018 was characterized by several major global trends in the financial markets. First, the US Federal Reserve (Fed) normalized its short-term interest rates with four increases during the year. This in part led to the dominant strength of the US Dollar (USD) against other major and emerging market currencies.
Global markets were also affected by the US-China trade tensions, two of the world’s largest economies. In particular, the conflict led to a selloff in both debt and equity markets, and triggered a correction in crude oil prices in the fourth quarter of 2018.
In an interview with The Asset, Edmund Leong, Head of Group Investment Banking, United Overseas Bank (UOB) shared these notable trends for 2018 and provided an outlook on Asia’s debt and equity markets this year against the backdrop of global trade tensions and tempered economic growth.
In 2018, how were issuers/borrowers positioned in the face of higher interest rates?
Issuers and borrowers brought forward their funding requirements, whether it was to address debt maturity or to finance expansion plans. We also saw issuers tap longer maturity debt as they seized opportunities to lock in their cost of debt on a longer term basis. For instance, UOB helped the Land Transport Authority of Singapore (LTA) with their issuance of S$1.5 billion 40-year Fixed Rate Notes in the Singapore Dollar (SGD) bond market last year.
Given the volatility in the USD bond market, some borrowers from emerging markets chose to tap the loan market instead. Some notable deals include those from Indonesian government-backed entities such as Indonesia Export-Import Bank (IEB) and PT Perusahaan Listrik Negara (Persero) (PLN). UOB acted as sole coordinator and mandated lead arranger for IEB’s US$1.15 billion syndicated term loan. We were also the mandated lead arranger for PLN’s US$1.62 billion syndicated credit facility, which was the state-owned electricity distributor’s inaugural offshore USD syndicated loan transaction.
What sort of deal structures worked and why?
As markets became more volatile in the second half of 2018, investors sought high grade bond issuances in their flight to quality. Last year, statutory board and investment grade issuances accounted for 65% of all SGD bond issuances.
High grade issuers also tapped the retail bond market following Temasek’s upsizing of its public bond offer as a result of strong subscriptions.
We also saw securitization structures – spearheaded by Temasek-backed entities – in the Singapore market. Clifford Capital’s infrastructure project finance securitization was the first in Asia, while Azalea Group’s securitization of private equity investments was notable as it also had a retail tranche.
Which markets saw more financing activity and which sectors stood out?
Asia Pacific’s loan market increased 9% year on year to US$484 billion in 2018, driven mainly by the 28% and 17% volume growth in Singapore and Australia respectively. In particular real estate financing, corporate refinancing and acquisition financing were the key contributors to Singapore’s loan volume growth.
While Asia’s USD bond market saw a decline of 35% to US$240 billion, the local currency debt markets in Southeast Asia were more resilient. The Thai Baht bond market stayed pat and both the SGD and Malaysian Ringgit bond markets had moderate drops of around 10%.
We believe the SGD bond market, with consistent annual volumes of S$20 billion to $25 billion and captive institutional and high-net-worth investors, is emerging to be one of the alternative reliable debt markets for issuers to diversify their investor base.
In terms of mergers and acquisitions (M&A) and financing, the deals across Asia were dominated by the real estate sector, particularly the commercial, retail and industrial sub-sectors. This trend was driven primarily by the proliferation of funds raised by real estate private equity sponsors and deep-pocket private investors. For example, the prominent deals in Hong Kong included the sale of The Center, the portfolio of retail assets owned by Link REIT (real estate investment trust) and two office towers in Cityplaza development by Swire Properties.
In Singapore, real estate also dominated the M&A and equity capital markets in 2018. One significant transaction was the merger of ESR REIT and Viva Industrial Trust, in which UOB acted as financial adviser. The merged entity has assets under management of S$3.0 billion, an expanded portfolio of quality assets and a committed sponsor in ESR, backed by Warburg Pincus, to expand the business further.
The offerings by REITs also took centre-stage in Singapore’s equity market with a total volume of S$4.6 billion last year. Most of the deals were driven by bolt-on acquisitions by the REITS.
What trends are likely to define 2019?
The ongoing US-China trade tensions and curtailed growth in consumer spending are expected to continue contributing to slowing economic growth. As such, the markets are anticipating a fiscal boost and more dovish monetary policies by Asian governments to improve growth.
To boost the economy, governments will likely also plan for significant infrastructure spending, which would lead to more project and corporate financing requirements. Specifically, we expect Singapore’s capital markets to have a more prominent role in fundraising for some of the infrastructure spending in Southeast Asia.
Against the backdrop of global trade tensions, we will see more multinational corporates and Chinese enterprises considering an alternative manufacturing and trading hub location to the US. ASEAN would be a key beneficiary given its young demographics, abundance of skilled workers, competitive wage costs and proximity to China. The shift of operations to ASEAN will in turn further drive the region’s infrastructure spending and domestic consumer demand.
Which segments of the capital markets are expected to be more active and which countries do you believe will be more prominent in the coming 12 months?
We believe both the bond and equity capital markets in Singapore will continue to see more local and foreign issuers in 2019. In the first three weeks alone, UOB has supported three of the largest deals in Singapore, from LTA, Housing & Development Board and ST Telemedia respectively. In particular, LTA’s yet another S$1.5 billion 40-year bond deal saw the tightest ever coupon pricing at 3.38% per annum and the largest in the market to-date.
The bond market has also seen many foreign institutions, including international and regional banks, tap the SGD bond market over the last two to three years. In 2018, Shangri-La Asia raised S$825 million in Singapore in its landmark issuance of seven-year fixed rate notes, marking the largest-ever senior issuance by a foreign corporate issuer in the local bond market. UOB was the joint bookrunner of this transaction.
For equity, issuers with foreign assets, such as Keppel-KBS US REIT and Manulife US REIT, accessed the market last year and we expect the trend to continue in both initial public offerings and secondary offerings.
As interest rates rise, how are you viewing the financial health of the region’s corporate sector?
Investment grade issuers are unlikely to face difficulties refinancing their upcoming debt maturity. However, their choice of debt options could be different as the loan market now provides more certain execution with competitive pricing, especially for durations of three to five years. Companies would probably choose to issue longer dated papers by accessing the bond markets which will continue to be constructive for high quality credits.
There could be continued volatility for high yield credits and this may result in some corporates having to access the alternative private financing markets for mezzanine debt and quasi equity financing solutions.
How is UOB growing the investment banking business?
At UOB Group Investment Banking, we are focused on providing solutions across debt and equity capital markets and event-driven services in areas such as corporate finance, M&A, leveraged finance, project finance and specialized finance.
To deepen our coverage of Asia’s capital markets, we have been expanding our regional teams in corporate finance, debt capital markets, loan syndication, project finance and securitization. We are also growing our distribution capabilities by continuing to develop strong investor relationships. This includes diversifying to institutional investors such as private equity funds across various asset classes, sovereign wealth funds and credit funds.
Backed by UOB’s established and integrated network, UOB Group Investment Banking is able to originate and to execute holistic and customized financing and M&A solutions for our clients. In particular, we have successfully underwritten and will continue to underwrite financing transactions where the certainty of funding is critical to our clients. Over the last few years, we have also led several landmark syndicated loan and bond deals in Asia, earning our position as one of the top three arrangers, bookrunners and underwriters in Singapore and ASEAN’s debt markets.
In the M&A and buyout space, private equity and corporate sponsors are increasingly tapping local currency markets to acquire domestic businesses. With our extensive regional footprint and strong local currency capabilities, UOB Group Investment Banking is well-positioned to advise our clients and to fund their buyout and acquisition deals.