1. THE INTERNATIONAL DEBT CAPITAL
MARKETS HANDBOOK
2016
COVER+SPINE_DCM_2016 9/10/15 07:16 Page 1
2. 2824
Traditional values. Innovative ideas.
Thinking that can change your world. www.rmb.co.za
Rand Merchant Bank is an Authorised Financial Services Provider
THINK
CAPITAL
MARKETS.
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IFC_DEBT_2016.qxd 9/10/15 09:49 Page 1
4. Setting standards in the
international capital market
The International Capital Market Association
(ICMA) has made a significant contribution to the
development of the international capital market for
almost 50 years by encouraging interaction between
all market participants: issuers, lead managers,
dealers and investors.
ICMA is both a self-regulatory organisation and a
trade association, representing members in Europe
and elsewhere, who are active in the international
capital market on a global or cross border basis.
It is also distinctive amongst trade associations in
representing both the buy-side and the sell-side of
the industry.
ICMA works to maintain the framework of
cross-border issuing, trading and investing
through development of internationally accepted
standard market practices, while liaising closely
with governments, regulators, central banks and
stock exchanges to ensure that financial regulation
promotes the efficiency and cost effectiveness of
the international capital market.
480 financial institutions
in 56 countries are already
experiencing the direct benefits
of ICMA membership.
Find out about joining us.
membership@icmagroup.org
+41 44 360 5256
+44 207 213 0325
If you are an individual working for a member firm (a full list of ICMA members is available from www.icmagroup.org) contact
us to find out how your membership of ICMA can directly benefit you as you transact your day to day business.
Setting standards in the international capital market www.icmagroup.org
a-d_DEBT_2015 9/10/15 08:02 Page b
5. Contents
Foreword
by Martin Scheck, Chief Executive at the International Capital Market Association (ICMA)
Chapter 1
Green is the colour
by London Stock Exchange
Chapter 2
New SEC guidance for shortened debt tender offers: Implications for European liability
management transactions
by Davis Polk & Wardwell LLP
Chapter 3
Capital markets for development
by International Finance Corporation
Chapter 4
Finnish corporate bond market to see more rated issuers
by Pohjola Bank plc
Chapter 5
Johannesburg Stock Exchange
by JSE Limited
Chapter 6
Africa is calling
by Rand Merchant Bank
Chapter 7
SGX: The ideal partner in the Asian bond market
by Singapore Exchange
Chapter 8
Australian debt capital markets: Strong, stable and growing
by Ashurst
Chapter 9
Financing through debt capital markets in Japan by non-Japanese entities
by Anderson Mori & Tomotsune
01
04
08
11
18
20
26
31
37
advertisersindex
inside
front
cover
facing
contents
7
15
29
35
39
45
51
59
outside
back
cover
Rand Merchant Bank
International Capital
Market Association
(ICMA)
Davis Polk &
Wardwell LLP
Pohjola Bank
Singapore Exchange
Ashurst
Anderson Mori &
Tomotsune
SIX Swiss Exchange
Walder Wyss Ltd.
GSK Stockmann +
Kollegen
London Stock
Exchange
a-d_DEBT_2015 9/10/15 08:02 Page c
6. Chapter 10
SIX Swiss Exchange – efficient capital raising on an international market
by SIX Swiss Exchange
Chapter 11
Developments in Swiss debt capital markets – 2015
by Walder Wyss Ltd.
Chapter 12
Capital markets 2016: What’s up in Germany?
by GSK Stockmann + Kollegen
Chapter 13
Private placement bonds poised for further growth in 2015
by Euronext
42
48
54
62
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7. FOREWORD I CAPITAL MARKETS INTELLIGENCE
The main drivers of this change are new post-crisis
regulation affecting all areas of capital markets activity and
participants in the markets, combined with a continuing
ultra low interest rate environment. Economic growth is
fragile and remains an issue. And with the imposition of
QE, the ECB’s buying programmes of both private sector
and public-sector assets have driven large swathes of the
bond markets into negative yield territory. Furthermore,
negative deposit rates have turned the market’s
relationship with cash on its head. Market structures are
having to adjust and participants are fundamentally
reassessing their business models and the way that they
interact with each other and with end clients.
In secondary markets the impact of these changes on
liquidity, not only in the cash bond market but also the
collateral and repo markets, is already very evident. There
are further challenges to liquidity in the pipeline, from the
implementation of MiFID II transparency provisions (where
the proposed definition of what constitutes a liquid bond
needs further work), from the implementation of the
proposed mandatory buy-in regime under the Central
Securities Depository Regulation and from the continuing
impact of QE. On the other hand the dearth of liquidity is
also driving innovation in the field of electronic trading and
is also stimulating useful discussion on how issuers and
investors might be able to contribute more to mitigate the
problem.
Primary debt capital markets are also coming under
increasing regulatory scrutiny, with the recently issued
report of the UK’s Fair and Effective Markets Review
commenting on the allocation process and transparency of
new issues. ICMA responded to the consultation on behalf
of our members and will continue to work with issuers,
underwriters, investors and the authorities to ensure that
the new issue processes are predictable, transparent and
fair so that this important market segment remains
efficient and effective.
As this is written in the summer of 2015 we sense clearly that the pace of
change in capital markets is accelerating. We can predict that debt
capital markets of the future, primary secondary and short-term money
markets, will not look the same as they do now. The roles of the issuers,
intermediaries and investors in the capital markets will be differently
configured and many of them, including ICMA’s member firms, are as a
result facing some significant challenges. Ever present geopolitical
tensions, both within and outside Europe, are adding to this complex
picture.
Foreword
by Martin Scheck, Chief Executive, International Capital Market Association (ICMA)
Foreword
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8. FOREWORD I CAPITAL MARKETS INTELLIGENCE
The Capital Markets Union initiative in Europe is a welcome
development as it recognises the increasingly important
role capital markets must play in financing jobs and growth
in the European economy. The creation of an integrated,
resilient and effective capital market facilitating the flow of
capital across borders has been central to ICMA’s mission
for many years. Our work to develop the markets in
European Private Placements, green bonds, infrastructure
financing and securitisation, and in removing structural
barriers to collateral flow, is fully aligned with the goal of
the CMU initiative to improve market-based finance
available to businesses in Europe.
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9. CHAPTER 1 I CAPITAL MARKETS INTELLIGENCE
1
Green is the
colour
by Gillian Walmsley, London Stock Exchange
London Stock Exchange is often seen primarily as an equity
exchange operator but it is also one of the world’s major
centres for issuing, listing and trading all types of debt
securities. In 2014 alone there were more than 1,500 bond
issues across our fixed income markets, raising the
equivalent of more than US$350bn, in 25 different
currencies. London is the leading global centre for
international Eurobonds, with London-based firms
accounting for 60% of the primary market issuance and
70% of trading on the secondary market. Our London retail
bond market (ORB) provides companies with direct access
to private investors, and builds on the success of deeply
liquid retail bonds markets; MOT and EuroTLX on Borsa
Italiana, part of London Stock Exchange Group (LSEG).
Our wider wholesale fixed income markets allow issuers full
flexibility with a range of market models available to support
varying levels of secondary market access and transparency.
MTS, also part of LSEG, complements our fixed income
secondary market offering, helping buy-side and sell-side
institutional participants that trade pan-European corporate
and government bonds. In 2014 MTS expanded through the
The green bond market is growing and London Stock Exchange is looking
to lead the way. Green bonds were born when the World Bank launched
and listed its first product in 2008. Today, investors are driving fund
managers, index providers and asset managers to offer green investment
solutions, against a backdrop of increased awareness around Corporate
Social Responsibility from companies themselves. This demand has meant
the green bond market has grown from around US$13bn in 2013 to an
estimated US$100bn in 2015*. To support the continued development of this
market and help further increase transparency for investors, London
Stock Exchange has launched a range of dedicated green bond segments
on its fixed income markets.
Gillian Walmsley, Head of Fixed Income
London Stock Exchange
tel: +44 (0) 20 7797 3679
email: GWalmsley@lseg.com
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10. CHAPTER 1 I CAPITAL MARKETS INTELLIGENCE
acquisition of Bonds.com, a US-based electronic trading
platform for corporate and emerging market bonds, which
enables US fixed income traders to meet their domestic and
international needs.
Green bonds currently account for only a small proportion of
the capital raised in the wider fixed income markets, but
they represent one of the areas that are experiencing the
fastest growth, with high levels of demand from experienced
practitioners and the general public alike. Green bonds are
classified as any type of bond instrument where the
proceeds of the capital raised will be exclusively applied to
finance or re-finance, in part or in full, new and/or existing
‘green’ projects. This key feature will be described in the
bond’s legal documentation, be separately managed within
the company issuing the bond and monitored and reported
throughout the life of the instrument. Potential eligible
green bond projects include renewable energy, energy
efficiency, sustainable waste management, sustainable land
use, biodiversity conservation, clean transportation and
climate change adaption.
The potential scale of the market is highlighted in a recent
WEF Green Investment Report which estimated the world
needed an additional US$700bn investment in green-
related projects to meet the climate change challenge. The
need for greater investment in this sector means there will
be an emphasis on improving access to green finance, with
green bonds being one of the key tools that the industry
can use to help hit this target. The WEF report also notes
that developing countries are increasingly playing an active
role in scaling up green investment but highlights that
more needs to be done to accelerate this trend and push
more private finance into green investment initiatives.
China in particular is seen as a huge source of potential
future growth for the green bond market. Market
participants are increasingly highlighting the growing
appetite for green finance from Chinese companies and
financial institutions.
In 2014, global green bond issuance grew to almost
US$37bn, and this figure is expected to triple in 2015*.
Market infrastructure organisations such as LSEG have an
important role to play in facilitating capital raising, by
providing investors and issuers with an efficient,
transparent and regulated marketplace. To support the
development of this market, London Stock Exchange has
launched a full range of dedicated segments specifically
designed for green bond issuance. The aim is to promote
greater transparency in the market by providing green
bond instruments with a specific position within London
Stock Exchange’s standard debt markets, and helping
investors identify the ‘green’ instruments more easily. In
2010 we launched our Order book for Retail Bonds (ORB)
and in 2014 the Order book for Fixed Income Securities
(OFIS) for exactly the same reason; to provide investors
with easily identifiable instruments alongside the benefits
of electronic order book trading. Green bond documents
will also be made available on our website and we will
promote secondary market transparency by encouraging
issuers to admit their green bonds to these dedicated
segments, which will provide easily accessible order book
trading or end-of-day pricing.
