* Asians back to focusing on issues in 144A format
* Past two years saw record bonds sales without US participation
* Fund flows, investment limits move demand away from the region
By Neha D‘silva
HONG KONG, March 7 (IFR) - Asian insurer AIA priced a US dollar bond on Tuesday that focused solely on American investors, in a U-turn from the strategy adopted for its dollar debut last year. The shift happened as Asian investor interest in dollar-denominated bonds wanes.
AIA’s deal last year was executed in a Reg S-only format, which exempts issuers from the cumbersome process of registering in the US, but means the bonds cannot be sold to US-based investors.
The choice to reverse course happens as bankers say Asian investors are reaching their limits on the amount of dollar debt they can hold and as funds flow away from emerging markets.
Emerging market bond funds lost US$11.05bn this year through February 26, nearly as much as the US$14.04bn that flowed out in all of 2013, according to fundtracker EPFR. Most of that was after the US Federal Reserve in late May indicated intentions to roll-back its massive monetary stimulus.
EM bond funds recorded inflows of US$38.4bn in 2012, US$7.9bn in 2011, and US$35bn in 2010.
Asian investors began driving bond deals in the region in 2009, and became the main source of demand at the start of 2012.
Last year, the amount of dollar debt from Asian companies sold in the Reg S-only format exceeded the amount sold via 144A/Reg S. In 2012, the number of bonds issued as Reg S-only deals already had exceeded the number sold in 144A/Reg S.
AIA Group became the flag bearer for that movement last year when it priced a US$1bn two-tranche transaction without the legal and regulatory hassle of a 144A transaction. At the time, bankers involved in the deal praised it as a sign that Asian issuers no longer had to abide by the stricter requirements of US investors to get large deals done.
However, since the fourth quarter of 2013, bankers have been reporting weaker demand for Reg S-only transactions.
One reason is investors are bumping up against investment limits, bankers said. Specifically, Asian investors have been selling their holdings in Reg S bonds to buy into new deals, according to a Singapore banker, suggesting companies will have to start looking at the US investor base for support again.
The shift in demand could also push Asian companies back to the strategy of beginning their marketing efforts in the US, instead of in Asia.
“You could see Asian issuers starting to do their execution in the US, instead of kicking it off here and then going to the US to complete the books,” said one syndicate banker in Singapore.
By yesterday, the US high grade market had seen nearly US$44bn in issuance this week alone, while the Asian market was quiet. Usually a busy day of new issues in the US prompts deals to be launched in Asia the next morning.
“The answer to that is the fund flow pattern,” said a Singapore DCM banker. “Developed market funds are seeing more flows than emerging markets, which means developed markets will prove to be more stable and liquid sources of funding.”
Flush liquidity conditions in the US also mean large transactions not only get done, they get priced at tighter levels.
Last Tuesday AIA raised US$1bn in a dual-tranche deal. The Asia-based insurer spun off from AIG sold US$500m in five-year bonds priced to yield 80bp over Treasuries, and US$500m in 30-year bonds priced to yield 135bp over.
At those levels, the lead managers were able to price the five-year 23bp inside the secondary levels of AIA’s outstanding Reg S-only 1.75% March 2018s, and the 30-year 25bp through the Reg S-only 2023s.
Further proof of the strong demand for Asian issuers in the US was evident in AIA’s books. The issuer attracted US$12bn in orders for its 144A debut.
As Asian investors reach their investment limits, and funds flow back to developed markets, issuers in the region may have to once again accept the stricter disclosure requirements which come with the deeper investor base of the United States. (Reporting By Neha D‘silva; editing by Christopher Langner and Abby Schultz)