Strong economic growth and a wave of mergers and acquisitions will drive Asian firms to borrow more in the international bond markets, driving up issuance by 20 percent a year or more, a Standard & Poor's (S&P) executive said.
Companies such as Tata Steel, India's top private sector steel maker and Singapore's state investment firm Temasek Holdings will lead the surge in new issues as they scour the world for new acquisitions to boost their profit growth, said Surinder Kathpalia, managing director at S&P in Singapore.
"Strong economic growth is creating opportunities that need to be financed," Kathpalia, a former investment banker who has been with the ratings agency for 10 years, told Reuters in an interview.
"Companies across the region are looking for deeper markets, a wider pool of investors and a longer tenor of funding. Most domestic markets do not have funding for the private sector beyond five years. It forces you to go offshore," he said.
Tata Steel last month bid 4.3 billion pound ($8 billion) for Anglo-Dutch firm Corus Group Plc, a deal that would be the biggest ever by an Indian company for an overseas firm. A Temasek-led consortium paid $3.8 billion earlier this year to acquire Thai telecoms group Shin Corp.
Asia's primary issuance, excluding Japan, rose 13 percent in 2005 to $48.8 billion. Issuance through September this year has reached just $30.6 billion because of a market fall-out in May and June, but Kathpalia said the longer-term trend pointed to strong growth over the next few years. The Asian financial crisis in 1997-98, when several Asian currencies collapsed against the US dollar, left many Asian borrowers crippled by their dollar-denominated debts.
That prompted the development of local bond markets, so that borrowers could reduce their exchange rate risk and dependence on bank loans. Now, as Asian companies are growing and making acquisitions, many are turning to the international bond markets where they can borrow for longer terms and tap a wider range of investors.
This year, the Philippines' Metropolitan Bank and Trust Co, Malaysia's AmBank and Thailand's TMB Bank PCL all raised debt using perpetual bonds - which have no maturity date and pay a steady stream of interest forever.
Some borrowers believe it is more efficient to issue perpetual bonds as this avoids the need to refinance the debt and incur additional costs. Temasek may raise 1 billion euros in a 30-year deal, one source told Reuters, in what would be one of the longest-dated issues to come out of Asia. Hong Kong conglomerate Hutchison Whampoa Ltd raised $1.5 billion from a bond issue which matures in 2033, while Indonesia's government sold 30-year bonds last year.
Singapore has been at the forefront in developing its bond market, Kathpalia said, and stands to attract a high proportion of the borrowers thanks to its large pool of investors including global fund managers and the Government of Singapore Investment Corp, which manages the city state's reserves.
"Singapore is a natural conduit for investments across Asia. It has private banks, hedge funds and there has been a migration of asset managers from Hong Kong to Singapore," he said. The S&P executive said Singapore had taken the right steps and provided a good example for other countries trying to boost debt activity.
Even though Singapore does not need to borrow, it has a keen interest in developing its capital markets and regularly issues bonds to provide benchmarks for other issuers.
The Singapore government is planning its first-ever 20-year issue in March 2007 to extend the yield curve. Kathpalia said that some insurance firms and other investors have said that the tenor could easily be stretched to 25 or even 30 years.
However, the Asian bond market still has some way to go. The Asian Development Bank said in a November report that East Asian bond markets had grown quickly since the 1997-98 crisis thanks to government bond issues, but that liquidity had not kept pace. More must be done so that investors can hedge their currency and interest rate exposures, Kathpalia said.
"Outside of Singapore, currency and interest rate swap markets are still underdeveloped," he said, adding that the region needed to accelerate deregulation. Singapore's blueprint for developing its own corporate bond market includes plans to allow banks to hold high-grade corporate debt as part of their minimum liquid assets, on top of cash and Singapore government securities. The central bank said this month that it would broaden the range of securities in 2007.
In order to be included under a banks' minimum liquidity requirements, companies would also have to get rated, another factor that could led to increased global investor demand. "This will help widen the pool of investors even further. It can only help to attract more issuers," Kathpalia said.
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