Creating confidence

Initiatives either to support or guarantee bond issues have helped open new sources of funding for Asian companies and, at the same time, attract investors outside their home markets. The pace of progress, however, has been slow.

Investors are understandably cautious when it comes to investing outside their home markets. Unfamiliar companies, cultures and regulations mean that confidence has a hard time crossing borders. However, overcoming that home bias is the key to uniting Asia’s capital markets.

There are signs that credit-enhancement schemes can help companies breach some of those borders.

The Credit Guarantee and Investment Facility, a joint initiative between the Asian Development Bank and the ASEAN+3 governments, allowed two Asian companies to access new groups of investors last year. Now, more CGIF-backed deals are in the works.

“The guarantee we gave in Indonesia helped bring a Japanese investor to the rupiah bond market for the first time,” said Boo Hock Khoo, CGIF vice president for operations. “We’ve successfully placed a second tranche to another Japanese investor this March given increased investor appreciation of the product.”

BCA Finance, an auto-financing unit of Bank Central Asia in Jakarta, priced a Rp300bn (US$25.5m) three-year bond to yield 8.2% in early December. Sumitomo Mitsui Financial Group acted as co-ordinator on the offering and investors included Japan’s Dai-Ichi Life Insurance.

“BCAF has been keen to access foreign investors to diversify our funding sources and to strengthen our presence in the capital market,” said Roni Haslim, president-director of BCAF, at the time. “The guarantee from CGIF is an effective form of support for BCAF to fulfil our funding strategy to back up our business growth.”

BCAF is well known in its home market, where it has a local Triple A rating, but it would have struggled to attract overseas investors without the CGIF guarantee. The offering also came at a challenging time for Indonesia, after a global emerging-markets selloff, beginning May, had sent the rupiah plunging more than 20% against the US dollar.

Standard & Poor’s rates CGIF an AAA on its ASEAN scale and AA+ globally, well above Indonesia’s Baa3/BB+/BBB– sovereign ratings ceiling.

It was only the second bond CGIF had guaranteed since it began operations in May 2012. The first was a Bt2.85bn (US$99.4m) three-year bond in April 2013 from Noble Group, a Hong Kong-based, Singapore-listed commodity trader.

“Companies will only issue in overseas markets if it makes sense for them economically. For us, there is a risk and reward angle, too, but we also have to think about the development impact.”

While Noble has no trouble attracting overseas investors, having issued US dollar bonds in the past, the CGIF wrapper won the offering an AAA rating on Fitch’s local Thai scale. Pricing to yield 3.55%, or about 70bp over government bonds, proved competitive against the group’s other sources of funding. The issue also gave Thai investors a chance to diversify their portfolios.

With only two issues under CGIF’s belt so far, critics note that progress has been slow and deals remain highly selective. However, to support an issue, CGIF has to be comfortable taking on a significant amount of credit risk without jeopardising its own high credit rating. For that reason, critics have said a sudden spurt of new issues is unlikely.

CGIF also wants to ensure it supports projects that promote the development of the region’s bond markets.

“Companies will only issue in overseas markets if it makes sense for them economically,” said Khoo. “For us, there is a risk and reward angle, too, but we also have to think about the development impact.”

Indian initiatives

While the CGIF mandate covers the ASEAN+3 grouping, multilateral development institutions are also working on credit-enhancement projects in individual Asian markets.

India’s local rupee debt market is home to several initiatives aimed at making it easier for the country’s smaller businesses and infrastructure projects to access credit.

India Mortgage Guarantee Corp, a joint venture between India’s National Housing Bank, Asian Development Bank, International Finance Corp and US-based Genworth Financial, guaranteed its first financing on March 31. Private mortgage lender Dewan Housing Finance sold Rs378m (US$6.3m) of 9% mortgage-backed notes to ICICI Bank, in India’s first securitisation to come with a mortgage guarantee.

NHB, regulator of the Indian housing finance industry and entirely owned by the Reserve Bank of India, owns 38% of IMGC. Genworth holds a 36% stake, while ADB and IFC hold interests of 13% each.

The IMGC guarantee covers 10% of the pool of mortgages underlying the deal. The single-tranche securitisation carries credit collateral equal to 7.5% of the pool size. The partial guarantee helped the deal receive an AAA rating from local agency Care. Care’s senior rating for DHFL is AA+.

Domestic Indian investors, led by state-owned insurers and pension funds, insist on very high ratings and short tenors, while banks are reining in credit growth after a rise in non-performing loans. To help bridge that gap, the ADB is also supporting Indian Infrastructure Finance on a pilot scheme to bring more project financings to the rupee capital markets.

The ADB agreed on a further US$700m credit line for IIFCL in October with the aim of supporting credit guarantees for infrastructure projects. IIFCL has yet to guarantee its first deal, but the scheme intends to draw more institutional investors into the sector to help Indian banks reduce exposure to long-term infrastructure lending.

Despite the slow going, market participants believe there is a future for project bonds as Basel capital rules force banks to review long-term lending policies.

Malaysia’s ringgit bond market, for instance, has been supporting local infrastructure projects since 1993, notes Khoo at CGIF.

“Insurers and pension funds need to invest in assets over 10 years, while banks don’t want the risk of duration. Local currency project bonds in other markets will take off eventually: it’s a natural fit,” said Khoo.

In April, IFC provided its first credit wrap to a local currency bond in Indonesia, covering 20% of a Rp504bn three-tranche bond from property developer Ciputra Residence to finance environmentally friendly building projects.

IFC’s partial guarantee bumped up the bonds’ rating from Fitch Indonesia one notch to Single A, helping attract pension funds in a well-oversubscribed issue.

IFC plans to offer more credit-enhancement structures to corporations in Asia, where it has been less active than elsewhere. In 2001, it offered partial credit guarantees to rupee bonds from Bharti and Ballarpur Industries and, a year later, to an issue from Thailand’s TelecomAsia.

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