London Stock Exchange’s Main Market is the world’s most
international market for the listing and trading of equity,
debt and other securities and provides access to a deep
pool of global liquidity. The UK Listing Authority (UKLA)
offers the highest standards of disclosure and regulatory
oversight. London Stock Exchange’s green bond segments
will sit alongside a range of dedicated specialist market
offerings including ‘dim-sum’ bonds and Islamic finance
‘sukuk’ instruments. Our flexible model offers OTC-style
trade reporting, end-of-day only pricing or continuous
market maker quoting.
Our sister market, Borsa Italiana is also promoting
issuance of green bonds to both institutional and retail
investors, as demonstrated by the recent retail dedicated
“Green Growth Bond” issued by the World Bank and listed
on Borsa’s MOT market on June 15, 2015.
Alongside the new dedicated green bond segments, LSEG’s
extensive expertise in information services and index
calculation, through FTSE Russell, will offer further
opportunities to increase transparency in the green bond
market. By providing issuers with more efficient tools to
report about their sustainable initiatives, and investors
2
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11. CHAPTER 1 I CAPITAL MARKETS INTELLIGENCE
with a comprehensive product to assess a wide range of
financial instruments, the Group can offer a range of tools
within an innovative Low Carbon Economy framework.
FTSE Russell has long been at the forefront of
developments in the environmental, social and governance
(ESG) market, having launched the FTSE4Good Index
Series in 2001. Subsequently FTSE has expanded its
offering further with the launches of the FTSE
Environmental Market Series, the FTSE ESG Ratings and
the FTSE ex-Fossil Fuel Series. All of these are supported
by a dedicated Business Unit. FTSE Russell supports
clients by providing clear definitions, data and tools to
enable the integration of ESG considerations into
investment management and asset allocation.
At the end of 2015, the United Nations Climate Change
Conference will aim to achieve a legally binding and
universal agreement on climate change, from all the
nations of the world. The overarching goal of the
convention is to reduce greenhouse gas emissions and to
limit the global temperature increase to two degrees
Celsius above pre-industrial levels. London Stock Exchange
Group is a committed proponent of green financing and
believes it is a sector with huge growth potential. By
creating dedicated segments for green investment
products, LSEG can promote the growth of this market,
harness the increased appetite from investors and issuers
and turn what is today a niche market, into a more
mainstream tool for the benefit of all.
Note:
*Source: Climate Bonds Initiative.
3
Contact us:
London Stock Exchange
10 Paternoster Square, London EC4M 7LS, UK
tel: +44 (0) 20 7797 1000
web: www.londonstockexchange.com
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12. CHAPTER 2 I CAPITAL MARKETS INTELLIGENCE
4
New SEC guidance for shortened
debt tender offers: Implications for
European liability management
transactions
by Reuven Young and Radoslaw Michalak, Davis Polk & Wardwell LLP1
On January 23, 2015, the Staff of the US Securities and
Exchange Commission (the “SEC”) issued a no-action letter
addressing the circumstances under which issuers may
conduct tender offers for debt securities that remain open
for five US business days, rather than the 20 US business
days required by Rule 14e-1 under the US Securities
Exchange Act.2
The new guidance modernises the existing
framework and alters the long-standing positions of the
Staff contained in a series of no-action letters dating back
to 1986, recognising the advancements in communication
technology over the last three decades that allow issuers
to provide information to investors on a real-time basis.
In addition to comprehensively setting forth the
requirements for shortened debt tender offers, the new
guidance also applies to high-yield debt securities, which
have historically been excluded from shortened debt
tender offers no-action relief, and permits the five business
day accelerated timeline for certain exchange offers.
The US rules have tended to dictate the timetable in many
significant European liability management projects. In
general terms, the US tender offer rules apply if the tender
offer touches the United States (for example, where there
is a small number of holders in the United States) even if
the issuer is a non-US company. As a result, the new
framework should be particularly helpful to European
issuers, particularly of high-yield bonds, who were
previously reluctant to engage in tender offers subject to
US tender offer rules because of their complexity and more
onerous procedural requirements. For many companies,
the recent changes will provide new flexibility to take
advantage of the current low-interest rate environment and
quickly and efficiently refinance debt.
A new no-action letter from the SEC Staff substantially revises the
framework applicable to debt tender offers.
Reuven Young, Partner
tel: +44 (0) 20 7418 1012
email: reuven.young@davispolk.com
Radoslaw Michalak, Counsel
tel: +44 (0) 20 7418 1393
email: radoslaw.michalak@davispolk.com
Reuven Young Radoslaw Michalak
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13. CHAPTER 2 I CAPITAL MARKETS INTELLIGENCE
Five business day tender offers
Under the new no-action letter, a tender offer for non-
convertible debt securities can be held open for as little as
five US business days if it satisfies a number of technical
requirements. The most significant of these are:
• the offer must be an “any-and-all” tender offer (i.e. all
holders are eligible to participate and all validly
tendered securities are accepted by the offeror) –
which excludes waterfall, capped and similar
structures;
• the offer must be made by the issuer of the target
securities or its direct or indirect wholly-owned
subsidiary or a parent entity that holds, directly or
indirectly, 100% of the issuer’s capital stock;
• the offer must be announced via a press release
through a widely disseminated news or wire service,
disclosing the basic terms of the offer and containing a
hyperlink to the offer materials, by 10:00 a.m., Eastern
time, on the first day of the offer (defined as
“Immediate Widespread Dissemination”);
• if the issuer is an SEC-reporting company, it must
furnish to the SEC the press release announcing the
offer by 12:00 noon, Eastern time, on the first day of
the offer;
• the offer must be for cash and/or “qualified debt
securities” (generally speaking, securities identical in
all material respects to the target securities except for
the maturity date, interest rate and redemption
provisions, which have a weighted average life to
maturity that is longer than the target securities);
• participants must be given the right to withdraw their
tendered securities before the offer expires (previously
not required, although often voluntarily granted in
debt tender offers);
• the offer must provide a mechanism for “guaranteed
delivery” which allows holders to tender during the
offer period but deliver their securities up until the
close of business on the second business day after
expiration;
• early settlement (i.e. settling tendered securities prior
to the expiration of the offer) is not permitted;
• the offer must not be made in connection with a
consent solicitation; and
• the offer must not be made in connection with certain
extraordinary transactions (such as a change of
control) or an existing default or event of default under
an indenture or material credit agreement to which the
issuer is a party.
Key changes from current market
practice
Standard minimum offer period
The new accelerated timeline recognises the advancements
in technology which enable investors to react quickly and
efficiently in a much shorter timeframe than 30 years ago.
The five business day standard is also intended to ensure
that investors have a uniform minimum period of time to
make a tender decision. Prior SEC guidance required
tender offers for high-yield debt to remain open for 20 US
business days, while allowing certain investment grade
debt tender offers to remain open for 7-10 calendar days –
even if one or more of those days fell on a weekend or
market holiday. In addition, DTC (as registered holder)
often received the offer documents late on launch day,
which effectively meant that investors had one day less to
consider the offer. The new guidance, which imposes a
standard minimum offer period and requires Immediate
Widespread Dissemination, makes it far more likely that
investors will promptly receive offer materials and have a
standard period in which to make a tender decision.
High-yield bonds eligible for accelerated
timeline
One of the principal changes brought about by the new
guidance is the elimination of the distinction between
investment grade and high-yield securities, consistent with
changes in other areas of the SEC’s rules and reflecting the
size, profile and sophistication of the high-yield investor
community. Under previous no-action letters, high-yield
tender offers were required to be held open for 20 US
business days. As a result, the five business day flexibility
may be very useful to European high-yield issuers who in the
past had been reluctant to undertake liability management
5
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14. CHAPTER 2 I CAPITAL MARKETS INTELLIGENCE
6
exercises subject to US tender offer rules because of the
relatively complex and onerous regulatory framework.
Broader “benchmark” pricing and reduced
market risk
The new no-action letter expands the definition of
“benchmark”, previously limited to US Treasuries, to also
include LIBOR, swap rates and sovereign securities
(denominated in the same currency as the target securities)
so long as they are readily available on Bloomberg or a
similar trading screen or quotation service. The exact
amount of consideration must be fixed no later than 2:00
p.m., Eastern time, on the last day of the tender period.
This, combined with a substantially shorter minimum offer
period, should make the US framework significantly more
attractive to European issuers intending to refinance their
debt, who in the past were generally limited to offering a
fixed nominal price in tender offers for non-US dollar
denominated securities. Allowing the use of spread-based
pricing (expressed as, for example, “UK Treasury Gilt due
March 2018 + 80 basis points”) on a five business day
timetable should significantly reduce market risk compared
to the old framework.
Reducing interest expense
The new accelerated timeline also means that issuers will
be able to complete tender offers more quickly, thereby
reducing interest expense on the old debt being refinanced
by reducing “double carry” (paying interest on both the old
debt and the new issue) or “negative carry” (paying
interest on the old notes until the offer expires and they
can be repurchased). This will in particular benefit high-
yield issuers that previously struggled to match settlement
of a new bond issue with expiration of a tender offer when
trying to reduce interest expense.
Shorter tender offer periods should also be attractive in
refinancing scenarios where holders want to “roll over”
their investment by using funds received in a tender offer
to purchase a portion of the concurrent new money issue.
New flexibility, new limitations
The new guidance comes with certain limitations and will
also restrict some of the current market practices, as it
supersedes several previously issued no-action letters.
Since the no-action relief only applies to any-and-all tender
offers, partial tender offers will not benefit from the new
framework. As a result, offers with a “waterfall” or
“capped” structure or “modified Dutch auction” pricing –
which target less than all of the outstanding securities –
will still need to remain open for 20 US business days.
Similarly, the new framework does not apply to tender
offers which are combined with a consent solicitation.
Accordingly, the usefulness of the new framework may be
limited in case of transactions that go beyond a pure
refinancing (for example, the relief would not be available
for a transaction seeking an “exit consent”).
Tender offers which are not eligible for the new accelerated
timetable (or where issuers are not willing to comply with
the new requirements) can still be structured as a regular
20 US business day offer (with an “early bird” deadline on
the 10th US business day, if applicable). Certain tender
offers may also be eligible for the Tier I exemption,3
which
some European issuers may view as an attractive
alternative due to its more relaxed procedural
requirements.
