Equities bankers are on a slow boat to China, with Asian investors showing little interest for their offerings. But their debt counterparts are enjoying the wind in their sails, with investors from the Far East eager for hybrid issuance.
There is not much data available on the exact proportion of issuance from initial public offerings or bonds allocated to Asian investors. But what there is suggests that, although IPOs in Europe have been few and far between, those that have come to market have failed to spark the interest of Asian investors.
Only 0.2 percent of the free float of Ziggo, the Dutch telecoms firm that was listed in March for $1.2bn and the largest European IPO so far this year, is currently allocated with Asian investors, according to data from Bloomberg.
One head of equity capital markets at a European investment bank, who declined to be named, said there had been little increase in interest from Asian investors in European names.
However, if the conversation is about debt rather than equity, then Asian investors are prepared to listen, according to bankers. Hybrid debt, which has equity-like characteristics such as bearing first losses in the event of insolvency or equity conversion features, has become particularly popular.
Benedict Nielsen, head of debt capital market and syndicate in Emea at Nomura, said: “It is clear that the largest single potential investor base for hybrid debt issuance is Asia, and within Asia that is predominately, but not exclusively, concentrated in the Asian private bank investor base.”
Institutional investors are also snapping up hybrid debt issuance. Last month, Singapore government fund Temasek and a group of south-east Asian strategic investors invested in the issuance of Sfr3.8bn ($3.9bn) of mandatory and contingent convertible securities from Credit Suisse.
Nielsen said: “There has been a growing need for fixed income products among the Asian investor base. Historically, they are more used to buying equity than fixed income.
However, given the volatility in equities over the past three of four years there has been an increased focus on fixed income products that offer reasonably high coupons, but have significantly lower volatility. That is where hybrid capital has an important role to play.”
According to Nomura, which was on the deal, Asian investors took up the majority allocation of German utility RWE’s $500m issuance of hybrid capital notes.
Non-hybrid bond issuance has also attracted more interest from Asian investors. A euro 2bn bond issue in May by Dutch public lender Bank Nederlandse Gemeenten saw strong participation from Asian investors.
Even countries outside the core European market are seeing an increase in interest from Asian investors.
Paolo Zaniboni, managing director, and head of Troika Dialog’s London office, said: “There is a renewed interest in the emerging markets and in Russia-CIS from a wider range of clients.
You have more dedicated money from outside the usual Europe and US – such as Asia – looking into the Russia market.”
Like many investors across the world, Asian investors are sitting on an ever-growing pile of cash as the global economic crisis continues. Unlike others, however, Asian investors seem more willing to put their capital to work.
Christian Edelmann, partner and head of financial services in Asia-Pacific for Oliver Wyman, said: “If you look at the macroeconomic background, we observe that 39 percent of all global deposits sit in Asia. Although that is skewed towards Japan and China.”
Nielsen said: “Based on recent discussions over allocation with several private banks in Asia, I’d estimate around 25 percent more money is being invested in fixed income this year compared with last.
That increase is more attributable to cash built up in deposits, rather than a reallocation from other asset classes.
It is being invested into recognisable [European] names Asian investors are familiar with. In the hybrid capital space, there is the potential to see a lot more issuance in the short term.”
Aside from the issuance from the banking sector, these names include Siemens and Adidas, which have also issued hybrid debt this year.
Although debt offers a bright spot for bankers hunting for fees, many are cutting staff in the region. Credit Suisse, Deutsche Bank and Morgan Stanley are among the banks that have cut staff in recent months. Russia’s Renaissance Capital closed its offices in Hong Kong and Beijing in June.
Edelmann said: “You need an Asian distribution franchise, which few of the banks really have. While the top seven or nine global investment banks may have that distribution, if you go down into the second tier, the banks may have strong domestic origination capabilities in their home markets, but not the distribution franchise in Asia.”
The other problem is that fees in the region are far from US levels. According to data from Dealogic, the average IPO fee in Hong Kong was 2 percent to 4.5 percent between 2009 and 2011, depending on the size of the deal. In the US, this can range between 3 percent and 7 percent.
Edelmann said fees for debt issuance were also lower than in other regions. He said: “Just doing the DCM, ECM business out here is not going to make you any money, which is why you need a broader equities or fixed income platform – this is something many have struggled with.”