Why Asian borrowers are shunning US investors

When Legal & General replenished its regulatory capital last month, it chose to do so in US dollars. In a twist, the British insurer sought the bulk of the funding from investors in Asia rather than North America.

Sales of dollar-denominated bonds by companies in Asia-Pacific have reached record levels this year at $109bn, according to Dealogic, two-thirds more than the average of the previous four years.

Of the $850m L&G sold, 42 per cent went to investors in the region and underlined a growing trend of borrowers arranging deals specifically to attract Asian investment.

Historically, Asian demand for dollar investments has waxed and waned, as has investors’ ability to get hold of the currency. The current appetite is at least providing a temporary pool for corporate borrowers to tap.

However, some believe this year’s trend could be a sign that Asia’s markets — so long the backward country cousins of the global financial scene — are maturing.

“We’re strongly of the view that it’s a coming of age,” says Owen Gallimore, a credit strategist at ANZ. “This is about diversifying and investing in something other than US Treasuries — it’s a long-term story.”

One pointer that this year’s trend may be here to stay is the sharp decline in the number of Asian issuers seeking the registration required to reach US-regulated investors when selling dollar debt.

Five years ago, almost half of Asian debt deals carried the registration — known as 144A — according to Dealogic. That has dropped to 17 per cent this year, suggesting many no longer feel the need to go through this costly and lengthy process.

“It used to be you couldn’t do a deal without this big US investor base,” says one bank syndicate head. “This is driven by the growth of the region as well as interest from elsewhere and inflows into Asia-based funds.”

The longest-standing pool of Asian investment dollars has been Japanese investors, keen to better the meagre fixed rate bond returns on offer at home. They have been joined in the past couple of years by Taiwanese and South Korean investors, led by pension funds and insurers, who like their Japanese rivals, also face a squeeze on fixed rates of return. More recently the market has witnessed a flood of Chinese investment.

Chinese interest stems from domestic, or onshore fund managers, as well as the offshore units of Chinese companies that have already raised dollars as part of efforts to get around Beijing’s capital controls and need somewhere to park the proceeds. Last year, big banks led the way in order to help finance their clients’ overseas dealmaking as well to support the renminbi.

There are concerns that the record level of international bond sales by corporate China represents a recycling of funding, as one group raises dollars offshore and invests the proceeds in the next deal from the mainland while it waits to use the money itself.

Still, there is also growing interest from fund managers in mainland China, bankers say. Data from ANZ suggest that on average across the region, 65 per cent of new deals are sold to professional money managers, including pension funds and insurers.

Tapping Asian money is also not without its practical risks, particularly for borrowers still interested in attracting US-regulated investors. That requires opening the books on a deal in Hong Kong and Singapore, then keeping that deal open to bids through the European day and into US trading hours.

On a good day, the risk is negligible and a strong order book of Asian investors can boost interest from Europe and the US, leading to better terms for the borrower. But on a volatile day, it means keeping the book, with its offered price range, running through market swings that borrowers would not face if they waited to see how European markets traded before launching in New York. And any drop in interest from Asia risks deterring European and US bidders, potentially putting the deal at risk.

While bankers are generally confident they can cope with that risk, it is telling that so far no big US borrowers have felt the need to open a deal in Asia. Instead, the interest has been largely from Australian groups — traditionally large dollar borrowers — keen to expand their investor base into their regional back yard, and Europeans such as Legal & General.

For those heralding this year’s trend as a sign of the growing maturity of Asian markets, they point to the growing number of US asset managers setting up locally incorporated units to participate in dollar deals targeted at Asian investors.

As one banker says: “Traditionally, these satellites would invest very little and they had very little sway with the portfolio managers in the US. That is changing now.”