Notes:
1 By Reuven Young and Radoslaw Michalak, Partner and Counsel
respectively, of Davis Polk & Wardwell LLP’s London office. The views
expressed herein are personal and do not necessarily reflect those of
Davis Polk. This article provides certain insights into the new SEC
rules but is not intended to be an exhaustive analysis of all the
considerations and is not legal advice.
2 The no-action letter is the product of extensive discussions among a
group of liability management executives at several investment
banks, the Credit Roundtable (a group of large fixed-income
investors), law firms (including Davis Polk) which regularly advise on
liability management transactions, and the Staff of the SEC. A copy of
the letter can be found at: http://www.sec.gov/divisions/corpfin/cf-
noaction/2015/ abbreviated-offers-debt-securities012315-sec14.pdf
3 See Rule 14d-1(c) under the US Securities Exchange Act.
Contact us:
Davis Polk & Wardwell London LLP
5 Aldermanbury Square, London EC2V 7HR, UK
tel: +44 (0) 20 7418 1300
web: www.davispolk.com
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16. CHAPTER 3 I CAPITAL MARKETS INTELLIGENCE
8
Capital markets for
development
by Ethiopis Tafara, International Finance Corporation
And this is only part of the story. Small and medium-sized
enterprises in emerging economies – and counting only the
minority in the formal sector – are also starved for finance.
Their needs are over US$250bn in Latin America,
US$200bn in Asia, and at least half that in Africa.
It is clear that developing country governments cannot
provide financing of this scale, nether can donor
governments, nor can local financial institutions. So what
is the answer? Capital markets.
Consider the supply side of the equation – the amount of
money available for investment around the world. In 2013,
assets controlled by institutional investors in OECD
countries grew to over US$92 trillion, and they keep rising.
The world’s largest 300 pension funds controlled almost
US$15 trillion, while sovereign wealth funds have amassed
about US$6.5 trillion. Imagine if the emerging economies
could capture just a fraction of these funds.
Then consider the rapidly growing domestic savings across
the emerging economies. In Africa there are now nearly
US$400bn in pension fund assets, and in Latin America the
Ending extreme poverty for good and building shared prosperity across
the developing world takes money. A lot of money. Take infrastructure, for
example. For the foreseeable future, an estimated US$50bn per year is
needed in Africa to deliver basic services such as running water and
electricity, and to build roads connecting communities to markets. Annual
infrastructure financing needs in Latin America amount to over US$300bn
between now and 2020; and in populous Asia the price tag is US$8 trillion
over 2010-20 period. These numbers are equivalent to 7% of GDP of these
regions. This is double the percentage of GDP the developed countries
spend on their infrastructure; and it highlights the magnitude of the
challenge the emerging economies face in advancing their development.
Ethiopis Tafara
IFC General Counsel and Vice President,
Corporate Risk and Sustainability
International Finance Corporation
tel: +1 202 458 8206
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17. CHAPTER 3 I CAPITAL MARKETS INTELLIGENCE
pension funds of the five largest economies alone had over
US$720bn in 2013. In Asia’s growing economies the figures
are even more impressive.
There is enough capital in the world. The question is how
to channel it to the development needs most effectively
and in the way that works for investors. Capital markets
are a big part of the solution.
Time and time again capital markets have proven to be
effective intermediaries in channelling savings and other
funds to countries’ national development priorities and
fuelling economic growth and jobs. They serve as an
alternative to the banking sector. In this role not only do
they mobilise additional finance to drive economic growth,
but by virtue of providing an alternative, capital markets
introduce financial stability into economies. They also
introduce stability through a different approach to risk
allocation, making economies more resilient in the face of
capital outflows and banking crises.
Capital markets in developing countries – many of which
are still in their infancy — hold tremendous potential. Local
bond markets, for example, have been growing at a robust
rate in some regions in the last decade. The Asian bond
market has grown more than fourfold since 2008 to US$3
trillion, representing almost a quarter of GDP. In Sub-
Saharan Africa only South Africa had issued a sovereign
bond before 2006, but now over US$25bn has been raised
across the continent, with US$7bn in 2014 alone. While
these numbers fall short of the financing needs, they point
to the trajectory of growth through a lot of momentum
gained in a short time. Similarly, the size of domestic bond
markets in the largest Latin American countries has more
than doubled since 1995, but apart from Brazil and Mexico
the pool of capital is still relatively small.
What would it take for the emerging economies to develop
robust capital markets to finance the growth of private
enterprise, economy, jobs, and improve the lives of
millions?
Today, when we think about global capital markets, we
focus on the great financial centres — New York, London,
Tokyo, Hong Kong. But this focus on the largest, most
modern markets misses an important point: every market
is both similar and unique — similar in that they all
respond positively to certain fundamentals, but unique in
the environment and tradition in which they develop and
prosper.
For example, the US capital market stands at
approximately US$60 trillion. This is a huge number
connected to a complex market. But its size and complexity
obscures the simple fact that the US capital market is still
just a market. Markets, in one form or another, have
existed in every society since the dawn of recorded history.
And, despite the size and complexity of modern trading
places, market fundamentals today are similar to those
that permitted markets to function thousands of years ago
in ancient Sumeria, Egypt, and China, or in the Bantu and
Swahili cities of Africa.
These fundamentals are simple. They include a place
where buyers and sellers can meet. This place can be a
simple bench under a buttonwood tree, which is how the
New York Stock Exchange got its start, or it could be an
old-fashioned trading floor, or the Rwandan Stock
Exchange or, increasingly, the virtual space of the Internet.
Second, there must be property rights. Buyers and sellers
must have some legal right to control and transfer the items
traded. In ancient times, these rights were recognised by
custom or possession. Today, they usually involve laws.
Either way, without these rights, markets cannot exist.
Third, and most importantly, markets require trust. Trust is
the lubricant that keeps the wheels of a market from
grinding to a halt. It is the faith that a buyer is buying what
he expects, and the faith that the seller will receive the
payment promised at the time promised. Without this basic
trust, no market in the world, no matter how
technologically sophisticated, will succeed.
In the informal markets in Africa, trust is based on your
family, reputation, and the relationships you have built
within a small community. In the diamond markets of New
York and Amsterdam, trust is based on ethnicity, religion
and the personal interaction of a handful of traders. These
markets work because of the value of reputation in their
9
08-10_DCM_2016.qxd 9/10/15 09:33 Page 9
18. CHAPTER 3 I CAPITAL MARKETS INTELLIGENCE
10
tight-knit communities. With the anonymous trading that
characterises modern capital markets, this personal trust
has been replaced by a surrogate — best practices,
securities laws, regulations, and their vigorous
enforcement.
So how do we go about building trust in these new capital
market? The answer lies not so much about the number of
laws or regulations, but rather about the principles and
behaviours they seek to establish. These principles and
behaviours need to reflect a thorough understanding of the
investors’ perspectives and needs – it is their capital at
stake, after all.
One of the underlying principles governing trust is
transparency. To earn trust, participants in the market need
to be completely transparent to their investors, clients and
regulators about their practices, their conflicts of interest
and their risk profile.
Reliability and credibility are also essential. Investors need
to have assurances that the information disclosed to them
is accurate, complete and verified. It gives them confidence
that they have a sound basis to judge the value of what
they are buying. So accountants and auditors serve a
critical role in enabling the transparent and accurate
financial reporting that underpins investor confidence and
trust. Credit rating agencies are also key actors in
rebalancing information asymmetries by providing
information about the creditworthiness of companies to
lenders and investors.
And finally, trust is built on knowing there is a public or
private cop on the beat. Clear rules are necessary but their
credible enforcement is equally crucial.
Without a doubt, governments have to play a central role in
creating and enforcing the regulatory framework that
fosters trust. But it takes time. Different market players –
private companies, accountants, auditors and rating
agencies – can do a lot on their own. Today we benefit from
the enormous body of knowledge and experience from
market successes and failures that have been translated
into global principles and standards. There are partners
like IFC to help make these principles and standards work
across different environments in the emerging markets to
build investor confidence as the foundation for capital
markets. The development of domestic capital markets
across the developing world has the potential to provide
the funds necessary to drive economic growth to end
extreme poverty and build shared prosperity and also bring
robust returns for investors.
Contact us:
International Finance Corporation
2121 Pennsylvania Ave.
Washington DC, 20433, US
tel: +1 202 473 1000
web: www.ifc.org
08-10_DCM_2016.qxd 9/10/15 09:33 Page 10
19. CHAPTER 4 I CAPITAL MARKETS INTELLIGENCE
11
Finnish corporate bond market
to see more rated issuers
by Jani Koivula, Pohjola Bank plc
The Finnish corporate bond market has always been, to
some extent, held hostage by the solid bank lending scene
prevailing in Finland. This is one of the main reasons why
the Finnish corporate bond market remains somewhat
underdeveloped compared to the wider European market in
terms of relative volumes, average issuer profile and
composition of the issuer base. In general the euro-
denominated bond issuance is dominated by rated
corporates with both the volumes raised and number of
issues strongly tilted towards them, whilst in Finland the
number of unrated issues have constantly been higher than
rated ones, although rated issuance fares better against the
unrated market when comparing volumes due to larger
average issue sizes for rated issuers (see Exhibit 1 and 2).
Finnish corporates have mostly been reliant on bank
borrowing in the past and, whilst they have become more
inclined to utilising the bond market to meet their
financing needs, bank borrowing remains a far bigger
source of debt funding for them in general. Healthy
balance sheets of Nordic banks, the main source of bank
funding for Finnish corporates, and their insignificant
The Finnish corporate bond market has historically been a playground for
unrated issuers. Whilst there are a number of issuers with an official
credit rating, many of them are rather infrequent issuers and the majority
of issuance has come from unrated issuers in recent years. Whilst the
unrated issuers have been able to find sufficient demand for their
transactions we have, for a couple of years now, felt that a number of
them would benefit from a credit rating as their issue sizes are growing,
the total amount of bonds outstanding is increasing and they are
targeting more international and diversified investor bases. Times are
changing and there are signs that a number of current and potential
future corporate issuers are contemplating obtaining a rating.
