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| CORPORATE FINANCE |
July/ August
2000 |
SAMURAI BONDING; DINERS' DELIGHT
CFOs seeking funds are looking to
Japan; Securitization in Singapore
By Abe De Ramos
Alan Greenspan has made life rougher for
CFOs in Asia. The US Federal Reserve Bank's recent interest
rate hikes have narrowed the options for Asian companies seeking
funds for working capital or to refinance existing debt. The
solution, for more and more finance managers, has been to
look east.
Indeed, Pohang Iron & Steel Co (Posco)
of Korea chose the Japanese market for its first foreign bond
issue in May. The reason was simple. "When I reviewed
the Euro, Samurai and Yankee markets, Samurai was the best
for the considerably low level of interest rate," says
Hwang Tae-Hyun, finance director of the world's largest steelmaker.
Posco successfully raised 15 billion yen
(US$142 million) from Japanese investors, paying a coupon
of only 1.5 percent, or 92 basis points above Japanese government
bonds.
In fact, low interest rates in Japan have even attracted blue-chip
US and European issuers. In June, IBM raised 140 billion yen
(US$1.32 billion) worth of Samurai bonds, the largest ever
from a single corporate issuer. Xerox Credit and Alcatel preceded
IBM, and next to join the fray are US-based Household Financial
and Italian carmaker Fiat. The amount of Samurai bonds - yen-denominated
bonds issued by non-Japanese entities - in the first six months
of the year totaled 742 billion yen (US$7 billion), exceeding
660 billion yen (US$6.2 billion) raised in all of 1999.
Bankers say yen investors - in Japan or elsewhere - are only
too willing to invest in instruments yielding better than
the near-zero interest that Japanese government bonds pay.
And while the flurry of new issues could make investors demand
higher yields, bankers expect the Bank of Japan to maintain
its zero-interest rate policy at least until the end of the
year, as recovery in the Japanese economy is happening at
a snail's pace.
"Japanese investors are looking for a certain kind of
risk because the yield is higher," says Takashi Ueno,
head of debt capital markets at Bank of Tokyo-Mitsubishi.
Glenn Kim, who heads debt capital markets at Lehman Brothers
in Hong Kong, adds that the Samurai market is also luring
companies whose level of disclosure does not satisfy the stringent
US generally accepted accounting principles.
The Samurai market, however, is not for
everyone. Kim points out that Japanese investors are highly
brand conscious - in bonds as well as clothes. A Samurai by
an Asian issuer with a strong brand image would do well in
the Japanese market, while those with a lower regional profile
might not. Investors would also start to dig deeper into their
pockets if the maturity went beyond three years, and the size
beyond 30 billion yen.
Ueno says even investment-grade corporates with a negative
outlook - typically due to deteriorating business conditions
that could result in poorer credit - are on the bottom of
Japanese investors' lists. "A single-A rating would be
very easy to accept. Even though it has a downgrade outlook,
there is an allowance. But some Japanese investors worry about
a triple-B. [While] emerging markets for now are stable, [investors
are not confident about] the future trends," Kim says.
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Dining On Receivables
When Diners Club (Singapore) launched
its credit card business last September, finance manager Peter
Tam had no idea that new customers would account for 20 percent
of the company's total client base within six months. Now
Tam forecasts that this segment will make up more than half
of Diners Club subscribers in the next three years. And as
it grows, so does the need to fund the business.
Tam needed a funding structure that would
not lock in Diners Club with a fixed amount of debt for a
fixed period of time. He had to have room for more borrowings
in line with the growth of the business. The answer came in
the form of a revolving asset-backed securitization. It allows
Diners Club to sell securities backed by credit card receivables
on a monthly basis. The size may vary according to its working
capital needs at that time. "With the growth in credit
card base, we need a funding structure that would grow as
our receivables grow. Securitization did just that,"
Tam says. ABN Amro Singapore managed the transaction.
Under the deal, Diners Club sells credit
card receivables to a special purpose vehicle (SPV) it created.
This SPV then issues 30-day certificates backed by the receivables
to a unit of ABN Amro. This conduit in turn sells the certificates
on the US commercial paper market. When the certificates mature,
Diners Club has the option to issue another round of certificates,
backed by another round of receivables. This option lasts
three years. In the first tranche of S$44 million (US$25.9
million) in May, Tam says Diners Club paid an annual rate
of 3.6 percent, a fraction of the annual 36 percent it normally
charges credit card holders.
"Diners wanted a financing program
that could be modified on a monthly basis. The easiest way
to do that was to issue in the commercial paper market, because
we can go in and increase the size later depending on their
needs," says Gary Watmore, head of Asia Pacific Securitization
at ABN Amro in Singapore.
They chose the US commercial paper market
for its liquidity - it is the most liquid money market in
the world. Singapore, by contrast, is just opening its doors
for corporate bonds. Diners Club's Asian operation became
the first company from the city-state to sell securities backed
by anything other than rentals and mortgages. But Diners Club
may be bringing more business to Singapore. The SPV it created
also has a license to sell certificates to the Singapore market
within the next three years. "I'm hoping the Singapore
market will take off. Although we are not exposed to foreign
exchange risk because of a currency swap, once I go into the
Singapore market, I will not need to pay the market for that
facility anymore," says Tam.
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LOCAL BOND MARKETS
Shangri-la
dreaming
A US$500 million unsecured five-year loan
by nine local banks to Shangri-la Hotels has Goldman Sachs'
debt-markets analysts crying foul. Commercial banks, they
claim, are stalling the growth of the local bond markets.
The Shangri-la loan will be used to refinance
a convertible bond due in December 2000 and to bolster working
capital. In more developed markets than Hong Kong, where the
loan was extended by banks including HSBC, BNP Paribas and
Societe Generale, companies would have typically turned to
the bond market for refinancing, via a convertible or other
type of bond, because of the lower cost of servicing debt.
The price the Shangri-la negotiated was 68 basis points over
Libor, very good terms for a sizable Asian credit, suggesting
that bankers are bending over backwards to extend the loans.
Posco, the South Korean steel giant, in contrast, went to
the Samurai bond market to borrow US$100 million in June,
and was only able to squeeze 72 basis points over Libor from
its investment bankers (see related story, "Samurai Bonding").
Says Fan Jiang, head of Asian debt markets
research for Goldman Sachs in Hong Kong: "The fact that
Shangri-la didn't go to the convertible market to refinance
is significant. It means it's more expensive to go to the
capital markets. Someone must be wrong." He adds: "You
can't have two risks, two rankings, for the identical borrower.
Either the bond market is priced too high, or banks are taking
on too much of the risk." Jiang's explanation is that
local banks, flush with cash on their balance sheets, don't
have enough places to put it, and are giving sweetheart deals
to put their cash to work.
But are banks delving into a risky, pre-crisis
style of behavior? Or is it that the Shangri-la loan has left
investment banks like Goldman Sachs with a distinct aftertaste
of sour grapes?
Tom Leander
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