinese bid is starting to resonate.
If you buy Asian G3 bonds, here are the 40 people to know
The Asset September 27 2016
By 2018, Asset Benchmark Research detected the growing professionalism of the China bid. The Astute Investor rankings included no fewer than 10 individuals from China, as well as five mainland China investors in the Hong Kong top 10.
Gold at the end of the rainbow
Since the dotcom boom in the late 1990s, companies have been striving to find the sweet spot to harness internet technology in bond trading. December 1999 saw the launch of a bold new venture with powerful backers: Singapore Telecom, Mitsui & Co, Government of Singapore Investment Corporation, Deutsche Bank and J.P.Morgan, was launched. Asiabondportal was the brainchild of Income Partners founding partners, Francis Tjia and Emil Nguy. But a handful of months later, a rival group, BondsInAsia backed by HSBC, Citigroup and Deutsche Bank set up in competition.
So how can either asiabondportal or BondsInAsia make it? In a word: liquidity. Whichever is able to generate the most liquidity will eventually dominate the e-bond market. This is easier said than done.
Bond portals race ahead to win market share
The AssetJuly 2001
These were prescient words. Neither portals survived in their intended form.
It is not a straightforward task to wean Asia off voice-to-voice trading. For one thing, the region is known for its technical rather than fundamental investing. As a result, investors prefer to talk to their counterparties in order to assess the prevailing trends of who is buying what. This need for market colour has been one reason why E-Trading has been slow to take off. Another reason is that liquidity is thin for many names making buyers and sellers reluctant to make a commitment to a particular price online. This is even more of a problem for large-size trades. Many investors also prefer to retain human contact.
Data from Asset Benchmark Research’s Asian G3 Bond Benchmark Review conducted in late 2016 illustrates that the uptake of e-trading in the region is limited. Most of the investors that were surveyed were not trading electronically for dollar-denominated Asian bonds (52%). The reasons for their reluctance was the preference for human contact, insufficient liquidity and an inability to negotiate prices or trade in bigger ticket sizes. Voice is still the predominant mode of trading as investors don’t want to ‘show their hand’ by putting bids online. They also get better market colour through a salesperson.
What’s holding back electronic fixed
income trading in Asia?
The Asset 12 October 2017 
In 2019, the conundrum remains unresolved, although the pretenders now include the information and news network, Bloomberg and MarketAxess, a survivor of the dotcom bubble. Although the 2018 Asian G3 Bond Benchmark survey reported that more investors were using E-Trading platforms, many were only daring to tap into the price quotes rather than executing trades.
The most popular platform is Bloomberg, however MarketAxess has made significant gains from 12 months prior.
Upheavals in the Asian G3 bond market
The Asset 12 January 2018
Just as the global experts have been facing difficulties cracking into the Asian market, so the rating agencies have had a roller coaster ride. In the wake of the Asian financial crisis, the reputations of the rating agencies were badly bruised. They were accused of not giving investors warning about the impending credit crisis.
“Given the fact they [rating agencies] were burnt so much during the crisis … because they did not provide any warning ahead of time, I think they are leery to be leading indicators,” believes one US-based investor. “But I don’t think that as a lagging indicator, they provide much benefit [either]. You see all the market changes priced in before they do their ratings. At best they are a co-incident indicator.”
One European investor says that in some cases he continues to use the ratings. “But if you look at the Philippines, the ratings agencies have definitely been behind the curve. We hold some credits in the high-yield market. When we called the rating analysts, one was on holiday and the other [from a different agency] was saying: ‘Whoa, the bonds are trading so low, I will have to look at it’. His reaction came very slowly.”
Misguided or misunderstood?
The Asset May 2001
At the time, the rating agencies defended their approach. “What a high-quality rating should do is to reflect a disinterested and highly focused opinion on the ability to repay debt,” Julia Turner, then regional managing director Asia Pacific for Moody’s Investor Service, was quoted as saying in the same article.
Lincoln Chan, managing director and head of Standard and Poor’s Hong Kong office responsible for Greater China, echoes a similar view. “A lot of the time people misunderstand our ratings as similar to those provided by investment banks. But our rating is not an indication or recommendation to buy, sell or hold, but it is a reflection of the credit risk. It is up to the investor whether or not to accept this risk. All we are doing is analyzing the company and highlighting the risk factors in the longer term, say one to two years – to see where the credit is going.”
Misguided or misunderstood?