Jani Koivula, Head of DCM Origination
Pohjola Bank plc
tel: +358 (20) 252 2360
mob: +358 40 5475 245
email: jani.koivula@pohjola.com
11-17_DCM_2016.qxd 9/10/15 09:36 Page 11
20. CHAPTER 4 I CAPITAL MARKETS INTELLIGENCE
exposure to troubled assets during the credit crises have
enabled corporates to rely on bank borrowing even in
recent years despite turbulent market conditions.
Whilst Finland boasts a relatively healthy and liquid
domestic corporate bond market, a number of issuers have
funding needs, both size and maturity wise, that cannot
efficiently be met by bank borrowing, investors willing and
able to invest in unrated bonds, or the combination of the
two. These funding needs act as a key driver for corporates
obtaining a new credit rating. The most likely candidates
are those operating in capital intensive industries, such as
utilities, telcos and real estate development, which tend to
require funding for large investments that provide stable
income over many years, often decades. Whilst banks are
happy to lend money to such companies, bond financing is
often more attractive for them due to longer tenors, often
significantly, on offer.
Bank funding is generally limited to five years, or seven at
best, whilst fixed income investors can buy bonds with 10-
year maturities, or even longer, subject to an investment
grade (“IG”) rating. In the event that the rating falls into the
high yield (“HY”) category, the significantly expanded and
more international investor base becomes the key benefit
for the issuer enabling larger issue sizes and tighter pricing,
whilst a maturity extension may not be as significant.
However, regardless of the rating falling into the IG or HY
category, companies have an incentive to obtain a credit
rating as it enhances their funding options thus giving them
funding advantage over their unrated peers.
Whilst rating provides corporates with significant flexibility
in funding, such as longer maturities, cheaper funding,
wider and more international investor base and access to
private placements market, it is only rather recently that
we have noticed a clear change in attitudes towards
12
Finnish corporate bond issues – senior unsecured Exhibit 1
Source: Bloomberg, Pohjola Markets
Date Issuer CCY Amount (€m) Coupon Maturity Spread over m/s Rating
26-Jun-15 Forchem Oy EUR 70 4.900 Jul-20 ~433 nr
24-Jun-15 Solteq Oyj EUR 27 6.000 Jun-20 ~549 nr
17-Jun-15 Func Food Group EUR 38 Floating Jun-19 3mE+900 nr
21-May-15 Technopolis EUR 150 3.750 May-20 340 nr
12-May-15 Sponda EUR 175 2.375 May-20 200 nr
06-May-15 Kemira EUR 150 2.250 May-22 170 nr
24-Mar-15 Containerships EUR 45 Floating Apr-19 3mE+750 nr
16-Mar-15 YIT EUR 100 6.250 Mar-20 597 nr
11-Mar-15 Neste Oil EUR 500 2.125 Mar-22 178 nr
13-Mar-15 Eagle Industries EUR 105 8.250 Mar-20 ~800 nr
29-Jan-15 TVO EUR 500 2.125 Feb-25 148 nr/BBB/BBB
14-Nov-14 HKScan EUR 100 3.625 Nov-19 335 nr
12-Nov-14 DNA EUR 150 2.875 Mar-21 235 nr
22-Sep-14 Citycon EUR 350 2.500 Oct-24 143 Baa2/BBB
18-Sep-14 Outokumpu EUR 250 6.625 Sep-19 ~610 nr
16-Sep-14 Suominen EUR 75 4.375 Sep-19 400 nr
08-Sep-14 Lassila&Tikanoja EUR 30 2.125 Sep-19 175 nr
04-Sep-14 Ahlstrom EUR 100 4.125 Sep-19 370 nr
26-Aug-14 Elenia Finance EUR 13 3.103 Sep-34 - nr/BBB
18-Jul-14 Elenia Finance EUR 25 Floating Aug-29 6mE+145 nr/BBB
03-Jul-14 Elenia Finance EUR 20 3.077 Jul-26 - nr/BBB
11-17_DCM_2016.qxd 9/10/15 09:36 Page 12
21. CHAPTER 4 I CAPITAL MARKETS INTELLIGENCE
obtaining a rating. Corporates have been wary of resources
tied up in obtaining and maintaining the rating, especially
human resources and money. However, as corporates have
increasingly started to use debt capital markets as a
funding source and as a low interest rate environment
combined with tight spreads have made long-term funding
more attractive to them, many of them have started to view
the rating process more as a natural part of their funding
process. Furthermore, one can never underestimate the
power of example. Corporates that have more recently
obtained a rating have shown the benefits that are
available for a rated corporate. In our view, this
development will continue for the years to come.
The companies operating in capital intensive industries
have been active in debt capital markets and many of them
have either had a rating for years or have obtained a rating
more recently. Their issue sizes, total amount of bonds
outstanding or both often justify, and sometimes require, a
13
European and Finnish corporate issuance Exhibit 2
Source: Bloomberg, Pohjola Markets
Rated volume, €bn Unrated volume, €bn
——— Number of rated issues (rhs) ——— Number of unrated issues (rhs)
Rated volume, €bn Unrated volume, €bn
——— Number of rated issues (rhs) ——— Number of unrated issues (rhs)
Europe
Finland
2010 2012 2012 2013 2014 2015
2010 2012 2012 2013 2014 2015
350
300
250
200
150
100
50
0
5
4
3
2
1
0
700
600
500
400
300
200
100
0
25
20
15
10
5
0
€bn
#issues#issues
€bn
11-17_DCM_2016.qxd 9/10/15 09:36 Page 13
22. CHAPTER 4 I CAPITAL MARKETS INTELLIGENCE
rating in order to be efficiently and economically able to
manage their debt portfolios. The recent “rating wave” was
started by Citycon obtaining ratings from Moody’s (Baa3)
and S&P (BBB-) in May 2013 (see Exhibit 3). Citycon, which
obtained the rating to increase funding flexibility and
extend its maturity profile provides a good example of
what a corporate can, at best, achieve by obtaining a credit
rating.
Citycon’s inaugural five-year €150m public bond issue was
priced at mid-swap +290 bps and allocated mostly to Finnish
investors (88%), whilst a year later, after obtaining the
rating from two agencies, the company issued a seven-year
€500m bond at mid-swap +245 bps and the majority of the
bonds were allocated to non-Finnish investors (74%) – i.e.
the credit rating enabled Citycon to issue a larger bond with
a longer tenor and tighter spread, whilst attracting
significantly more demand from a wider and more diversified
investor base. Furthermore, the spread of the inaugural
bond tightened by 110 bps in just over a year of which some
50 bps can be directly linked to obtaining the rating.
Fifteen months after the first rated bond Citycon issued a
10-year €350m bond following the rating upgrade from
both agencies (Baa2 by Moody’s and BBB by S&P) at mid-
swap +143 bps with the clear majority of bonds again
allocated to non-Finnish investors. In just over two years
Citycon transformed itself from a domestic five-year issuer
to an international issuer with access to 10-year funding by
obtaining a credit rating – so the company managed to
double the maturity whilst more than halving the spread it
paid over the relevant interest rate.
This development has not gone unnoticed by other Finnish
corporate issuers and whilst a credit rating does not suit
everyone there are plenty that would benefit from having
one and who would like to experience similar development.
SATO, a real estate development company focusing on
residential properties mostly in Finland, followed suit by
obtaining a rating from Moody’s (Baa3) in May 2015. Whilst
SATO had yet to issue a bond as a rated entity by the end
of H1/2015, it is only a matter of time before they put the
newly obtained rating to work.
14
Citycon bond spread development Exhibit 3
Source: Bloomberg, Pohjola Markets
0
50
100
150
200
250
300
350
400
CITYCON 4 1/4 05/11/17
CITYCON 3 3/4 06/24/20
CITYCON 2 1/2 10/01/24
350
300
250
200
150
100
50
0
Bps
May-12 Nov-12 May-13 Nov-13 May-14 Nov-14 May-15
S&P issues inaugural BBB-
rating
Moody’s places rating on
review for upgrade
S&P places rating on
review for upgrade
S&P upgrades rating to BBB
Moody’s upgrades rating to
Baa2
Moody’s issues inaugural
Baa3 rating
11-17_DCM_2016.qxd 9/10/15 09:36 Page 14
23. OP Financial Group is a co-operative banking group and market
leader in Finland. OP Financial Group provides a wide range of
financial services consisting of responsible investment, financing
and insurance. Pohjola Bank plc is member of OP Financial Group.
Your reliable
partner in capital
markets services.
11-17_DCM_2016.qxd 9/10/15 09:36 Page 15
24. CHAPTER 4 I CAPITAL MARKETS INTELLIGENCE
16
Another driver increasing the number of rated corporates
in Finland has been the debt capital market activity of large
international private equity and infrastructure fund-owned
companies. These funds have been actively refinancing
their acquisition funding and raising funds for future
investments from the debt capital markets. The funding
needs have been rather sizeable thus making the obtaining
of the credit rating a pre-requisite for the bond transaction.
Private equity and infrastructure funds are used to and
comfortable with operating in debt capital markets to meet
their financing needs as bank funding is often too
restrictive or short term for them. Recent examples include
stone wool insulation producer Paroc (B2 by Moody’s and
B by S&P) in June 2014 and Elenia (BBB by S&P),
previously Vattenfall’s Finnish electricity distribution and
heating business unit, in December 2013. Elenia cuts an
interesting figure in the rating landscape by falling into
both categories of issuers likely to obtain a rating –
infrastructure fund-owned corporate and operates in a
capital intensive industry.
There are currently 13 rated Finnish corporates, of which
four, or more than 30%, have obtained a rating in 2013-
2015ytd (see Exhibit 4). We expect the portion to rise to, or
at least near, 50% for the 2013-16 period. It would take five
new ratings by the end of 2016 to achieve this ratio, which
we consider fully possible.
We expect to see at least two to three new companies
obtaining a rating by the end of 2016 at the latest; the
number could well be twice as high subject to funding
needs, including investment decisions and potential
acquisitions. Whilst the number may not sound high we
consider it, combined with other recently rated corporates,
to be a relatively large number of new ratings compared to
the number of rated Finnish corporates prior to the recent
“ratings wave” at the end of 2012 (nine rated corporates).
We last witnessed a similar wave of newly obtained ratings
by Finnish corporates in 1997-98, then driven by the paper
industry. The current trend shows Finnish corporates’
changing attitudes towards credit ratings and also the
growing importance of debt capital market funding.
