* Asian demand to pick as investor base recovers
* Market shows early signs of thawing
* Suitability tests a major hurdle for private banks involvement
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 greater.”
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 26.
“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 very little.”
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.
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 said.
For example, private banks only took 9% of a US$1.25bn high-risk Additional Tier 1 issue for UniCredit sold two weeks ago.
“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 suitability tests.
“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)