A shortage of U.S. dollars, new banking regulations and strong investor demand mean Asian banks are set to help spur long-awaited innovation in the region's debt capital markets.
Singapore is consulting on new guidelines to help its banks issue covered bonds and Hong Kong plans to study investor appetite for similar products, while banks across Asia are looking at forms of debt previously unseen in the region, such as hybrid or perpetual bonds.
"Every institutional investor is waiting for another investment to diversify their portfolio, especially those who already own unsecured bonds," said Warren Lee, head of structured financing solutions at Standard Chartered in Hong Kong. Although most Asian banks are flush with local currency retail deposits, many have been struggling to get access to enough U.S. dollars, so they are looking at new ways of issuing bonds to raise these funds.
In Singapore, for example, Fitch Ratings estimate that while local banks' overall loan-to-deposit ratio is around 90 percent, the figure for their U.S. dollar trading books exceed 100 percent.
The incoming Basel liquidity rules are also encouraging regulators in the region to help develop markets for highly-rated liquid assets that banks can hold to comply with more stringent capital requirements, such as covered bonds.
All these moves are likely to be lapped up by investors, with demand for Asian bank bonds strong given their reputation as being some of the safest lenders in the world in which to invest.
Demand for unsecured Asian corporate bonds has been buoyant so far this year, with issuance in first quarter alone more than half that seen for the whole of 2011.
Singapore, Australia, Hong Kong
The Monetary Authority of Singapore issued a consultation on covered bonds last month, saying that the assets could provide an additional longer-term funding source for banks.
Covered bonds are secured against a basket of assets, typically home mortgage loans. They are a popular safe-haven holding for investors, as if the issuer goes into bankruptcy investors can lay claim to the underlying assets.
For banks, covered bonds also tend to be a cheaper source of funding as investors are willing to accept a lower yield.
Thomson Reuters IFR reported earlier this month that Singapore's DBS Group Holdings (DBSM.SI) was already looking at a possible covered bond issue.
"While funding is not a huge problem for them (Singapore banks) right now, they want to diversify in case the senior unsecured market dries up in the future," said Helen Wong, director of structured finance at Fitch Ratings in Hong Kong. Australia and New Zealand have both introduced regulatory frameworks for covered bond issuance in the 18 months, with the country's banks being quick to turn to this new funding source.
Australia and New Zealand Banking Group (ANZ.AX) issued A$3.16 billion (US$3.29 billion) in four-year covered bonds last month, while Commonwealth Bank of Australia (CBA.AX) issuing A$3.5 billion in January.
Hong Kong is also interested in assessing the market potential for covered bonds.
"We are aware of the recent developments with regard to covered bonds in Singapore and Australia. In the light of the inclusion of covered bonds in the high-quality liquid assets for liquidity coverage ratio purposes, we intend to gauge the appetite for such bonds in Hong Kong's banking sector, a spokesperson for the Hong Kong Monetary Authority said in an email reply to Reuters questions.
"If there is indeed demonstrable demand, we will consider the policy implications of introducing a covered bond regime."
The region's banking leaders say covered bond initiatives should help spur a wider drive to develop its debt markets, which lag behind those in the West.
Bond issuance in Asia totaled $100 billion in the first quarter of 2012. While that was up on 2011, it was still less than a tenth of the $1.2 trillion that U.S. companies issued during the same period, according to Thomson Reuters data.
"There are good reasons, in any case, for Asian countries to be putting a focus on deepening and developing their debt capital markets because that is a way of reducing reliance on cross-border, dollar-based flows," said Peter Sands, chief executive of Standard Chartered during a news conference in March.
For investors though, the lingering worry is that while Asian banks may look to issue more debt, they are also likely to be big buyers and holders of high-rated corporate debt, which could dampen activity in the secondary market.
"Banks do have a lot of money here. If there is no sovereign debt, they tend to buy high quality corporate debt," said Khiem Do, a fund manager at Barings Asset Management, which oversees $48 billion in assets globally.
"So people like us, the fund managers, have to quietly say 'hey you're not supposed to be doing that. That's our business.' So in a way, they are intruding in the natural financial markets," he added.
One of the reasons why Asian companies have been reluctant to issue bonds is that many are already heavily cashed up, which makes them less willing to risk any impact to their credit ratings by borrowing from the debt market.
For example, China Mobile is sitting on a cash pile of more than $50 billion in cash, while Singapore Airlines has about $5 billion in its kitty.
In come perpetual bonds. With no maturity dates, they are sometimes treated as equity by ratings agencies due to their long-term nature. That means companies can borrow with less impact on their gearing ratio.
In March, casino operator Genting Singapore's S$1.8 billion ($1.4 billion) perpetual bond issue was almost four times oversubscribed.
Data from Thomson Reuters publication IFR shows that perpetual bond issues in Asia this year have already surpassed the combined total of the preceding 15 years.
Much of this demand has come from private banks in the region looking for some for higher yields, said Raymond Tong, a partner at Clifford Chance in Singapore that advised the Genting deal.
"Private banks have been very interested in perps," Tong said, referring to the bond by its industry-shorthand. "Private bank clients are typically looking for capital preservation, and a top-rated perp issue matches that need."
($1 = 0.9612 Australian dollars=S$1.23 Singapore dollars) ($1 = 1.2593 Singapore dollars)