HSBC and Citi compete for Asian bond supremacy

HSBC and Citi lead the way as competition for record issuance is at its most intense in five years, with the number of underwriters rising

PUBLISHED : Monday, 07 July, 2014, 5:26am
UPDATED : Monday, 07 July, 2014, 8:08pm

Competition to underwrite record bond sales in Asia is the most intense in five years as more banks seek business in the world's fastest-growing regional economy.

The gap between this year's first and second-ranked arrangers of notes denominated in US dollars, euros or yen has narrowed to 1.4 percentage points, the least since 0.9 in the same period in 2009.

HSBC Holdings leads with 12.5 per cent, followed by Citigroup at 11.1 per cent.

The number of underwriters jumped to 55 from 47.

Borrowers in Asia sold a record US$107.7 billion equivalent of notes in the first half, as the region's economy is set to lead global growth with a 6.18 per cent expansion this year, according to the median estimate of economists surveyed.

Offerings for all of this year might reach a record for a fourth year, exceeding the US$137 billion total last year, the top five arrangers said.

"Volumes are going up and absolute revenue continues to increase even if the percentage fee on each deal varies," said Mark Follett, the head of high-grade debt capital markets for Asia ex-Japan at JP Morgan Chase, which is in third place with 8.4 per cent this year. "The bond market is a highly visible business and many banks see it as a critical part of their investment banking footprint in Asia."

Issuance in the first half jumped 26 per cent from the previous high last year. Thirty-two borrowers sold dollar-denominated deals valued at a minimum US$1 billion, more than double in the same period last year.

Underwriting competition was also intensifying after fee income from arranging bond and equity sales, as well as advising on mergers and acquisitions, dropped 23 per cent in the region in the past three years, said New York-based research firm Freeman & Co.

China Petrochemical Corp, the parent firm of Asia's largest oil refiner, raised US$5 billion in April in the biggest offering of notes in the US currency by an Asian issuer in more than a decade. The amount matched a sale in November 2003 by Hutchison Whampoa.

CNOOC, the mainland's largest offshore explorer, sold US$4 billion of bonds and Tencent Holdings, Asia's biggest internet company, priced US$2 billion of debt.

All three deals were issued in April, making it the busiest month on record for dollar-denominated bonds in the region.

Greater China accounted for over half of the new high-grade issuance in the first half, independent research firm CreditSights said. That was in contrast with the first quarter of the year when only 35 per cent of new high-grade bonds came from the mainland and Hong Kong.

The increase was in part thanks to "jumbo" bonds from a number of state-linked companies, CreditSights said.

"It certainly is more competitive but issuers are also increasingly realising they need a global banking partner with a global sales force," said Amit Sheopuri, a co-head of debt capital markets at Citi.

Along with deal size, the list of banks on larger trades is also growing. China Petrochemical picked 13 banks to underwrite its bond offering this year compared with 10 last year.

"We will continue to see a trend of pre-financing upcoming maturities or fundraising for capital expenditure," said Hital Desai, a director in the Asia debt syndicate at Bank of America Corp's Merrill Lynch unit. "In addition, mergers and acquisitions could be one of the key catalysts for seeing further supply into the bond space."

The bank jumped three spots to No 5 this year from the same period last year.

Yield premiums on Asia's dollar securities have dropped 25 basis points this year to 238 basis points more than treasuries, JP Morgan indices show.

Investors receive a premium of 94 to 122 basis points for five-year investment grade debt from Asia over their US counterparts, according to HSBC indices.

Speculative-grade new issuance reached US$17 billion in the first half, equivalent to 70 per cent of all of last year's high-yield supply, CreditSights said.

As investors' hunt for yield continues, Deutsche Bank, at fourth place so far this year after ranking second last year, expects an increase in junk-bond sales.

"Risk appetite remained healthy in the second quarter," CreditSights analyst Sandra Chow wrote. "The new supply included eight new perpetual bonds, five debut high-yield issuers and Pakistan's first sovereign dollar bond since 2007."