APEC business chiefs back aset-backed Asia bonds
APEC business chiefs back aset-backed Asia bonds
KUALA LUMPUR (Bloomberg): Business leaders attending the Asia- Pacific Economic Cooperation forum in Malaysia on Tuesday called for government support for collateral-backed bonds to channel capital to the region's cash-starved companies.
The proposal, being submitted to APEC leaders on Tuesday, would establish a task force to generate market and government backing for the bonds "within the next two weeks," said Nelson Chang, president of Taiwan's Chia Hsin Cement Corp. Chang is a member of Taiwan's delegation to the APEC Business Advisory Council, or ABAC.
The debt, known as collateralized bond obligations (CBO), would be backed by the U.S., Japan, Taiwan and other governments to reduce risk for the bond purchasers, lowering the price for the borrower in the process, Chia said.
"With a proper rating, presumably the secondary market will have more liquidity, and the instrument itself could function as an Asian benchmark for further issuances," Chia said.
Asia's bond market outside Japan has all but been wiped out by the region's economic crisis that struck 16 months ago, triggering corporate defaults, downgrading of sovereign and corporate ratings and sending investors fleeing.
Now, policy makers and corporate executives groping for new sources of funds to keep companies afloat are again looking to revive the bond market, with CBOs among the options being examined.
On Monday, U.S. and Japanese government officials said the two nations will team up with the Asian Development Bank and the World Bank to raise at least US$10 billion to help shore up the region's economies and companies.
According to the details so far released, Japan will give $3 billion to the ADB to guarantee bond sales by companies.
The CBO plan wouldn't rely on government and ADB guarantees, instead depending ultimately on private investor backing. The credit enhanced bonds would be modeled on those sold in Mexico in 1994 to help that country out of its financial crisis.
Credit-enhanced bonds could raise "billions of dollars" for Asian companies, said Francis Yeoh, managing director of YTL Corporation Bhd., a Malaysian construction conglomerate. "I think if it works, there should be no limits to this," said Yeoh, who was a participant in the business summit in Kuala Lumpur.
"CBOs have the advantage of providing access to new sources of funds from investors who would not normally participate directly in such risk debt," the Business Advisory Council proposed, according to a copy of the statement ABAC prepared for APEC leaders.
The instrument has been common in Japan but has rarely been used elsewhere in the region. That may be about to change.
"There's definitely a market for (CBOs) and it makes sense that they do it," said Mark Daniell, managing director of Bain & Co. (Asia) Inc., management consultants.
Daniell, who has long advocated CBOs in Asia, said the backing of countries and multilateral banks would represent "an intervention on risk," which would cut uncertainty for investors.
CBOs' main advantage is they can be rated above the sovereign ceilings of the country in which they are issued, said Frederic Drevon, managing director for structured finance ratings in Asia for Moody's Asia-Pacific Ltd., in Hong Kong.
"The key to a successful CBO is diversification," said Drevon. Diversification reduces risks and increases credit ratings, reducing costs for the borrower.
Tuesday's decision by Moody's to downgrade Japan's sovereign debt one notch to Aa1 from AAA didn't affect the ratings of any of Japan's CBOs, said Drevon.
"It's still possible to achieve AAA in Japan even after the downgrade," said Drevon.
Chia Hsin's Chang said the plan envisages the issuance first of sovereign bonds, most likely in U.S. dollars, and would be led by "world-class investment houses."
Bonds would also be "over-collaterized" so that if, for example, the bond has a principal of $100 million, it would be backed by collateral worth $120 million or more.
That way, the value of the collateral could fall 20 percent before the bond loses full backing, Bain's Daniell said.
CBOs could eventually help bring investors back into Asia's bond market, Chang said.
"The principal idea is to revive the Asian debt market and provide liquidity to the troubled economies as well," said Chang.
Taiwan has already said it would buy as much as a quarter of any bond issue set up to raise funds for the region, while other countries have been tapped for support, Chang said.
The U.S. Assistant Treasury Secretary for International Affairs, Tim Geithner was scheduled to hold discussions with ABAC's financial group this afternoon.
"If leaders endorse this concept and ask various ministers to proceed on this then certainly it's possible within the next six months," Chang said.