Upfront
OPINION INTERNATIONAL FINANCING REVIEW ASIABehind the curve
W
hat goes down must go up, at least when it
comes to bond yields.
After a brief period, when it looked as though
negative yields might become the norm, investors and
CENTRALûBANKûOFlCIALSûAREûlNALLYûPREPARINGûFORûRATESûTOûTAKEû
off.
That could spell bad news for the investors who hungrily
snapped up long-tenor dollar bonds from Asian issuers in
the hunt for yield this year.
The 30-year Formosa bonds sold by investment-grade
companies and sought after by Taiwanese life insurers
might no longer seem like such good investments.
Worst exposed to rate increases are holders of the
MANYûlXED
FOR
LIFEûPERPETUALûBONDSûSOLDûINû!SIAûTHISûYEARûnû
although, in fairness, they never looked like a good idea at
the time. Perpetuity is an awfully long time to be locked in,
especially when interest rates cannot go lower.
Starved of yield as Treasuries remained mercilessly low,
investors have moved to longer tenors and down the credit
curve in an effort to earn decent returns.
So far, it has been a one-way bet as yields have continued
TOûEDGEûLOWER ûBUTûAûREVERSALûWOULDûINmICTûHEAVYûMARK
to-market losses on portfolios. Eventually, higher
borrowing rates ought to feed through to an increase in
defaults, making investors regret some of their high-yield
investments.
Some of the larger asset managers are preparing for
THEûTIDEûTOûTURN ûBUTûTHEûmOODûOFûMONEYûINTOûSOMEû!SIANû
credits, especially anything with a connection to China, has
looked less than discerning, and some investors could be
left high and dry. Asian bonds have performed defensively
even during emerging market sell-offs in recent years, but a
sudden rise in rates would cause ripples globally.
Of course, part of the reason that rates have stayed low
while equities have rocketed is that US infrastructure
spending plans and tax cuts have been anticipated since
November but have yet to materialise. If these planned
sources of stimulus should fall by the wayside as President
Trump takes on the more important tasks of berating
sportsmen and hurricane victims, there might be little need
for rates to rise.Under a cloud
W
hat will it take for Hong Kong’s IPO underwriters
to take the regulators seriously? Last week’s
comments from the city’s top enforcer, who
SAIDûûlRMSûHADûFAILEDûINûTHEIRûDUTIESûASû)0/ûSPONSORS û
with some engaging in what he described as “reckless”
behaviour, were met with barely a shrug from the broader
ECM community.
It’s certainly true that the Securities and Futures
Commission has toughened its oversight of IPOs for a good
half decade already. In that sense it doesn’t come as a huge
surprise that it now has 136 active enquiries ticking along.
But that still puts the entire underwriting community under
a cloud, exposed to the next unforeseen thunderbolt when
the failings of some long forgotten IPO will be laid at the
door of the sponsor.
This is what happened when the SFC sued UBS and
Standard Chartered in January for bringing China Forestry
'ROUPûTOûTHEûEXCHANGEûINû ûmAGGINGûTHEûPROSPECTûOFûAû
LICENCEûSUSPENSION ûHEAVYûlNE ûORûBOTH
The problem for underwriters is that, at least until this
particular case is brought to a conclusion, there’s still no
concrete example that allows them to calculate their real
exposure in sponsoring an IPO.
It is clear that sponsors carry a far greater regulatory
burden, yet the additional fees generated over other
BOOKRUNNERSûHARDLYûREmECTûTHAT
UBS, for its part, doesn’t seem unduly worried. It was
happy to sponsor ZhongAn’s wildly popular Hong Kong
listing last month, and is said to be pitching hard for others.
That’s no surprise. A sponsor mandate puts a bank in
the box seat when it comes to deciding how underwriting
fees are shared between members of the syndicate. This is
not something to be sniffed at when a deal has two dozens
arrangers.
(OWEVER û4HOMASû!TKINSONSûCOMMENTSûTHATûûlRMSûHADû
failed in their sponsorship role should make underwriters
think twice before they take on that responsibility. At the
very least, they should review how they charge for the
exposure.Worst exposed to rate increases
are holders of the many
lXED
FOR
LIFEûPERPETUALûBONDSû
sold in Asia this year