IFR Asia - October 27, 2018

Upfront

OPINION INTERNATIONAL FINANCING REVIEW ASIA

Scrip doctors

N

ever mind Adam Smith’s invisible hand, state-owned

entities in China and Bangladesh are proposing

to deliver a helping hand to ease the pressure on

investors facing losses in their troubled equity markets. Not

only that, but they are planning to issue bonds to fund the

exercises.

Chinese media cut to the heart of the matter and branded

Shenzhen Investment Holdings’ planned issue a “bailout

bond”. Proceeds will provide funds to private sector

companies facing temporary liquidity problems as a result

of owners pledging their shares against loans.

Meanwhile, the Investment Corporation of Bangladesh is

planning to issue subordinated bonds and use most of the

proceeds to invest directly in the stock market to prop up

prices following a sharp decline.

The carry trade might work for Shenzhen Investment if it

charges higher rates for loans than it pays on its bond issue,

but ICB has no certainty that Bangladeshi shares will deliver

the 9% annual return needed to cover its coupon, making

the business rationale hard to fathom.

In Western markets, governments generally only prop up

struggling equity markets indirectly, through policy easing

or injecting liquidity into the system. Close to a decade of

rock-bottom policy rates in the US and Europe certainly

boosted stocks, but this happened across the board, and

SPECIlCûCOMPANIESûWEREûNOTûTARGETEDûFORûSUPPORTûMERELYû

because their share prices had sagged a little.

In Asia, where sovereign wealth funds are big equity

investors, it is perhaps less taboo for governments to

intervene directly in the stock markets, but picking

individual companies to support will require some

JUSTIlCATIONûTOûAVOIDûACCUSATIONSûOFûFAVOURITISMûnûUNLESSû

they are at immediate risk of collapse.

Unspoken is that the stock markets in parts of Asia act as

THEûUNOFlCIALûRETIREMENTûFUNDûFORûMANYûINDIVIDUALSûTAKINGû

some burden off the state, as long as they trend up.

That also means that when shares slump the effect is felt

across a much wider segment of society than in the US or

Europe. ICB even paid compensation to investors who lost

money in the country’s equity market crash of late 2010.

Equity is supposed to be the riskiest layer of capital,

where bad decisions and poor luck can cause investors to

lose it all. In parts of Asia, though, the house considers it

easier in the long run if everyone wins.

Better late than never

T

HEû+OREAû(OUSINGû&INANCEû#ORPûHASûlNALLYûACHIEVEDû

a long-held goal to issue covered bonds in the euro

market. It is, perhaps, a surprise that it didn’t come

sooner. US interest rates are rising, and it’s no secret that

Europe has a much more liquid covered bond market than

the US, which is where KHFC has issued all of its previous

deals.

,ASTûWEEKSûõMûlVE

YEARûCOVEREDûBONDûSUCCESSûHASû

underlined for KHFC and other prospective Asian issuers

that, indeed, Europe is still the best market for this type of

transaction.

It is nonetheless understandable that it has taken so long

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+(&#ûlRSTûBUILTûAûRAPPORTûWITHû53ûINVESTORSûWHOûWEREû

already familiar with the jurisdiction, and South Korean

issuers continue to be frequent visitors to the Yankee

market. The US was the comfort zone, even though the

issuer said it knew it would have to make it to Europe.

Now, future Asian issuers have a better shot at this

market, as there is a growing set of comparables to help

establish themselves.

KHFC’s transaction was over three times subscribed,

WHICHûWASûPARTICULARLYûIMPRESSIVEûCONSIDERINGûlNANCIALû

markets were whipsawing during the bookbuild. It helped

that the deal was paying a generous premium over higher-

rated Triple A Singaporean euro covered notes, and that the

bonds had a “Social” tag, which certainly draws attention in

Europe.

The basis swap is also much more conducive than last

year, which makes funding in euros cheaper than the US

DOLLARûMARKETûBYûABOUTûBPnBP

That’s not to say that there are no issues for European

investors to consider. Korean household debt is a major

ONEûnûITûHITûûOFû'$0ûINûTHEûlRSTûQUARTERûOFûTHISûYEARûDATAû

from the Bank for International Settlements show, far above

THEû'ûAVERAGEûOFûû4HEûGOVERNMENTûCERTAINLYûNEEDSû

to take a grip on the situation and to do so it is hoping to

ADJUSTûMORTGAGEûSTRUCTURESûTOûlXEDûRATESûFROMûmOATERSûTOû

promote economic stability.

3OUTHû+OREAûHASûAûTARGETûTOûINCREASEûlXED

RATEûLOANSû

to 47.5% of the total mortgage pool by year-end. KHFC is

optimistic that, with the help of more covered issuance, the

country can reach that target.

Chinese media cut to the heart

of the matter and branded

Shenzhen Investment Holdings’

planned issue a “bailout bond”.