“Very satisfied, a bit nervous but generally exhausted.” That was how one debt capital markets banker described primary market activity in the Asian debt capital markets in 2010 – a year that will be remembered for achieving the widest spread of issuers that the Asian bond market has seen, for the issuance of bonds in the largest sizes and, increasingly as the year went on, at the lowest yields.

“Everything macro conspired to make investors look to Asia for yield, which in turn made it easier for Asian issuers to lock in funding as cheap as any other market could offer, within or outside the region.”

Plenty of G3 deals

“The G3 bond market has had a really storming year in terms of volumes, but even more so in terms of the greater growth in the numbers of deals, which indicates a broadening out of the market,” says Sean Henderson, head of debt syndicate at HSBC. Asian offshore borrowings totalled US$71 billion in public benchmark bond issuance by the end of November, according to Bloomberg figures, compared to US$56 billion racked up in the whole of 2009.

That represents 147 issues, up from 72 in 2009 – of which HSBC has been involved in 51. No wonder Henderson calls it “a phenomenal year,” comprising “everything from high yield to a lot of début issuers providing a broader platform to choose, from an investor’s standpoint.” That’s what makes it hard to discern the theme of the year, he continues; “there’s no one theme because this year the market has covered so many bases”.

The local currency markets hummed too, continuing their rise to permanence – if not prominence – since the financial crisis, flowing in union with the vast pool of liquidity that is Asia’s bank lending market. It was only the offshore syndicated loan market, previously the dominant source of borrowing for Asian companies and financial institutions, that lagged its peers in its own year of two halves.

“There was a tightening of liquidity in May when the euro crisis sent jitters through the market and pricing, which had been coming down a lot up until then, rose sharply from then onwards and deals became harder to do,” says Phillip Lipton, head of Asian loan syndication at HSBC. “On the other hand, the loan market was still there for borrowers at the end of the year when the bond market shut down completely.”

Still the loan market in 2010 was an improvement on last year with volumes rising, though it was not a very balanced increase, adds Lipton. Hong Kong, Taiwan and Indonesia were pretty active but the lending markets for credits from Singapore ( which concentrated government policy on promoting itself as a regional bond market ) and Australia ( whose corporate resources borrowers were not as desperate as they were last year ) disappointed. So too, most importantly, did the market for the two largest economies of them all, India and China.

Indian, China shine

In contrast Indian banks and a rare Chinese corporate name made stunning appearances in the US dollar bond market in November – just before the G3 bond markets closed down early for the year, pleased to take external scares as a cue to close the books on an 11-month through-train that smashed all sorts of records in primary market issuance and saw the region take on a new mantle as the focal point in the global financial debt markets.

Sinochem, one of the most sizeable Chinese chemical fertilizer companies, wowed investors with a US$2 billion dual tranche bond issue via Citi, HSBC and UBS that comprised US$1.5 billion of bonds, paying a coupon of 4.5% to provide a yield of 280bp over 10-year treasuries, and US$500 million in the longer tranche paying a coupon of 6.3% to yield 228bp over the 30-year benchmark. The reason for surprise is that Sinochem was unrated and a début issuer, and the 30-year tranche was the first by any Chinese borrower, as well as the largest bond issue from the country and, incidentally, only the fourth to have paper outstanding in the market.

The same huge Indian banks that at the beginning of the year were still deleveraging from a previous borrowing binge that crashed in 2007, roared back with a vengeance in November. ICICI, the largest Indian private bank, raised US$1 billion in 10-year funds for the same yield as it got on its return to the market only four months before – despite the doubling in size and tenor. A few days later, the State Bank of India, the government-owned lending giant, pulled off a s1 billion 10-year offering that finally offered European investors the taste of Asian paper in their own currency – something they had been starved off all year but that US accounts became increasingly fond of – and accustomed to – as their own economy limped predictably on towards the welcome renewal of central bank support and the availability of cheap money into next year.

“There has been a refocus on Asia and the resilience of Asia,” says Devesh Ashra, head of debt syndicate at Credit Suisse. “The emergence of our regional investment base really ramped up for deals that support the growth of the region, and at the same time investors in the US and Europe were allocating a meaningful proportion of their portfolio in Asia.”

Chasing higher yields

Another theme that applies to all the borrowings was the low level of the yields, thanks to the lowest US treasuries rate regime on record being applied all year, spurring cheap money to find a home with some added return. Asia had long since been recognized as excitingly emerging. Now it was impressing investors with its stability.

“That’s why by the end of the year, investment banks were able to sell a 10-year deal for Reliance Industries, for example, because of the shape of the curve, because it meant that investors in their search for alternative yields were being forced to buy longer credit products,” says HSBC’s Henderson. “These are low coupons for them; even Reliance Industries at 4.5%, Hyundai Capital 3.75%, the Philippines 4% – that’s why the numbers of deals doubled.” And that is the reason too why the Republic of the Philippines chose a US$3 billion exchange deal in July to pay back some of its shorter-dated debt, while it added something novel in its US$1 billion-equivalent peso-denominated bond that tapped offshore peso funds, including some of the millions saved abroad by Filipino expatriate workers, in September.