Pohjola Markets Rating Seminar, held in April 2015, serves
as another tangible example of Finnish corporates
contemplating the rating. The seminar, which included
Rated Finnish corporates – current ratings Exhibit 4
Source: Bloomberg, Pohjola Markets
Bonds outstanding
Company Moody’s S&P Fitch 1st rated (€m)
SATO Baa3 - - May-15 249
Paroc B2 B - May-14 430
Elenia - BBB - Dec-13 828
Citycon Baa2 BBB - May-13 988
Teollisuuden Voima (TVO) - BBB- BBB Sep-06 2,602
Fortum Baa1 BBB+ A- Oct-02 5,076
Elisa Baa2 BBB+ - Nov-00 600
Metsa Board Ba2 BB - Nov-98 225
Fingrid A1 A+ A+ Feb-98 749
UPM-Kymmene Ba1 BB+ - Nov-97 954
Metso Baa2 BBB - Jun-97 540
Nokia Ba2 BB+ BB Mar-96 2,616
Stora Enso Ba2 BB - Sep-89 2,270
11-17_DCM_2016.qxd 9/10/15 09:36 Page 16
25. CHAPTER 4 I CAPITAL MARKETS INTELLIGENCE
guest speakers from Moody’s and S&P, attracted plenty of
interest with more than 20 corporate representatives from
some 15 corporates. We consider each corporate attending
the seminar as a potential for obtaining a rating in the
coming years, whilst a number of obvious candidates were
missing due to earlier commitments.
So who will be the next corporates to walk down the aisle
with the ratings agencies? One would do well to look
towards corporates in capital intensive industries, private
equity and infrastructure fund-owned assets, corporates
with significant re-financings at hand or simply those with
sizeable debt portfolios. Some obvious candidates are
Caruna, formerly Fortum’s Finnish electricity transmission
business unit acquired by infrastructure funds in 2014,
which can be likened with the case of Elenia and
Outokumpu, a Finland based global stainless steel
producer, that will see the coupon of its €250m bond
maturing in 2019 increasing by 100 bps unless it obtains a
rating by the end of Q1/2016. However, the pool of
corporate issuers contemplating a rating is sizeable
enough to provide some surprises.
We have seen the market developing towards the point
where it will become likely that a number of issuers will
decide to go for a rating to increase their funding options
and flexibility. It has taken somewhat longer than we
expected but we strongly believe that the trend that
started in 2013 will continue and strengthen in the coming
years. In our view, credit rating provides not only a
competitive edge for the corporate obtaining it, but also
develops the Finnish corporate bond market as a whole
and makes it more attractive for international investors.
Unrated issuers are likely to remain the larger portion of
the Finnish corporate market in terms of the number of
transactions. However, we expect the rated segment of the
market to challenge the unrated one even more heavily in
the future, volume wise. Furthermore, as more corporates
move from the unrated to rated market it will create
opportunities for new unrated issuers to fill the void and
provide new unrated investment opportunities for mostly
Finnish bond investors. We have already seen a few new
Finnish corporate issuers so far in 2015 and we expect this
trend to continue.
17
Contact us:
Pohjola Bank plc
Teollisuuskatu 1, Helsinki, Finland
tel: +358 10 252 2360
fax: +358 40 5475 245
web: www.pohjola.fi
11-17_DCM_2016.qxd 9/10/15 09:36 Page 17
26. CHAPTER 5 I CAPITAL MARKETS INTELLIGENCE
18
Johannesburg Stock
Exchange
by Bernard Claassens, Johannesburg Stock Exchange
The JSE debt market was established in 2009, following the
exchange’s acquisition of the long-existing Bond Exchange
of South Africa (BESA).
The South African debt market is liquid and well developed
in terms of the number of participants and trading activity.
Roughly R25bn is traded daily. In 2014, the JSE debt market
raised R319bn, down 23% from FY2013.
Participants in the debt market comprise a number of
issuers, including primary dealers, who contribute to the to
increasing the liquidity of the debt market; special purpose
vehicles; corporates; government securities; banks; inter-
dealer brokers; agency brokers; issuers and investors.
Currently, there are nine primary dealers that contribute to
raising the liquidity of the bond market. Inter-dealer
brokers and agency brokers act as intermediaries between
the banks and investors respectively. Investors purchase
the instruments for their portfolios.
The types of bond issues are equally diverse and comprise
of corporate, government and convertible bonds;
commercial paper; asset-backed securities, mortgage-
backed securities as well as well as credit linked notes.
The JSE debt market is also home to the Repo Market.
Repo transactions contribute to bolstering the liquidity of
the JSE debt market, with daily funding exceeding R25bn.
Given the collateralised nature or the repo market, it
records daily trading spikes in excess of R200bn, making it
a highly liquid and efficient segment of the JSE debt capital
market.
Investors are also able to access the debt market through
corporate bonds. The first corporate bond issue was
issued in 1992. Since then, there have been 1,500
corporate debt instruments listed on the JSE, and these
instruments provide a way for the corporate entities
The Johannesburg Stock Exchange (JSE) is home to the most robust and
largest primary debt capital market on the African continent, with a
market capitalisation of R2 trillion. As such, South Africa’s primary debt
capital market plays a crucial role in facilitating capital formation for the
economy and economic development.
Bernard Claassens
Johannesburg Stock Exchange
Tel: +27 11 520 7000
Email: BernardC@jse.co.za
18-19_JSE_DCM_2016.qxd 9/10/15 09:39 Page 18
27. CHAPTER 5 I CAPITAL MARKETS INTELLIGENCE
concerned to raise money for large capital projects. In
2014, new debt issued by corporates and banks totalled
R187bn.
Government bonds also constitute the substantial share of
the debt market with these instruments accounting for
more than 90% of the JSE’s liquidity. The government
contributes to the lion’s share of nominal listings, as has
been the trend since the 2009 recession when it adopted a
counter-cyclical fiscal policy by increasing expenditure to
boost a slowing economy.
A diverse range of government entities, such as state-
owned companies and municipalities issue bonds by listing
them on the JSE Debt Board. As the key feature of the debt
market is to offer long-term capital, government entities
tap into the bond markets to raise capital for large
infrastructural projects intended for socio-economic and
sustainable development, such as roads and hospitals.
Given economic volatility uncertainty since 2008, fixed-rate
instruments have proven to be the most prominent
securities as they have enabled investors to lock-in
interest rates at the time of issue, thus providing certainty
about the cost of funding for the instrument’s duration.
Fixed-rate instruments account for 68% of total primary
listings on the JSE debt market.
The South African bond market remains resilient even with
high levels of volatility and global economic uncertainty
brought on by tapering of the US Federal Reserve Bank’s
Quantitative Easing programme and anticipated interest
rate hike.
In 2014, turnover, which is indicative of the liquidity of the
bond market, was R21 trillion, with 25% of this being
attributable to foreigners, and there are no restrictions on
foreign ownership of fixed income products. In 2014, 837
new bonds were issued, with the volumes increasing by
13% in comparison to the previous financial year.
Going forward, the JSE is collaborating with the National
Treasury and other market participants to implement an
electronic trading platform (ETP) for government bonds.
The development of an ETP is intended to align the JSE
with best practice of bond markets in developed
economies and also to improve transparency. It is
expected, that with time, the ETP platform will be made
available to primary dealers and other bond market
participants such as banks.
19
Contact us:
Johannesburg Stock Exchange
One Exchange Square, Gwen Lane
Sandown, 2196 Gauteng, South Africa
Tel: +27 11 520 7000
Website: www.jse.co.za
18-19_JSE_DCM_2016.qxd 9/10/15 09:39 Page 19
28. CHAPTER 6 I CAPITAL MARKETS INTELLIGENCE
20
Africa is
calling
by Martin Richardson, Rand Merchant Bank
A glut of excess liquidity – generated by expansionary
monetary policy in the aftermath of the GFC – was
channelled from exceptionally low-yielding environments
into high-beta investment destinations which were largely
uncorrelated with global happenings (Exhibit 1). African
economies, outside of South Africa, such as Egypt, Nigeria
and Kenya attracted scores of capital investors, post 2009.
While the tapering of asset purchases by the Fed has
somewhat tempered demand, sizeable capital injections by
the European Central Bank and Bank of Japan continue to
support the search for yield. Investors are still hungry for
high returns and continue to seek value in an array of
African assets. This has enabled local African entities to
tap the international market for funding, often for the first
time.
The sovereign debt boom
African sovereigns issued a record number of US dollar-
denominated bonds between 2012 and 2014 (Exhibit 2).
The love affair between global investors and Africa
flourished during this period, but rational thinking did not
always prevail. Typical warnings of a debt boom were met
with more aggressive bond structures, overly inflated order
books, greater volumes of hot money and banks, with no
African footprint, bringing deals to the market.
Given Africa’s chequered debt past, it could not afford a
high-profile market failure during this time. But economies
have stayed the course and met their funding
requirements, reflecting improved levels of governance and
macroeconomic stability relative to the early 2000s.
In the initial stages of Africa’s Eurobond bonanza, investors
painted African economies with broad brushstrokes with
little regard for idiosyncratic risks. However, this is slowly
starting to change. Like the American businessman Peter
Lynch says, “Know what you own, and know why you own
it.”
The Global Financial Crisis (GFC) was a boon not only for Africa’s
telecommunications industry, with the likes of MTN and Helios Towers
coming to market, but for the continent as a whole as investors starved
for yield turned their attention to unconventional markets.
Martin Richardson, Head of Debt Capital Markets London
Rand Merchant Bank
tel: +44 207 9391 730
email: martin.richardson@rmb.co.uk
20-25_DCM_2016.qxd 9/10/15 09:41 Page 20
29. CHAPTER 6 I CAPITAL MARKETS INTELLIGENCE
Although the period of high levels of oversubscription and
record low yields has passed, African sovereigns and
corporates will continue to show a preference for
Eurobonds over concessional debt as a means of foreign
financing.
