* Asian demand to pick as investor base recovers
* Market shows early signs of thawing
* Suitability tests a major hurdle for private banks
By Helene Durand and Christopher Langner
LONDON, April 11 (IFR) - Asian investors may start buying
large chunks of bank capital deals again due to the shift in
market dynamics, but with many hurdles still in the way, a
repeat of the 2012 heyday will be difficult.
Asian investors, including private banks, were among the
early supporters of the new generation of banks' hybrid debt
issues, allowing financial institutions to raise more risky
forms of hybrid debt capital. They have, however, retreated due
to emerging market volatility and the prospect of the Fed
unwinding its bond buying programme. Banks, now though, have
started seeking out new investors in the euro, sterling and
onshore dollar markets, which have since shown great depth.
"Asian investors were hit by a triple whammy last year - a
combination of rising rates, high exposure to emerging markets
and high leverage - which hit them hard relative to other
investor bases," said Adam Bothamley, head of EMEA debt
syndicate at HSBC. "However, they currently have a more
constructive tone around Europe in particular, and appetite is
Last week Norddeutsche Landesbank's US$500m Reg S Tier 2 was
the first European bank capital deal specifically targeted at
this investor base for well over a year. Asian investors took
35%, of which private banks accounted for 38%. This was a higher
take-up than other recent deals, where the numbers have been in
the low double digits at best.
"Asian investors have started to realise that issuers have a
suite of options and can diversify away from Asia," said Nick
Dent, head of EMEA syndicate at Nomura. "Also, these investors
are now more willing to look at different credits and are
returning to the market."
This is good news for issuers who need an alternative to the
onshore dollar or euro markets. The latter suffered from
indigestion recently after a wave of heavy supply.
Meanwhile, there are signs that Asian investors are getting
frustrated with poor allocations.
One private banker said his institution only got 0.6% of the
orders placed for the US$1.75bn 4.436% 10-year subordinated Tier
2 transaction sold by Sumitomo Mitsui Financial Group on March
"When the American funds come in, all the allocation goes to
them," complained a private banker in Singapore. "Just a few
months ago, real money couldn't really buy these bonds; now
demand is coming from all over the world and we are left with
Official statistics indicated that Asian accounts were given
19% of the SMFG bonds, and private banks, 3%, a far cry from
UBS's first total-loss bond in February 2012, when over 70% was
placed with private banks.
NOT SO FAST
However, while the Nord/LB deal could be a positive sign,
Asian investors, including private banks, are unlikely to
dominate order books following a shift in internal guidelines on
the suitability of these products for retail clients.
"It has become a lot harder to approve the suitability of
Basel III-compliant bonds for retail clients," a private banker
For example, private banks only took 9% of a US$1.25bn
high-risk Additional Tier 1 issue for UniCredit sold two weeks
"Each issue is different so regulators have been requiring
that we make sure that the client has a risk profile that is in
line with the inherent risks of these deals."
The banker added that even the sell-side has started to be
more careful about suitability analysis. He said most dealers
now required private banks to submit detailed guidelines of
their know-your-client policies.
One FIG banker in Hong Kong said banks now refused to
allocate private banks which have not explained their
"Compliance guys have started to become quite worried about
this," he said. "It is hard for, say, a Pimco to claim that they
did not understand the risk they were taking with a
capital-eligible bond, but that is a real danger when you deal
with retail clients."
Meanwhile, not everyone would welcome a return of the
private banks to the capital fold as arguing that it is not a
stable investor base, and sells at the first sign of trouble.
A senior FIG banker in London said, "We don't want the
return of a totally unreliable bid. At the moment we have a good
10-15% going in for these deals from real investors in Asia. I
prefer that to 30% of low quality."
(Reporting by Helene Durand, Christopher Langner, Editing by
Alex Chambers, Luzette Strauss)