In sizzling Asia market, one recent offering cost issuers a mere $1 for each underwriter
This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (January 4, 2018).
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Fierce competition to underwrite debt offerings in Asia's booming U.S.-dollar bond market is forcing some big global banks to work on deals for next to nothing.
Barclays PLC and Standard Chartered PLC were among seven banks that recently helped sell a total of $1.3 billion in dollar-denominated bonds from three state-owned Indian companies, effectively providing their services free of charge. The three Indian companies paid a dollar in underwriting fees to each bank that handled the sales, according to company representatives and people familiar with the matter.
A similar trend is emerging among banks underwriting some Chinese bond offerings, bankers say, particularly in the case of state-owned corporations that have large pools of underwriters to choose from and tend to be stingier with fees.
Banks that agree to arrange bond offerings for ultralow fees are generally hoping to build relationships with corporate clients for future deals. They are also hoping to generate revenue from related businesses, such as fees for setting up foreign-currency swaps or on bond-trading commissions.
In some cases, local brokerages have been aggressively slashing fees to win bond underwriting mandates, leading issuers to demand global banks do the same, bankers say.
Asian companies excluding Japan sold about $334 billion in U.S.-dollar bonds in 2017, up 60% from 2016, according to Dealogic. More than half the bonds were issued by Chinese companies, which, in many cases, enjoyed strong investor demand for their debt.
But market participants say global banks' underwriting revenue, while also up from a year ago, isn't keeping up with the accelerating pace of Asian corporate bond issuance. It is raising concerns that this core investment-banking business could become largely unprofitable in the fast-growing region.
"Fee income from bonds in Asia has not grown proportionately to deal volumes," said Clifford Lee, managing director and head of fixed income, treasury and markets at DBS Bank in Singapore.
In the U.S., underwriting fees, in recent years, have averaged about 0.7 percentage point on investment-grade corporate bonds, meaning that for a $1 billion bond issue, companies would pay about $7 million to banks arranging the sale. For U.S. high-yield, or "junk," bonds, the fee averages 1.2 percentage points, according to data from Thomson Reuters.
Fees in Asia are generally lower and can vary widely, bankers say. Chinese banks, including state-owned Bank of China Ltd. and Industrial & Commercial Bank of China Ltd., paid a 0.1 percentage point fee on recent bond sales, according to a person familiar with the matter. Some companies are more generous. Alibaba Group Holding Ltd. paid $33 million in fees -- or about 0.47 percentage point -- on a $7 billion investment-grade bond deal in November.
Some bankers who recently handled bond sales for Chinese companies said they have earned nothing from the deals in some instances.
"We don't like to do that but competition forces us to be on some deals no matter what," said a Hong Kong-based banker for a Chinese bank, calling some of the fee practices "irrational." He declined to name specific issuers.
Another factor contributing to lower fees: the rising number of banks participating on bond offerings. The average number of bookrunners on Chinese companies' U.S.-dollar bond deals rose to 6.5 last year, from an average of 3.6 in 2012, according to Dealogic. The average for Asia excluding Japan was recently 4.6, versus 2.2 in the U.S.
Larger bond syndicates mean lower fees per deal are also being divided among more banks, making it harder for individual firms to profit, said Florian Schmidt, a former investment banker who now runs a consulting firm in Singapore.
Across Asia excluding Japan, nearly 170 banks or brokerages were involved in arranging U.S.-dollar bond sales for issuers in the region in 2017, more than triple the number five years earlier, according to Thomson Reuters. Most of the newcomers were local financial companies and they included dozens of Chinese securities firms.
When China sold $2 billion in U.S.-dollar sovereign bonds in late October, it tapped 10 investment banks to handle the global sale to investors in Asia, Europe and the Americas. The country paid the banks, which included Chinese, U.S. and European banks, a total fee of $2 million, or 0.1 percentage point. That suggests each bank earned $200,000 on the sale.
Another reason many banks will swallow low fees is to move up the so-called league tables, which rank banks based on their deal volumes. They are followed closely and touted by many banks, and those that do the most business tend to be more sought after by corporate clients.
"The pressure to be higher up on the league table rankings becomes so much that investment banks start undercutting themselves by quoting absurdly low fees," said Dharmesh Ojha, a former investment banker who is now chief investment officer of ITI Reinsurance in Mumbai.
In India, at least one of the three state-owned corporations that recently paid banks $1 to underwrite their bond deals said there was no reason to pay more, because banks were eager to win the business. The companies -- Indian Railway Finance Corp., Rural Electrification Corp. and Power Finance Corp. -- each issued hundreds of millions of dollars worth of bonds.
An official from New Delhi-based Power Finance, the country's largest state-owned and nonbank finance company, said it had invited banks to submit competitive bids to arrange its $400 million 10-year bond sale in late November. Units of Barclays, Standard Chartered, and the investment banking arm of the State Bank of India arranged the sale. "The mandate was given to the lowest quoted fee," the official said.
Julie Wernau and Yifan Xie contributed to this article.
Write to Manju Dalal at firstname.lastname@example.org
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January 04, 2018 02:47 ET (07:47 GMT)