Asian Demand for SSA

An Institutional Investor Sponsored Report on Accessing Asian Investors

Asian demand for euro-denominated issuance from top-rated sovereign, supranational and agency (SSA) has continued to rise over the last 18-24 months. “Especially in our euro benchmarks, we have seen rising Asian demand over the last couple of years,” says Petra Wehlert, head of new issues at KfW in Frankfurt. “The Asian take-up was 16 percent in 2011 and by 2013 it had almost doubled to 31 percent, as Asian investors increasingly diversified into euros.”

Bankers say this increased demand has been fuelled principally by a continued rise in the reserves of central banks in Asia—spearheaded by China—which accounted for 70 percent of the rise in global central bank reserves in 2013. The lion’s share of those assets are still held in US dollars, which accounted for just under 61 percent of the global total in the second quarter of 2014, roughly unchanged from their share of 62 percent in 2000.

Holdings in euros, however, have now reached 24 percent, according to IMF data, up from 16 percent in 2000, which has underpinned demand from Asian central banks for top-quality and liquid issuers from the Eurozone. “This year we’ve seen between 20 percent and 30 percent of 10 year benchmarks from borrowers such as KfW, EFSF and EIB placed in Asia,” says Spencer Dove, managing director, SSA DCM at Nomura in London.

Historically, away from the largest and most liquid borrowers in Europe, Asian demand has been focused more on the dollar market. Take the example of a smaller European sovereign like Finland. “The feedback we have had from Asian investors is that while they like our credit, they generally prefer to buy us in dollars than in euros,” says Teppo Koivisto, director of finance at the Government Debt Management Office in Helsinki.

Strength of demand for exposure to Finland in dollars remained in evidence in early September, when the government’s $1.5 billion five year transaction generated total orders of about $4.3 billion. Asian demand accounted for 31 percent of the total, with dollar-hungry central banks taking 53 percent of the issue. This is broadly in line with the distribution pattern of dollar benchmarks from other European SSA borrowers, between 20 percent and 40 percent of which have generally been placed in Asia.

More surprising, however, was the reception given by Asian investors to Finland’s euro-denominated syndicated issue the previous month. This was a €4 billion six year benchmark, 12.4 percent of which was placed in Asia. “The number of Asian investors was much higher than in the previous issue and the strong participation of central banks was a pleasant surprise,” the Finnish Debt Management Office announced at the time of the transaction.

More generally, bankers say that even among ultra-conservative Asian institutional investors, the search for added yield is fuelling renewed interest in some of the smaller Eurozone sovereigns that have seen a notable improvement in their credit ratings. “A trend we’ve seen this year is that there has been a rise in demand from a number of investors from Asia, especially Japanese accounts, for sovereigns like Ireland,” says Dove at Nomura. “With absolute yields so low, there has been more of a focus on relative value.”

At the same time, Asian demand for euro issuance from some of the highest-rated and tightly priced names may have reached a plateau. “Given the current environment of very low yields in the euro market and spreads having compressed significantly across the credit spectrum, we see Asian demand being a bit lower in 2014 for our euro benchmark bonds,” says Wehlert at KfW. “In the first half of the year, 21 percent of the investors in our euro benchmarks were Asian accounts.”

Steady demand for French debt

There has been no such slowdown in Asian demand for leading French public sector borrowers, led by the sovereign itself. “We have seen sustained demand for French bonds from Asian investors since the beginning of the year,” says Ambroise Fayolle, chief executive of the Agence France Tresor (AFT) in Paris. “Central banks remain very active in French debt instruments, but we have also recently seen renewed interest from commercial banks, fund managers and insurance companies.”

Asian demand has also been rising for exposure to French agency borrowers such as Caisse d’Amortissement de la Dette Sociale (CADES). Originally set up in 1996 to fund and redeem debt accumulated under the French general social security system, CADES raised just over €15 billion in medium and long term debt in 2013, and began 2014 with an expected funding requirement of between €15 billion and €18 billion.

By mid-September, CADES had already raised €17.45 billion from the international capital market, a substantial share of which has come from Asian investors. “We’ve issued four very large benchmarks this year, two in euros and two in dollars,” says Patrice Ract Madoux, CADES’ chairman.

Historically, says Ract Madoux, CADES has placed no more than about 30 percent of its benchmarks in Asia. This year, Asian buyers accounted for 44 percent of the placement of the agency’s three year $5 billion issue in January, for 49 percent of its €5 billion five year deal in February and for just over 50 percent of its $3 billion 10 year bond in March.

Perhaps the most striking evidence of growing Asian demand for CADES was the response to its €5 billion 10 year benchmark in September. This was CADES’ largest ever 10 year bond, and was priced at a record tight spread to French government bonds (OATs) of just 9bp. Total demand weighed in at €7 billion, with 40 percent of the bonds placed in Asia – an unusually high level for a 10 year transaction in euros. “Asian central banks have been active in our three and five year bonds for many years, but it was a positive surprise to see them moving into the 10 year maturity,” says Ract Madoux.

At the AFT, Fayolle has also seen rising demand at the longer end of the curve. “In general terms – and this is not specific to Asian investors – what we have seen in 2014 is a search for yield that has translated into a lengthening of the duration of bond purchases from many investors,” he says.

“We think this demand from Asia is a very good sign not just for France but also for Europe as a whole,” Ract Madoux adds. “Today, France has a small competitive advantage over Germany in attracting Asian demand, because OATs trade at a spread to bunds. But rising demand from Asia is a long-term trend, and for a number of years we’ve been receiving more visits from Asian investors undertaking reverse roadshows.”

A boost from central banks

Bankers expect Asian appetite for the world’s top SSA borrowers to remain robust, underpinned by a continued rise in central bank reserves. But they point out that there is a range of other ways in which SSA borrowers have been tapping into Asian institutional demand. Surendra Rosha, head of institutional sales for Asia-Pacific at HSBC in Hong Kong, says that a notable recent trend has been an increased focus on opportunities in local currency markets in Asia.

One of the most prominent examples of this, say bankers, has been in the Australian dollar market. “Demand has been driven by an increase in central bank holdings of Australian dollars and also by Japanese life insurance companies, which has made the market a popular source of duration for SSA issuers,” says Dove at Nomura.

HSBC’s Rosha adds that SSA issuers are also looking at some of the region’s emerging currencies as a way of diversifying their funding options. “These issues are not typically targeted at central banks but at long-only investment managers looking to increase their exposure to high-grade credits in emerging market currencies,” he says.

Another alternative that is growing in popularity as a funding tool for SSA borrowers is the market for green or socially responsible bonds, which are finding an increasingly receptive investor following in Asia. When IADB issued its inaugural $500 million four year education, youth and employment (EYE) bond in September, Asia accounted for 38 percent of distribution, with Bank of Korea, Taiyo Life Insurance and Chugoku Bank named among the 24 institutions that participated in the transaction.