The Asset May 2001
The rating agencies faced a similar barrage of criticism after the 2008 credit crisis, but at that point Asia was not the main focus of attention. Instead, ratings events delivered bursts of positive news. In 2013, the Philippines sovereign was upgraded to investment grade, which central bank governor Arnando M Tetango Jr described as “a decisive transformation from being once tagged as the ‘sick man of Asia’” [The Asset, April 2013]. Investment grade confers an important endorsement on a country since many pension funds and other investors are constrained by ratings. An investment grade rating will dramatically reduce borrowing costs for the sovereign (and therefore many corporate issuers). Explaining the phenomenon from the reverse argument, a World Bank study found that a downgrade to sub-investment grade on the foreign currency rating is associated with an average increase of 138 basis point in treasury bill rates [The Ghost of a Rating Downgrade: What Happens to Borrowing Costs When a Government Loses its Investment Grade Credit Rating? World Bank 2016]. As The Asset reported, there are additional advantages with an investment grade rating.
Budget secretary Florencio B. Abad comments that ultimately, the IG will allow the government to “expand fiscal space and, consequently, pour more investments into infrastructure, social services and PPP”. The IG removes a key investment obstacle for some offshore funds that may be mandated to invest only in IG paper, comments Citi economist Jun Trinidad. “The IG should make it easier to ‘market’ the economy to real investors. Attracting private proponents, including private funding to PPP and other infrastructure projects, would not constitute a major obstacle with the IG rating,” he says. The cost of investing will ease, providing an “additional spark for investment-driven growth”.
Investment Grade, Finally
The Asset April 2013
However, the China sovereign created a furore in October 2017 when it dared to return to the international credit markets without a credit rating. Stunningly, the dual tranche offering of US$1 billion each generated a massive demand of US$21 billion. As one banker was quoted as saying: “The response from the market very much reflects that the deal works very well without a rating.” Ping Lian, chief economist of the Bank of Communications, explained that the major reason for abandoning international rating agencies is that they have a “Western mindset” and their methodology is not applicable to China’s current economic model.
According to the Ministry of Finance, raising capital is not the main objective of the offshore bond. Instead, guiding the market yield is its primary consideration. With no rating agencies involved, China’s Ministry of Finance showed its confidence in the capital market to properly correct the yield curve.
Both tranches tightened even further in the secondary market and were both quoted at 10bp in late morning of October 27.
China’s tightly-priced unrated sovereign
 is a slap in the face for rating agencies
The AssetOctober 27 2017
But the sovereign’s avoidance of ratings was not without precedent. Many China corporates such as Huawei and Haier have completed unrated offshore bonds. In 2016, 74% of Chinese USD bonds were unrated, according to China Minsheng Securities. “Some large Chinese corporates do not want to use rating agencies because they just don’t want to entertain the rating agencies every year,” a managing director at a European bank told The Asset in 2017. Furthermore, investment banks have been increasing their headcount of ratings experts challenging ratings agencies in giving advice to issuers. One of their major duties will be giving issuers a clear sense of what credit rating they can get.
Another notable trend in the past two decades has been the growing role of the local ratings agencies. Indeed, China has no fewer than four agencies: China Chengxin International Credit Rating, China Lianhe Credit Rating, Dagong Global Credit Rating and Shanghai Brilliance Credit Rating & Investors Service.
Local Currency
Bond Markets
Long before the Asian G3 bond market took off, local currency fixed income was thriving and, in fact, had been one of the factors that contributed to the Asian financial crisis of 1997. Asian currencies pegged or strongly linked to the US dollar had been attracting foreign investor inflows aided and abetted by optimistic credit ratings. When the Thai government withdrew the peg and the baht devalued dramatically, the “contagion” spread across Asia.
Nonetheless the local currency bond markets accounted for 95% of the total bond issuance in 1998, according to data from Refinitiv. In 1998, in ex-Japan Asia, there were a total of 777 local currency bond issues, compared to only 40 in G3 currencies. Korea and India were large and well-established markets. Although smaller in terms of over volume, Hong Kong, Thailand, Indonesia, Malaysia, Singapore and Taiwan were also gaining momentum.
Governments across Asia have been keen to develop the local currency bond markets to provide medium- and long-term finance to both the public and private sectors. The advantages for companies are that funding from bonds does not dilute shareholders and is likely to be cheaper and less restrictive than a bank loan.