The rise of corporate Africa
Arguably, the euphoric investment sentiment that encircled
Africa’s Eurobond markets over the last three years is
starting to fizzle out. The experience did, however, awaken
investors to a number of credit opportunities in Africa and
has drummed-up support for new issuers like MTN
(telecommunications), FirstRand (banking), Naspers
(e-commerce, online services and print media), Sasol
(energy and chemicals), Puma Energy (mid- and
21
IIF EM inward portfolio investment Exhibit 1
Source: IIF, RMB
200
150
100
50
0
–50
–100
US$bn
1998 2003 2008 2013
Africa’s sovereign borrowing spree (excluding South Africa) Exhibit 2
Source: Bloomberg, RMB
3
2.5
2
1.5
1
0.5
0
2007 2008 2009 2010 2011 2012 2013 2014 2015
Kenya
Gabon
Ghana
Angola
Congo
Angola
Coted’Ivoire
Seychelles
Nigeria
Senegal
Namibia
Zambia
Angola
Gabon
Ghana
NigeriaRwanda
Tanzania
Mozambique
Coted’Ivoire
GhanaSenegal
Zambia
Ethiopia
Coted’IvoireGabon
Zambia
US$bn
20-25_DCM_2016.qxd 9/10/15 09:41 Page 21
30. CHAPTER 6 I CAPITAL MARKETS INTELLIGENCE
22
downstream energy provider), Petra Diamonds (diamond
producer) and Shoprite (retailer) (Exhibit 3).
Africa’s capital markets have evolved along traditional lines
with sovereigns leading the charge by setting a pricing
reference point for state owned enterprises and banks.
Corporates have been a little slower to dip their feet into
international waters, but are progressively turning to the
offshore market to support expansion plans that
necessitate capital in excess of what can reasonably be
raised from traditional sources (Exhibit 4). In many
instances, the cost of local borrowing is becoming more
onerous for local firms as commercial banks adjust to
stricter regulatory requirements.
This is evident in Nigeria. Between 2011 and 2013, four
tier-1 Nigerian banks issued maiden Eurobonds, totalling
US$1.45bn. Rising interest rates and tighter domestic
liquidity conditions prompted First Bank and Access bank
to tap the international market once again in 2014 and
together with Zenith, Diamond and Ecobank raised a total
of US$1.75bn in debt.
Nigeria’s foray into the international debt market laid the
foundation for corporate issuance outside of the banking
and oil sectors. The shift in its consumer growth patterns
has also translated into a significant broadening of
issuance, as companies in consumer-driven industries such
as telecommunications, energy, real estate and banking
turn to capital markets to finance their growth.
In 2014, Helios Towers Nigeria issued a US$250m RegS
Senior Unsecured Guaranteed Bond, offering real money
investors the opportunity to gain exposure to a non-
financial, Nigerian-focused corporate. Their issuance
marked the first US dollar-denominated African
telecommunications deal since December 2007 and
recorded the lowest ever coupon for an inaugural Nigerian
corporate offering.
The African bond universe has, indeed, changed
dramatically over the last five years. In 2010, South Africa
accounted for 69% of Africa’s total internationally-
marketed dollar-denominated bond issuances. Its
percentage shrank to 31% in 2014 and stands at a paltry
10% in 2015, reflecting two recently evolving themes:
Recent African corporate issues Exhibit 3
Source: Bloomberg, RMB London
Naspers
Puma
Shoprite (ZAR convertible)
MTN
Sasol
Petra Diamonds
FirstRand
Dec14 May16 Sep17 Feb19 Jun20 Oct21 Mar23 Jul24 Dec25 Apr27
Maturity
9
8
7
6
5
4
3
2
1
0
%
20-25_DCM_2016.qxd 9/10/15 09:41 Page 22
31. CHAPTER 6 I CAPITAL MARKETS INTELLIGENCE
1. The headwinds faced by the South African economy
have softened growth prospects, limiting the need for
debt to finance expansion.
2. There is a broader acceptance that African credits
(outside of SA) will access international capital
markets as a viable alternative for longer-term funding.
Under pressure
The durability of African debt will be tested by the ever-
changing global backdrop and country specific-risks.
Investors should be mindful of what this means for African
economies.
The global outlook is cloaked by uncertainty over the
cyclical downturn in commodities’ prices, a deterioration in
geopolitical tensions, a correction in financial markets led
by monetary policy normalisation in the US, secular
stagnation, particularly in advanced economies, and a hard
landing in China.
The principal risk to advanced economies is stagnant or
weak potential growth, while emerging markets are
imperilled by widening output gaps. The Eurozone and
China remain at the forefront of these global growth fears,
threatening the growth in African exports. Growth
prospects across the Eurozone are lopsided suggesting a
delicate recovery in regional growth. Eastward, investment
and credit continue to underlie China’s growth, with
activity indicators reflecting a gradual moderation.
Across the Atlantic, the Federal Reserve’s “normalisation”
of policy rates is unnerving EM and frontier bond investors
as the cost of US dollar-denominated borrowing is
expected to rise. A far more palpable risk is a further
moderation in commodities prices from prevailing levels.
The oil price slump is a prime example of resource-reliant
countries coming under pressure – Angolan and Nigerian
current accounts are heavily dependent on funding from oil
revenues. A substantial push above US$55/bbl. appears
doubtful over the short term given the dichotomy between
23
Number of corporate issuances since 2008 Exhibit 4
Source: Bloomberg
16
14
12
10
8
6
4
2
0
Issuance count Issuance amount (RHS axis)
7,000
6,000
5,000
4,000
3,000
2,000
1,000
Millions
2008 2009 2010 2011 2012 2013 2014 2015
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32. CHAPTER 6 I CAPITAL MARKETS INTELLIGENCE
24
current supply and demand. African oil producers and their
local corporates will face less favourable market conditions
due to weakening fundamentals which should heighten
refinancing risks. This has already been evident in the
200bp repricing of the Nigeria 2021 Eurobond over the last
12 months.
In light of these global factors, the overarching risk to Africa
is that unwarranted public debt could erode the economic
growth prospects of many countries across the continent.
While Africa’s gross debt-to-GDP ratio has averaged around
30% since 2004, its debt stock has risen by more than
166%. This is particularly concerning in East Africa where
economies like Kenya have struggled in the past to contend
with debt overhang. Corporates are slightly less exposed
than sovereigns, as the ratio of hard currency corporate
bonds to GDP across the universe of African issuers,
remains low. This underscores the growth potential of this
market segment over the longer term.
December 2014 saw a blowout in EM credit spreads and
Africa did not escape unscathed. Broadly speaking, most
credits have tightened since then with the exception of any
names directly related to Nigeria and/or oil. One can argue
that the historical trend of indiscriminate investment
behaviour could lead to a credit bubble and risk a
disorderly exit from a distressed African corporate.
However, our sense is that the early hot money has been
replaced by the longer term holders and therefore we gain
comfort that the broader EM experience suggests that
investors will seek some form of restructuring rather than
an outright default. Encouragingly, a debt sustainability
analysis of SSA’s poorest countries reflects low or moderate
debt distress for the majority of issuers.
Given the plethora of risks, we believe that Africa’s
corporate bond markets need to be nurtured to enhance
their size and levels of sophistication to manage global and
domestic headwinds. The absence of a sound institutional
investor, benchmark yield and active secondary market will
severely limit the scope for investment.
Currency risk is also often underestimated. The cost of
servicing a US dollar-denominated debt might appear
cheaper than that of a local issuance, but rampant
exchange rate weakness will cause the cost of foreign
borrowing to rise. This type of risk is more pronounced if
the borrower is dependent on the exports of one or two
commodities for revenue and foreign exchange, as is the
case with oil and gas companies, specifically in Nigeria.
Are governments up for the
challenge?
The ability of African governments to contend with
prevailing challenges will influence the premium that
investors demand to compensate them for idiosyncratic
risks. Commodity-producing economies will come under
intense scrutiny as they attempt to navigate flagging
prices.
While the impact of a dwindling oil price appears worse on
paper for Angola than Nigeria, the Southern African nation
is better placed to manage the fallout. The Angolan
government has made significant attempts to cut
expenditure to help its struggling budget balance. To name
a few, it cut the fuel subsidy to unlock spending of around
US$2.2bn for much needed infrastructure development
among other things. Angola imports most of its fuel due to
its limited refining capacity and has spent 4% of GDP on
subsidies in 2014. The two fuel price hikes in 2014 of 20%
each have already saved the government US$1bn.
Furthermore, state-owned companies have been ordered to
reduce running costs by 30% and investment by 50%, and
most public investment projects planned by the ministry of
transport have been suspended. Most importantly,
parliament approved a decrease in the oil price assumption
in the 2015 budget from US$81/bbl to US$40/bbl, which
the finance ministry said would reduce the overall budget
by US$14bn. Moreover, the government has asked China
for a two-year suspension on existing debt payments and
for further credit to be extended. That said, the directness
of Angola’s funding request highlights the dire situation
following the oil price fall and leads to another concern of
whether debt levels will become unmanageable.
Nigeria’s options are a little less clear-cut given that a
Finance Minister is yet to be appointed to President
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33. CHAPTER 6 I CAPITAL MARKETS INTELLIGENCE
Buhari’s cabinet. A lack of policy direction will weigh on
investment as the economy will be subject to the budget
measures enacted by the former administration in May
2015, while a new candidate is sought. Having downwardly
revised its forecasts earlier in May, the finance ministry
announced that the fuel subsidy will be slashed by 90%,
freeing up almost US$5bn of much-needed funding. While
the withdrawal of the petroleum subsidy might assist in
realigning the government’s spending bias, it is likely to be
met with widespread criticism as the aid is perceived to be
an indirect form of wealth redistribution to the poor. The
bottom line is that the projected long-term decline in oil
revenue poses a broader socioeconomic risk if state and
local governments, which are already in financial disarray,
begin to compromise on service delivery in key areas such
as healthcare and education to accommodate lower
expenditure.
For Zambia, copper prices are still far off from the
budgeted level of US$6,780; the reversal of increased
mining royalties will weigh heavily on government
revenues; subsidies on maize will stretch the budget
further; and we remain sceptical whether significant
spending cuts are likely given the general election in 2016.
We remain concerned over the debt-financed spending and
will keep a close eye on whether the funding is used for
much-needed infrastructure projects otherwise the fiscal
position will become unsustainable. So far the government
has made some attempts to shore up funding: it has sold
US$80m worth of shares in the state-owned mining
investment company, ZCCM IH, while the fuel price hike will
take some strain off public finances. Zambia might also
save around US$670m by starting new projects only when
current ones are completed. No indication was given of
where the funds will be allocated but, with domestic
borrowing costs rising, it will offer some respite to the
budget.