It was a different rationale to that behind China’s reciprocal drive to start an offshore renminbi market in Hong Kong as a way of promoting the offshore spread of the renminbi by giving investors something to invest in. On the other hand, funds poured into domestic currency bond markets elsewhere to the extent that governments had to introduce capital controls to stem the flow of money that threatened to overwhelm their economies.

In addition, Asian issuers in cross-border borrowing into local currencies was a trend that was pioneered and continued in 2010 by Export-Import Bank of Korea ( Kexim ). During the year, it issued in Taiwan in US dollars, Malaysian ringgit and Thai baht and it is looking for more opportunities at arbitrage across borders in Asia.

These all made up the broadest wave of activity in the Asian bond market that seems to be embracing both the inward and outward flow of funds, its local currency bond markets and the wider global market of G3 currencies. Temasek, Singapore’s highest rated Asian issuer, even added the use of pounds sterling, when it launched a scorching £700 million bond offering in September, just before taking its Singapore dollar yield curve out to 40 years. Korean issuers were looking at Swiss francs in 2010 and who knows what might come in 2011?

Sovereign savings

The global Philippines peso bond, which gives foreign investors a chance to invest directly in the country without the hassle of going through the local market, was the first time that an Asian currency other than the yen has been used outside the region. It showed too how much the market for the country’s debt had rallied from when the Philippines began the year’s G3 borrowing in January with a US$1.5 billion re-opening of its 2020 and 2034 bonds via Barclays Capital, Deutsche Bank and HSBC. Still it already had a low new issue premium compared to its emerging market peers like Turkey – an indication of the way global emerging market investors would view Asian credits in 2010.

The Republic of Indonesia was the next sovereign to market a week later with a US$2 billion 10-year offering, led by Barclays Capital, Citi and Credit Suisse; it lost a planned 30-year accompanying tranche but, by being focussed on getting the best deal with a major benchmark size, says one lead manager, secured its lowest coupon ever ( 5.875% ). Indonesia attempted to re-open the sovereign sukuk market to help promote its efforts at becoming a player in Islamic financing, but had to settle later in the year for a samurai issue.

The Socialist Republic of Vietnam too joined the Southeast Asian sovereigns in January when it priced a US$1 billion 10-year issue. By the end of the year, Sri Lanka had completed two deals, the second ( also for US$1 billion ) continuing its return to favour after the end of the civil war.

But it was Malaysia that really turned on investors across the world, when it successfully launched its own Islamic sovereign bond in June. Lead managed by CIMB and HSBC, it attracted commitments of US$6 billion from 270 investors, raising US$1.25 billion with a record low yield of 3.87% for an emerging market sovereign in Asia.

Other notable deals included PTT Exploration and Petroleum ( PTTEP ) reopening the corporate bond market for Thai issuers in July when it raised US$500 million in five year funding – the biggest from Thailand since the Asian crisis in 1997. In September, DBS launched the largest size ( US$1 billion ) of Reg S senior bonds in September, while OCBC Bank’s lower tier 2 12-year non-call seven bond issue was the first of its kind from an Asian bank, although it suffered in trading later on.

It was Temasek, however, that spent the year proving the case for Singapore, putting its borrowed money where its mouth is, so to speak, to become perhaps the region’s premier borrower – out of nothing. Having only entered the Singapore dollar bond market in December 2009 with two issues of S$300 million 20-year and 30-year bonds, Temasek launched a benchmark S$1 billion 10-year issue in February that closed in less than five hours. I

t then followed up investor requests with 15- and 25-year issues a month later before ‘pushing the boundary’ in July by issuing a landmark S$1 billion 40-year bond that refuted the perception that the Singapore market cannot accommodate large sizes and tenors beyond 10 years. “This makes Singapore dollar bonds a possible funding source for local and foreign issuers and investors,” says Leong Wai Leng, chief financial officer of Temasek Holdings at The Asset’s Asian Bond Markets Summit in October. [“It] has also created new benchmarks for the market to price off, and the availability of a Singapore dollar corporate yield curve all the way to 40-years can serve as a real-time fair reference point for both investors and issuers,”

“Asia’s appeal as a multi-trillion dollar bond hub is set to accelerate as the region primes itself to become a key alternative funding source for investors,” she continued. “Bond markets in the East have become increasingly attractive particularly to institutional investors, as Asian countries boast healthier balance sheets compared with their Western counterparts.”

Cheung Kong Infrastructure and Noble Group introduced the first perpetual bonds by Asian corporates in September – to initial excitement but later succumbing to misgivings about the instrument. Intended to appeal to equity investors, with their pseudo-dividend features, the fledgling market in perpetual bonds could hardly have asked for more popular names than Noble and CKI.