A further attraction of the home bond markets, which was particularly germane in the aftermath of the Asian financial crisis, was to remove the currency risk associated with offshore borrowings in US dollars. Equally, institutions with local currency liabilities such as pension or insurance funds, require sufficient investment assets with equivalent maturities. Yet, in its first survey of the local currency bond market, Asset Benchmark Research reported large shortcomings.
Liquidity remains an issue in the domestic markets. Despite a more positive mood in Thailand, many respondents complained about the scarcity of good corporate bonds. Likewise, investors complain about the lack of commercial paper in the Philippines. […] In Malaysia, investors also note a supply-demand imbalance. “We are always looking for good opportunities in local paper,” says the manager of a large assurance company. “Presently, it is a supply-driven market. There has been a lack of issues compounded by the recession,” states the fund manager of a multinational insurance company.”
Room for Improvement
The AssetJune 2000
In an effort to provide more financing opportunities for companies and assets for investors, there have been several moves to develop new instruments. The first initiative in Asia was the renminbi-denominated Panda bond in 2005, aimed at opening China’s onshore bond market to foreign issuers. Although it was almost dormant for years after its launch, it experienced a revival in 2016 and again in 2018, which commentators linked its renewed appeal to China’s Belt and Road Initiative.
Panda bonds are also seen as a funding source for projects of China’s Belt and Road initiative. Maybank last year sold 1 billion yuan in panda bonds, earmarked for Belt and Road projects. “The Belt and Road initiative will improve the volume of issuance for panda bonds. Shanghai and Shenzhen have already carried a pilot bond for the Belt and Road initiative,” says Weifeng Li, assistant general manager, sovereign department at China Lianhe Credit Rating.
Panda on the rebound
The Asset17 July 2018
Not long after the Panda bond was created, Dim Sum bonds followed offering the twin lures of the renminbi and the China economy. But after a burst of activity, the market seems to have peaked in 2014 when more than 290 billion yuan (US$40 billion) was raised. Since then, other regulators have tried to replicate the idea starting with the Philippines’ less imaginative global peso bonds and culminating in the Komodo bond from Indonesia, which was originally known as a nasi goreng note.
The Asset’s columnist, Jonathan Rogers, questioned this funding/investment route in a comment piece at the beginning of 2018.
“Despite the initial hype, these instruments have failed to demonstrate staying power, and to my mind are best regarded as coupon-bearing instruments with a foreign exchange call embedded.
In other words, these bonds are hot when the outlook for the local currency in which they are denominated is rosy – usually thanks to an auspicious macroeconomic or political backdrop – and fall out of favour when that rosiness fades.
It’s not simply about that, however. What these instruments have been bedevilled by has been a telling lack of liquidity in the secondary market. After the initial flush of excitement, holders have decided that they would have been better off simply buying local government bonds, assuming that the relevant withholding tax regime allowed rebates where double taxation treaties were in play.”
Treat the Komodo bond
hype with the scepticism it deserves
The Asset17 July 2018
Only time will tell whether Pandas and Komodos become endangered or extinct species, but it is clear that the domestic currency markets are here to stay. In 2018, Asset Benchmark Research extended the survey to Vietnamese dong bonds and to the Chinese onshore fixed income securities market, the latter partly due to its opening to foreign investors.
“Asia has lagged behind the rest of the world, especially North America and Europe; until 2015, we were less than 10% of the total green bond market. But if you look at 2017, we had US$43.4 billion of green bond issuances in Asia, roughly accounting for 36% of the global issuances,” says Neelamani Muthukumar, group chief financial officer of Olam International Limited, which successfully issued a US$500 million sustainability-linked club loan in March 2018.
“More importantly, over 11 countries in Asia have already issued green bonds during this year. Already we are seeing close to US$200 billion of green bonds being issued this year,” adds Muthukumar.
Despite this explosive growth, two major challenges could block the further development of green bonds in Asia.
In particular, there is a pressing requirement for a more conducive regulatory environment for green bonds in various Asian markets. At present, the regulatory environment tends to favour investor protection. While there is nothing inherently wrong with investor protection, if not managed properly this bias could come at the expense of market development.
Another key development necessary is a convergence of various environmental, social, and governance (ESG) standards linked to the issuance of green bonds. At present, there are at least four sets of standards for issuing green bonds in Asia issued by different bodies.
What holds back the growth
of Asian green bonds? 
The Asset  6 November 2018
Have you read?