Outlook for future issuance
There are a few themes we expect to play out over the next
few years. Firstly, investors are demanding greater
transparency with regard to the use of proceeds, the
structure of debt and how mandates are originated, which
is very positive for Africa’s capital markets. Secondly,
investors are expected to continue to move away from a
“shotgun” approach to African credit and move towards
more selective investments. Thirdly, it is no secret that the
Nigerian oil & gas industry has been hit by the perfect
storm of several highly leveraged and fully priced M&A
transactions that closed before the oil price collapsed. As
this scenario plays out over the coming few years, and new
players look to pick up bargains, bonds will be used as
part of the restructuring and refinancing of distressed
assets.
25
Contact us:
Rand Merchant Bank (a division of FirstRand Bank)
2 – 6 Austin Friars
London EC2N 2HD, UK
tel: +44 207 939 1700
web: www.rmb.co.za
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34. CHAPTER 7 I CAPITAL MARKETS INTELLIGENCE
26
SGX: The ideal partner in
the Asian bond market
by Singapore Exchange
While the market is expected to continue to grow,
challenges remain. Bond markets have traditionally been
“quote-driven” where investors extract liquidity from
principal market makers. Post-global financial crisis, global
market makers have scaled back their principal market
making activities even in the face of increasing bond
market capitalisation. This has caused increasing
fragmentation of the secondary market for Asian bonds
with liquidity to shifting towards end investors and
regional dealers.
Singapore Exchange (“SGX”), as Asia’s leading market
infrastructure provider, has a key role to play in capital
formation by making it easier for issuers to tap the primary
markets and lowering funding costs by increasing liquidity
and aggregating fragmented liquidity.
SGX is making it easier for issuers to tap primary markets
by providing Asian debt issuers with a credible, efficient
and transparent venue for listing their debt. SGX also
operates a platform for OTC trading of Asian bonds to meet
the liquidity demands of a global investor base. As data is
vital for a vibrant and liquid market, SGX provides valuable
tools to ensure transparency and access to metrics that
enable informed investment decisions.
This article provides highlights of SGX’s role as a pioneer
within Asia’s bond market, and credentials that make it an
ideal partner for the growing network of active
participants.
A strong and deep bond listing
venue
SGX is today the preferred venue among issuers to list
bonds in Asia, and holds a market share of around 40% in
the listed Asia Pacific G3 currency bond market.
SGX has grown its market share by offering a trusted
platform to reach an international investor base – from
facilitating fund raising and investor outreach, to enabling
the execution of corporate actions and fulfilment of
regulatory and corporate governance obligations. Its
efforts to improve bond market infrastructure as well as
transparency in the secondary market also enhance SGX’s
attractiveness as a highly connected and increasingly
liquid bond market.
Particular benefits of SGX as a listing platform of choice
include its clear regulatory framework, [predictable and]
efficient listing process as well as ability to ease post-
listing issuer requirements. In addition, SGX offers strong
connectivity with international investors and a valuable
The Asian bond market, which includes local and G3 currency government
bonds and Asian corporate issuer bonds, has burgeoned to more than
US$8 trillion in value (excluding Japan), propelled by positive
macroeconomic trends, infrastructure financing needs as well as
corporate capital expenditure financing needs.
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35. CHAPTER 7 I CAPITAL MARKETS INTELLIGENCE
27
Regulatory and efficiency benefits of listing bonds on SGX
SGX’s clear and market-oriented regulatory framework ensures that listing rules are straight forward in application and
provide a predictable timeline, reducing any delays.
Most issuers are not subject to the prospectus requirements prescribed by the Securities and Futures Act (SFA), since
on average 80% of bond issuances on SGX are subscribed to by institutional and accredited investors.
Its secure online e-Submission System enables a fast processing time of one business day for bonds that are
distributed to institutional and accredited investors. The efficient process helps to ensure timely access to the debt
capital markets.
Straightforward post listing requirements with easy execution of issuer obligations
SGX understands the importance of facilitating the fulfilment of post-listing obligations, as well as protecting investors
by ensuring timely, full and fair disclosure. SGXNet provides a secure online portal that enables issuers to easily and
efficiently distribute material company announcements, which are then published on SGX’s website. The structured
format submission eases the burden of filing announcements, and the immediate dissemination of information is
valuable in building connectivity with global investors.
Choice listing venue for debt securities in Asia Exhibit 1
Source: SGX, as of September 30, 2015
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36. CHAPTER 7 I CAPITAL MARKETS INTELLIGENCE
28
channel through which to profile securities to a global
audience.
SGX Bond Pro bringing liquidity to
Asia’s bond market
By December 2015, SGX will launch ‘SGX Bond Pro’, Asia’s
first dedicated Over-the-Counter (OTC) electronic trading
platform for Asian bonds, connecting buyers and sellers of
Asian bonds.
SGX Bond Pro will initially offer Asian bonds denominated
in G3 currencies, with Asian bonds denominated in local
currencies expected to follow. It has been developed in
close consultation with the industry and will offer a trading
experience that will cater to the different needs of market
participants, including dealers, market makers and
liquidity providers and institutional investors.
The platform will cover different market places (Dealer-to-
Client, Dealer-to-Dealer and All-to-All) to suit the different
liquidity needs of participants and offer different trading
protocols designed specifically for each market place. In
addition, SGX Bond Pro will have a General Counterparty,
which will act as an intermediary and increase market
connectivity, and therefore liquidity, by allowing
participants who do not have bilateral relationships to
transact. The General Counterparty role also helps to
ensure controlled information disclosure, separate pricing
from settlement risk and reduce legal and back office
processes for market participants.
SGX Bond Pro encourages participant adoption by lowering
integration costs through an “Open Access” model. Trading
protocols are FIX compliant and support FIX best practices
in order to standardise the integration process and we
encourage full integration with any third party Order
Management System (“OMS”), Execution Management
System (“EMS”), gateway providers and other liquidity
venues.
Using market data to enhance
transparency across the Asia bond
market
Given the role and importance of data and transparency in
building trust within the market and underpinning liquidity,
SGX has taken valuable steps to enhance this in its market.
Evaluated bond prices
Addressing the historic lack of shortage of public price
information in the secondary OTC bond market, which
presents a big challenge to the assessment of debt
securities, SGX offers an independent evaluation of SGX-
listed debt securities via its Evaluated Bond Price (EBP)
webpage.
Using market data and modelling techniques, the EBP
provides users with a reference point for bond value and
helps guide investors’, and other participants’, assessment
of the securities. SGX has enhanced access to reference
data on 90% of the debt securities listed on SGX through
an intuitive search function.
Enhancing liquidity with
SGX Bond Pro
Exhibit 2
Source: SGX, as of October 2015
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37. Trade defined
Singapore. Now we’re
redefining trade.
Singapore Exchange
From a modest trading post, Singapore has
grown into a global commercial hub with one
of the world’s busiest ports and largest
financial centres.
Singapore Exchange is at the heart of the action, connecting Asian
companies and investors to global capital, and global investors and
companies to Asian growth.
We help investors and clients transform opportunities into reality,
through solutions that anticipate their needs and are supported by
world-class regulations.
More than a platform for commerce, we see ahead and stay ahead,
to build and foster trade.
sgx.com
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38. CHAPTER 7 I CAPITAL MARKETS INTELLIGENCE
30
Fixed income indices
The development of fixed income indices for both retail
and institutional clients has also helped to deepen market
transparency. SGX recently introduced the TR/SGX “SFI”
series of SGD Bond Indices in collaboration with Thomson
Reuters, which comprises 60 indices across various
segments of the SGD bond market.
Indices such as TR/SGX “SFI” provide investors with
valuable metrics to enable better benchmarking of
investment performance, and better informed investment
decisions. By linking indices to tradable investment
products such as Exchange Traded Funds (ETFs), it also
broadens the scope of investable asset classes, and helps
to drive liquidity of the underlying bond market.
Meeting the demands of the Asian
bond market
Over the past 15 years, the local currency bond market in
Asia (excluding Japan) has grown at a CAGR of nearly 17%,
and with the region’s expected economic growth and
mounting infrastructure requirements, issuer demand for
access to the bond market as a source of financing is
expected to continue.
At the same time, we are seeing rising international
investor appetite for Asian bonds, as they increasingly
seek diversified multi-asset exposure and look beyond
their core portfolios.
While these trends are complementary, obstacles to both
access and availability across the Asian bond market
remain, and SGX is playing a key role in breaking these
down by building out the essential bond market
infrastructure needed to enhance flow and liquidity.
By providing a robust platform for corporates to issue
bonds, SGX facilitates access to both capital expenditure
and general investment financing, which is essential to
support the growth of the Asian corporate sector. At the
same time, this is helping to address the under-supply of
corporate bonds relative to growing investor demand, and
is further enhanced by efforts to improve secondary market
access and liquidity.
SGX will continue to work closely with the Asian issuer and
investor communities to improve and customise the market
infrastructure to meet the evolving needs of all market
participants in Asia.
Contact Us:
Singapore Exchange
2 Shenton Way, #02-02, SGX Centre 1
Singapore 068804
tel: +65 6236 8888
web: www.sgx.com
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39. CHAPTER 8 I CAPITAL MARKETS INTELLIGENCE
31
Australian debt capital markets:
Strong, stable and growing
by Paul Jenkins, Jamie Ng and Caroline Smart, Ashurst
Rise of the domestic market
The Australian domestic capital markets have seen robust
levels of issuance in recent years, standing at A$474bn in
non-government, non-matured issuance in 2014.1
In 2014
Australian vanilla issuance totalled almost A$114bn, up
A$9bn from 2013.2
With current issuance standing at
A$81.58bn as at September 16, 2015,3
it appears that levels
could match, if not surpass, 2014 volumes.
Particularly on the rise has been corporate issuance – an
area that the Australian market is very keen to see grow.
Recent high-profile domestic issuances by major
corporates such as SABMiller, raising A$700m in July 2015,
BHP Billiton, raising A$1bn in five-year notes in March
2015, Telstra raising A$500m in seven year notes in
September 2015 and Apple raising a record A$2.25bn on
four and seven-year notes in August 2015 indicate
increasing demand from Australian and Asian investors.
They also highlight the willingness of the Australian market
to support large volume issuances.