Noble is a supply chain and commodities trader that has come to represent the post-crisis China-led and Asia-backed global trading economy and that has earned myriad plaudits as one of the classiest borrowers in the international debt markets, not least by securing an equity injection structured into a loan from China Investment Corporation.

CKI is a company owned and guaranteed by Hutchison Whampoa, belonging itself to Li Ka-Shing, global stock market front-loading supremo and Asia’s richest man. But Noble saw its bonds gap out three points in November, thus curtailing the expansion of a market that flickered for a couple of months for the first time in Asia but now shows no sign of life.

That, perhaps, was the point at which Asian issuers could achieve no more during a year where the sky, elsewhere, was the limit in the international bond markets, and it may have seemed to investors that all bonds only rally – suggesting that the interest in Asian bonds in 2010 may be more than just a cyclical response to cheap money and the forthcoming renewal of quantitative easing in the US.

Loans fall-back

Noble Group was however able to tap another more traditional source of funds with aplomb, signing a US$1.559 billion syndicated loan refinancing in July with the same group of stellar banks around the world that provided its US$800 million loan last year that came hand in hand with a triumphant bond issue. It was an illustration of how the loan market is working in tandem with its younger, more dynamic debt market counterpart, especially for borrowers requiring large amounts of sizeable funding quickly, like in the real estate and casino industries.

Shimao Holdings used it to great effect this year too. The Chinese property developer reopened the international bond markets for the real estate sector at the end of July with a US$500 million seven-year non-call four bond that drew US$3.7 billion worth of orders from more than 240 accounts. But before that, it had wanted some quick cash to fund the acquisitions of stakes in some of its existing joint ventures, which certain bond covenants had prohibited. Instead in May it secured a quickfire US$340 million five-year syndicated loan to tide it over.

Another corporate subsector of the Asian syndicated loan market – that has been that other outlet for excess Chinese savings – is the Macau casino sector. Macau was saved in 2009 by Chinese punters, allowed by Beijing to visit the gambling enclave from the second half of the year, just as the Chinese banks and some important Western banking friends did the honours for the gambling and property sector. That largesse continued in 2010 with Sands, MGM and Galaxy groups all funding the next, higher-class stage of Macau’s development.

Galaxy Entertainment and MGM Grand Macau closed loans of HK$9 billion and US$1.1 billion respectively. Both deals avoided the fate of Las Vegas Sands’ subsidiary Venetian Macau’s attempts to sell down a US$1.75 billion-equivalent facility which hung over the overall market for Asian syndicated loans all year. Underwritten at the end of 2009, just before the I0th anniversary of China’s resumption of Macau's sovereignty, and launched into the market in January, the deal finally closed in May, with six more banks taking up just $157.6 million. Even then it could be picked up in the secondary market at below that price - signs that at least one bank among the 10 underwriters was left holding more than it wanted. The difference between the three deals was that the last one was arranged by investment banks, comments one commercial banker.

Another protracted loan deal this year caused even more problems for the underwriters holding on to massive commitments and impinging upon their appetite for other lending projects – the high-profile loan for Indian telecommunications firm Bharti Airtel’s. Its US$7.5 billion offshore syndicated loan to finance its acquisition of the African telecom assets of the Kuwait-based Zain Group was mandated in February and the loan struggled in syndication most of the year closing only in October. Bankers said the deal was an embarrassment, attracting very little of the demand that should have been there due to the tight pricing that the borrower insisted upon.

That was one side of the loan market: too many top heavy offshore syndications that made it easier for all concerned to opt for club deals to do away with the underwriting risk. The other side though was illustrated in India, having a vibrant domestic market in bank lending, so much so that Indian banks fill the top positions in the regional league tables – especially with the Chinese banks withdrawing from the market under orders from Beijing to focus on re-capitalizing their balance sheets in the equity markets.

That scooped away the main lenders to Asian corporates of the previous years. When Greece threatened to default on its euro-denominated debt and risked bringing down the European Union, liquidity tightened and even in Asia the syndicated loan market slowed down.

A year of two halves if either there was one. It wasn’t just European banks that were constrained from lending but all the banks saw their internal cost of funds going up enough to make lending not worth what Asian treasurers were asking.

Having been the stars of 2009’s economic stimulus in their prolific lending to Chinese companies, to state bodies, to projects, and – with any excess funds left over – to a myriad corporate borrowers across the Asian region, but especially to their supplier countries such as Australia, the Chinese banks were focussing on the equity markets in 2010. In that guise they would continue to dominate Asian capital markets issuance – as the issuer this time, not the provider.

In 2011 the world will be watching them in action as they try to spread their wings abroad. They will probably then write the next chapter on the development of the Asian debt and equity capital markets – and its growing position within the global financial markets.