By Nina Trentmann 

More European companies are tapping Southeast Asian bond markets, in a move to diversify their sources of funding.

They are following their U.S. peers -- to Taiwan, Singapore and Hong Kong -- as strict regulations on capital exports make it less attractive for European firms to raise capital in China.

European companies in the first quarter issued 25 so-called "Formosa" bonds worth $7.9 billion in Southeast Asia, according to data provided by Dealogic. The majority of bonds were issued in Taiwan.

Telefónica SA, the Spanish telecommunications firm, at the end of March raised $200 million, through a private placement in Taiwan, a first for the company. The deal is part of Telefónica's ongoing efforts to strengthen its balance sheet with long-term financing, a spokeswoman said.

"We are detecting a growing interest from Asian investors in European issuances," she said.

Telefónica's debt sale comes on the back of earlier issuances by Vodafone Group PLC in February and by Electricite de France SA in the fall of 2016. A number of European banks, including Barclays PLC and HSBC Holdings PLC, also recently sold bonds in Asia.

European firms still trail their U.S. counterparts -- U.S. issuance in Southeast Asia during the first three months of the year amounted to $9.2 billion -- but the market is growing, bankers say. Bond sales by U.S. firms tend to be bigger in size than those of their European peers.

"We are seeing that change now," said Isabelle Toledano, head of corporate debt capital markets at UBS Group AG in London.

Placing debt in Asia helps European treasurers diversify their sources of funding, Ms. Toledano said.

Most of the capital raised in Taiwan, Hong Kong and Singapore is done in U.S. dollars and needs to be swapped back to euros. Still, the capital comes at a competitive price, said Andrew Wallis, director at Aroundtown Property Holdings PLC, a German real-estate firm.

Aroundtown recently raised $400 million, via a private placement in Hong Kong. It is the third time the firm has tapped Southeast Asian capital markets.

The surge of these issuances by European firms comes despite strong availability of capital in their home markets. The European Central Bank's corporate bond buying program has resulted in lower yields, making it cheaper for firms to raise capital in Europe.

Issuing in Southeast Asia is complementary to issuing in Europe, Mr. Wallis said. "We see it as a great add-on to our financing universe," he said. Aroundtown in 2016 raised nearly EUR2.6 billion ($2.7 billion) in Europe.

However, it takes a while for Southeast Asian investors to get to know European issuers, said Christophe Salmon, CFO at Trafigura Group Pte. Ltd., a commodities trading company.

"As a privately-owned company, we require more in-depth analysis which means it takes time until investors get more familiar with us," Mr. Salmon said. Trafigura in March raised $600 million in Singapore.

Raising capital in mainland China, on the contrary, is much less attractive for European firms.

Foreign companies can -- with the help of Panda-bonds -- issue yuan-denominated debt in mainland China. However, Chinese regulators want foreign issuers to spend the proceeds of their bond sales domestically.

"The use of proceeds is the biggest issue for potential European investors," said Scott Barton, head of corporate banking at Standard Chartered PLC in London.

In some cases, the regulator allows the overseas transfer of capital raised in China, especially if it benefits Chinese entities.

Veolia Environnement SA, the French utilities firm, in September 2016 was able to take 1 billion yuan ($145 million) out of the country, Mr. Barton said.

The firm had lengthy discussions with regulators early on. "Convincing the authorities to allow the transfer of the funds outside of China was not easy," said Claire Béchaux, Veolia's group treasurer.

Write to Nina Trentmann at Nina.Trentmann@wsj.com

 

(END) Dow Jones Newswires

April 05, 2017 12:59 ET (16:59 GMT)

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