Financial institution issuance, both domestic and
Kangaroo, has long been the backbone of the Australian
market and has remained robust throughout 2014 and
2015. There has been significant benchmark issuance by
domestic and foreign banks as well as insurers, including
Rabobank’s first Basel III tier-two compliant Kangaroo
issue in June 2015. Additionally, 2014 saw the arrival of
Australia’s first green bond, issued by the World Bank, with
five following issuances by both banks and corporates in
2014/15. Hybrid and high-yield issuance has also been on
the up.
Such increase in market issuance is a result, among other
things, of Australia being perceived as a stable market with
increasing opportunities to reach a wider investor base, as
the Australian superannuation industry and self-managed
superannuation funds look to fundamentally diversify their
portfolios.
Issuing in Australia
The Australian bond market is primarily made up of bank,
corporate and Kangaroo issuers.
In 2014, 116 deals raised A$46.57bn for non-government
domestic issuers. Financial institution issuers are the most
active in the market, accounting for 63% of all domestic
non-government bonds issued in 2014, compared with
corporate issuers who accounted for 37%.
Kangaroo bonds account for roughly a third of all
It is an exciting time for the Australian bond market. While relatively small
compared to European, US and Asian markets, the market is sophisticated,
strong, stable and expanding. With issuance on the up, new products
making an entrance and a commitment from government and industry to
grow domestic corporate issuance, now is the time to look at what
Australia can offer issuers and investors to execute successful issuance.
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40. CHAPTER 8 I CAPITAL MARKETS INTELLIGENCE
Australian issuances. As at September 2015, Kangaroo
issuance stood at just under A$29bn,4
compared with
approximately A$39bn raised in 2014.5
For the half year to June 2015, corporate issuance stood at
US$4.4bn.
While investment grade bonds with five to seven-year
tenors continue to make up a large portion of the market,
there has been increasing interest in 10-year bonds. In May
2015, major logistics operator Asciano made its domestic
debut raising A$350m through the issue of 10-year bonds,
the largest Australian 10-year corporate bond deal since
2007. Reports also indicate that while ultimately not
pursued, Australia’s largest telco Telstra had also
considered issuing 10-year bonds in September 2015.
Although 10-year bonds have yet to be issued at
benchmark levels, the Asciano deal and Telstra’s initial
interest in a 10-year bond highlights the continued
deepening of domestic market tenors.
Kangaroo issuance trends
In 2014, around 50% of Kangaroo bonds were issued by
banks, 40% by sovereigns and supranationals and 10% by
non-bank financials and corporates.6
While the majority of
Kangaroo issuers are AAA-rated entities, issuances by non-
AAA issuers increased from 30% in 2013 to 40% in 2014,7
highlighting increasing market depth and investor appetite
for lower rated bonds.
Ease of doing deals in Australia
In practical terms, Australian issuance is a cost-effective
and easily accessible option for issuers seeking to raise
funds through the debt capital markets. The geographical
diversity of investors in the Australian bond market,
representing both domestic and Asia-based investors,
coupled with the potential for greater investment by the
Australian superannuation industry adds further depth to
the market. Continued interest in portfolio diversification
by both issuers and investors is resulting in innovations to
the market, allowing for more varied investor criteria to be
accommodated.
Wholesale and retail issuance
The majority of bond issuance in Australia is wholesale
issuance. Wholesale issuances are put together through a
book build process, are mostly traded OTC and are only
available to wholesale and sophisticated investors.
32
Bond issuance 2014 Exhibit 1
Source: KangaNews
Kangaroo issuers Exhibit 2
Source: Reserve Bank of Australia
A$m
45,000
40,000
35,000
30,000
25,000
20,000
15,000
10,000
5,000
0
Kangaroo Bank Corporate
(domestic) (domestic)
Banks
Sovereigns and
supranationals
Corporations
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41. CHAPTER 8 I CAPITAL MARKETS INTELLIGENCE
Wholesale issuances are the most cost-effective and
efficient way to issue bonds in Australia. Most wholesale
issuance is unlisted and issued under debt issuance
programmes. Provided the requirements for an exemption
from the disclosure requirements of part 6D of the
Corporations Act 2001 (Cth) are met, wholesale issuances
do not require a prospectus. Instead, it is customary for
issuers to produce a short form information memorandum
that sets out the terms and conditions of the notes as well
as a pro forma pricing supplement, relevant selling
restrictions and taxation information. There is no
requirement to produce a description of the issuer or
include a risk factor section, although in practice it is usual
to provide information on the issuer’s business. The
issuer’s legal obligation is to ensure that its information
memorandum or any other offering material is not
misleading or deceptive. Programme documentation
otherwise generally includes a dealer agreement, a note
deed poll and an agency and registry services agreement.
As the information memorandum for an unlisted wholesale
senior debt issuance programme does not need to be
reviewed by a regulatory authority, establishment of an
Australian medium-term note or debt issuance programme
can be achieved very quickly.
In order to qualify for an exemption from having to produce
a prospectus, the bonds must, for example, be issued to:
(i) a professional investor (or “wholesale investor”) who
has or controls gross assets of at least A$10m, or (ii) a
sophisticated investor who purchases a minimum amount
of bonds of no less than A$500,000 or who has net assets
of A$2.5m or a gross income for the past two financial
years of A$250,000 or more, as provided in a certificate
from a qualified accountant.
Retail issuances comprise a much smaller component of
corporate bond issuance in Australia. Although they are
able to reach all potential investors, there are significant
regulatory requirements that add expense and time to an
issuance. Retail bond offers require the issuer to produce a
full disclosure prospectus. Most retail bonds are listed, in
order to facilitate trading and transparency for retail
investors, and must therefore also meet the listing rule
requirements of the ASX. These require the issuer to be a
public company or other ASX-approved entity, to have
either net assets of A$10m or a parent with net assets of
A$10m who will guarantee all bonds for the period of
quotation, and to meet continuing disclosure obligations.
Although still low in volume compared to wholesale
issuance, retail bond issuance in Australia has been
increasing in the past few years. Government support for
the continuing development of a fixed income market has
seen legislation passed that simplifies retail issuance
disclosure rules for certain vanilla or “simple” corporate
bonds. For “simple” corporate bonds, issuers can take
advantage of a less onerous prospectus regime. “Simple”
corporate bonds must: (i) be ranked senior unsecured and
pari passu with the issuer’s other senior secured debt;
(ii) be unsubordinated excepted to secured debt; (iii) be
Australian dollar-denominated; (iv) have a first tranche
minimum offer size of A$50m; (v) be listed on a recognised
stock exchange; and (vi) have a tenor of no more than
15 years.
33
Paul Jenkins
Partner, Finance Division
tel: +61 2 9258 6336
email: paul.jenkins@ashurst.com
Jamie Ng
Partner, Securities & Derivatives Group, Australia
tel: +61 2 9258 6753
email: jamie.ng@ashurst.com
Caroline Smart
Senior Foreign Associate
tel: +61 2 9258 6460
email: caroline.smart@ashurst.com
Paul Jenkins Jamie Ng Caroline Smart
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42. CHAPTER 8 I CAPITAL MARKETS INTELLIGENCE
Bonds issued in Australia are issued in registered form, as
bearer bonds can be subject to interest withholding tax.
Bonds are constituted by a note deed poll and, if unlisted,
are usually cleared through the Austraclear clearing
system.
Investors
Domestic investors, namely insurance and investment
funds, comprise a large percentage of the overall investor
distribution of corporate and financial institution bonds.
Domestic investors are particularly dominant in the
distribution of bonds issued by Australian financial
institutions. Asian investors also play a role in the
Australian market, taking up at least 9% of all reported
corporate bond distributions as at September 10, 2015,
with even higher levels of investment reported in relation
to issuances by financial institutions. Offshore investors
typically account for greater levels of investment in
Kangaroo bonds, with reported distribution figures
indicating domestic investors typically take up less than
50% of Kangaroo issuance.
Growing the market
The Australian Government and industry players are
committed to developing a larger bond market in Australia
with greater breadth and depth.
A key reason for this stems from the increasing need of
Australia’s superannuation industry for portfolio
diversification. Australia has a compulsory superannuation
system which is comprised of the third largest pool of
private pension funds in the world. Australian
superannuation assets were valued at A$2.02 trillion in
June 2015, a 9.9% increase over the previous 12 months8
,
and are expected to grow to A$3.5 trillion by 2025.9
Also
on the increase are self-managed superannuation funds
(SMSFs).
Historically, Australian superannuation funds have
favoured equity over fixed income investment – in part a
result of Australia’s investor-friendly dividend imputation
laws, which favour equity investments with preferential tax
treatment. However, industry and investor aims to achieve
greater portfolio diversification require a greater focus on
fixed income investments. Coupled with Australia’s ageing
demographic and the consequences this has for requiring
greater, predictable income-generating revenue in the
retirement phase of a pension scheme, there is rising
demand for fixed income investments. It is expected that a
likely consequence will be a steady increase in Australian
bond market investment.
At the regulatory and legislative level, the Australian
government has introduced measures to encourage a
broader range of issuance types and to increase retail
investor access so as to allow more SMSFs to participate in
fixed income investment. Such measures include
increasing the range of eligible debt securities issuable by
Australian banks and reducing regulatory and documentary
requirements for the issue of retail securities, such as
reduced disclosure requirements for “simple” corporate
bonds as mentioned above. Industry measures and
innovations have seen the development of managed
investment schemes, mutual funds and exchange traded
funds and methods to reduce minimum purchase amounts
from A$500,000. In 2105 it became possible for retail
investors to purchase exchange traded bond units, known
as XTBs, which are units in a fund that holds certain
corporate bonds. XTBs may be bought for low
denominations, for example A$100, whereas the minimum
denomination of the underlying bond may be A$10,000.
Growing the asset class
Not only has the domestic market, inclusive of corporate
issuance, been growing but so has the asset class itself. In
recent years, Australia has seen successful high yield,
hybrid and green bond issuance.
Opening in 2012 with a A$30m issuance by Silver Chef,
Australia’s high yield market experienced a growth phase
in 2014, increasing in size to A$1.5bn in issuance over the
18 months to January 2015.
Australia has demonstrated an appetite for green bonds in
line with international demand. The first green bond was
issued in Australia by the World Bank in 2014 and five
further deals have followed, including a A$300m issuance
by National Australia Bank in December 2014 and a
34
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From investment grade corporate bonds and
high yield through to regulatory capital, hybrids,
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and more, we leverage our global know-how
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Delivering solutions not just advice
Ashurst’s global debt capital markets team spans the world’s major
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