Transparency Push Eyes a Bastion of Asia Bond-Market Secrecy

(Bloomberg) -- The rapid expansion of Asia’s dollar-bond market in recent years has spurred plenty of gripes among international investors, from lack of documentation about issuers to the dominant presence of Chinese buyers.

Now, at least on one score, they have an ally in a major international trade group. An Asian committee of the International Capital Market Association last month encouraged lead managers to disclose their own orders for bond sales they’re overseeing, according to people familiar with the matter. While the group didn’t agree on specific rules, the discussion at a May 3 gathering reflected angst about the issue among investors.

In the U.S., bond arrangers would typically aim to avoid taking a share of the deals they work on -- after all, the idea is to find buyers for the securities. Yet in the China-dominated $1.3 trillion dollar bond market in Asia excluding Japan, the lack of a standardized approach to revealing orders has left some suspecting that underwriters buy a part of the sale themselves, under pressure from issuers who hand out bond mandates based on the size of orders. That can then leave an overhang of securities that gets dumped soon after the sale, harming other buyers. Some such practices were seen on high-yield bonds last year.

‘More Comfortable’

“Disclosure of joint lead managers would make us more comfortable to participate in bond deals,” said James Hu, a senior portfolio manager at Income Partners Asset Management (HK) Ltd. “In the past year, there were a number of Chinese dollar bond deals where lead banks or related parties of the borrowers had high allocations and flipped the bonds immediately, causing extra volatility in the secondary market.’’

Observance of the new call has been mixed. Lead managers disclosed their orders for 11 of the 24 deals that released information on orders since the May 3 meeting of the ICMA group saw a consensus supporting such transparency. Yet there have been more than 70 dollar-bond deals priced in that time.

Hu at Income Partners also worries that “it is hard to verify the authenticity of such disclosure. And as the disclosure is not mandatory, it may lead to disclosure bias: only deals with diversified order book will tend to make such disclosures.”

“The new guideline could provide more transparency for investors to gauge the real demand and should be helpful in fair pricing of deals. But at present, buyers still need to be wary,” said Leong Wai Hoong, a senior portfolio manager at Nikko Asset Management in Singapore.
Still, the backing of some underwriters may help the practice to spread.

“A lack of transparency will be detrimental to those JLMs who don’t follow market practice as investors can choose to not buy deals from them and eventually savvy issuers may not pick them to lead deals,’’ said Joanne Wong, head of debt capital markets at Bocom International Holdings Co., referring to joint lead managers.

Read here about how underwriters in Japan get left with chunks of bond sales.

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