Record M&A Spree Sees Banks Dominate Dollar Sales: Asean CreditKatrina Nicholas, Sanat Vallikappen and Liau Y-Sing
Southeast Asian banks dominated regional bond sales as corporate clients sought funding during the busiest year for acquisitions on record.
Seven of the top 10 borrowers in the Association of Southeast Asian Nations in the first six months were banks, the most in any half in Bloomberg-compiled data going back to at least 2007. United Overseas Bank Ltd., DBS Group Holdings Ltd., Krung Thai Bank Pcl and Export-Import Bank of Malaysia Bhd. were among lenders raising $4.6 billion.
Mergers and acquisitions by Asian corporate buyers, from a brandy maker to a grain trader, rose 19.1 percent from a year earlier to $343.4 billion. Banks sold dollar bonds to fund the deals, finance trade and meet stricter Basel III capital rules, taking advantage of record low U.S. borrowing costs that are predicted to start rising next year.
“Dollar funding costs are relatively cheap and expected to increase,” said Adissadikin Ali, the Kuala Lumpur-based chief executive officer of Export-Import Bank of Malaysia. In addition to trade finance, he said there is stronger demand for loans as “more Malaysian companies venture abroad.”
Kuala Lumpur-based Sona Petroleum Bhd. borrowed $140 million last month to help fund the purchase of a stake in two Thai oil and gas blocks. Animal feed maker Farm’s Best Bhd. announced a transaction June 12 to expand in China. Singapore’s Oversea-Chinese Banking Corp., which has raised $325 million selling dollar debt since Dec. 31, offered $5 billion equivalent to buy Hong Kong’s Wing Hang Bank Ltd. in April.
“Banks that are very active in trade finance as well as in M&A financing, like the Singapore, Malaysian and Thai banks, will often need to borrow from the markets to fund the U.S. dollar-denominated needs of their clients,” said Jean-Francois Tremblay, an associate managing director in the Asia-Pacific financial institutions group at Moody’s Investors Service. “And there are banks like OCBC that need to fund their own cross-broader acquisitions.”
The Asean bank issuance rose from $440 million the second half of 2013 and $1.965 billion in the first six months of that year. Singapore’s UOB raised $1.24 billion, with $440 million for funding and the rest for capital management requirements.
“While UOB remains predominantly deposit funded, we believe in diversifying our funding sources to enhance the stability of our liability base,” Chief Financial Officer Lee Wai Fai said in an interview July 1. “We’ve seen increasing demand for UOB bonds because of the bank’s strong credit ratings as well as investors’ desire to diversify.”
UOB’s $800 million of 3.75 percent Basel III-compliant Tier 2 subordinated notes due 2024 are trading at a spread of 184 basis points over Treasuries after being sold to investors in March at 225 basis points, Bloomberg-compiled prices show.
Lenders are being forced to implement better risk controls after the global financial crisis. Basel III bonds pay higher yields because the notes may be written off or converted to equity if a borrower’s balance sheet deteriorates to a point of non-viability. Basel III requires banks hold enough liquid assets, such as cash and sovereign bonds, to survive a 30-day funding squeeze.
OCBC leads Singapore banks, with liquid assets making up 13.2 percent of its balance sheet in 2013, Bloomberg Industries analyst Francis Wing Fu Chan said June 26. UOB followed at 12.4 percent and DBS at 11.5 percent.
“A lot of the dollar bond issuance, especially from the Singapore banks, is to replace Basel II-compliant instruments,” said Wee Siang Ng, the Singapore-based head of research at Maybank Kim Eng Research Pte. “That the market is still quite conducive and interest rates are expected to go up is another reason.”
OCBC’s dollar bond sales last half “augment our capital position and place us well to capture growth opportunities,” Ang Suat Ching, the bank’s head of funding and capital management said in an interview July 1.
“The dollar market offers good liquidity and it’s a more freely traded and recognized currency the bank needs in order to grow its balance sheet beyond Singapore,” she said. “Dollars are also demanded by clients to facilitate their global business activities. We’ve been growing our U.S.-dollar deposit franchise through our various business units and our overseas branch network to cater to the increased demand.”
Moody’s Investors Service said in a July 2 report that Asean’s “young and rapidly growing population bodes well for economic growth” in the region.
Singapore state-owned investment company Temasek Holdings Pte in March agreed to pay HK$44 billion ($5.7 billion) for a stake in A.S. Watson & Co., part of billionaire Li Ka-shing’s Hutchison Whampoa Ltd., while Philippines brandy maker Emperador Inc. is buying the Whyte & Mackay spirits business from Diageo Plc’s United Spirits Ltd. unit.
Cofco Corp., China’s largest grain trader, is organizing a $3.2 billion loan to back its acquisition of a controlling stake in Noble Group Ltd.’s agricultural trading unit.
“Demand for credit is going to be driven by growth expectations for Asia,” said Kevin Kwek, a Sanford C. Bernstein & Co. analyst in Singapore. “I don’t think there’ll be a drastic fall because there are plenty of investment opportunities in Asia.”
AmBank (M) Bhd., a unit of AMMB Holdings Bhd., issued $400 million of 3.125 percent 2019 notes on June 26.
“As an economy evolves it typically grows larger dollar funding requirements to support both domestic and offshore expansion,” Mandy Simpson, AmBank Group’s chief financial officer said in an interview July 3. “We have no current plans of issuing in the second half but if the nature of market pricing and our requirements were to change materially, we may reconsider our options.”