Despite volatile conditions, Asian issuers have just registered their busiest January ever in the US dollar bond market. The big question, however, is whether that pace is sustainable with Europe’s credit crisis still swirling.
Source: Reuters/Damir Sagolj
A woman smiles as she manoeuvres a makeshift raft through a newly flooded neighborhood in Bangkok.
What a difference a few weeks can make. Asia’s primary bond markets have gotten off to a flying start to 2012, in breathtaking contrast to the gloom that marked the end of 2011.
As the calendar ticker over, the window for new issues looked certain to remain shut – or at best only slightly ajar – with the eurozone crisis showing no sign of abating and headline risk from the US and Chinese economies looming large.
Yet, Asian issuers outside Japan and Australia sold US$14.5bn of new dollar bonds in January and, with the pipeline still as heavy as it has ever been, odds are that the raft of mandates sitting with the major underwriting houses will continue to convert into deal prints.
However, it is unclear whether January’s volumes are the result of borrowers rushing to take money off the table before European headlines turn any worse, or whether some of the lowest medium-tenor Treasury yields in history are driving a structural shift that will yield a record number of deals this year.
“So far this year we are running at well over twice the run rate of the first quarter of 2011, which was itself extremely busy on a historical basis. This is the result of a number of factors: more encouraging data from the US, a change in stance on policy from China, European LTRO lending to European FIG, better equity markets, and a renewed risk appetite from accounts flush with funds. And we have a large backlog from the second half of 2011,” said Julian Trott, head of Asia ex-Japan syndicate at Goldman Sachs in Hong Kong.
“Barring further deterioration of the situation in Europe, the outlook for G3 issuance in Asia remains very positive. The major G3 government rates remain at or near their all-time lows, the US Federal Reserve has given a clear signal that rates will remain at these low levels into 2014, a broader array of borrowers – particularly financial institutions in Europe – can anticipate markets increasingly opening as crossover indices and other measures of risk appetite continue to improve.”
Certainly, in terms of underlying investor demand, fund flows have been supportive. Some US$846m was put into emerging market bond funds in the week to January 25, versus just US$109m the week before, according to data from research firm EPFR Global. At the same time, hard currency funds pulled in US$472m of inflow, compared with the previous week’s US$158m.
For those DCM bankers who are hoping for the high-yield issuance window to open up – there has been no true corporate high-yield issuance in Asia primary G3 so far this year, although Indonesia’s Cikarang Listrindo is waiting to print a seven-year non call four Global subject to a successful tender exercise – the real money backdrop is encouraging. High yield funds received inflows of US$2.53bn in the week to January 25, a significant gain on the prior week’s US$1.64bn. For the whole of January the high-yield segment has attracted a whopping US$7.26bn of inflows.
Despite this encouraging backdrop, the theme at this stage of the year in Asian primary G3 has been one of high quality, with investment-grade corporations, high-quality FIGs and sovereigns dominating the new issuance flow. The usual suspects that have, traditionally, been the first off the blocks on the G3 issuance calendar – the Republic of the Philippines, Kexim and the Republic of Indonesia – have again led the way in printing deals.
Each has registered in the superlatives category, with the Philippines’ booking its lowest-ever coupon – of 5% – with the 25-year Global it closed in early January, Kexim’s printing the biggest single offshore bond from Korea – via its US$2.25bn Global – and Indonesia’s hitting the longest tenor from the country with its 30-year paper.
“You get the feeling that these seasoned borrowers were looking to have the money on the table as quickly as possible, both to lock in ultra-low coupons and raise funds before the music stops. The headline risk remains even though there is a sense of fatigue towards the eurozone crisis, both in the media and among market players. Volatility is low for now and is allowing the issuance window to remain wide open, but I have no doubt it will return and provide a renewed challenge for issuers,” said a regional syndicate head, based in Hong Kong.
According to data from Thomson Reuters, G3 currency bond sales almost doubled in January from the US$7.7bn registered in the same month of last year. Of the US$14.5bn, the bulk came from FIG issues – US$7.2bn from financials, with sovereigns and agencies accounting for US$6.2bn. The remaining US$1.1bn originated from the energy, power, telecoms and property sectors, although, in the latter case, Hong Kong property dominated issues.
Property problems
If Asian bond volumes are to break records in 2012, they may have to do so without the China property sector. One of the biggest drivers of international deals in the first half of last year, Chinese developers have been notable only by their absence.
The Chinese Government has acted to cool the property market with buying restrictions imposed in the country’s large cities, and a large number of its property companies facing a cash squeeze based on aggressive price discounting and refinancing woes. The refinancing burden is both at the commercial bank and shadow banking level – many Chinese property companies are in hock to trust lenders at internal rates of return as high as 30%–40%. Given all this, the prospects for China high-yield property issues are gloomy.
“The stronger China property names with large land banks and rental income will be able to tap the market, but it seems unlikely that the lower-rated names will be able to cross the line. Still, for high-yield, in general, the fund flow is there and the sector will start to move again,” said Jon Pratt, head of debt capital markets, Asia Pacific at Barclays Capital.
Investors have been willing to book exposure to China property, albeit via issuance from Hong Kong property companies with PRC property portfolios. This risk is, however, mitigated by income derived from the less risky Hong Kong property market and via geographical diversification. For example, in late January, Hong Kong property firm Wharf Holdings was able to raise US$600m of five-year money, even though 40% of its business assets are located in the PRC property sector. Tellingly, while the rash of China property issues last year came from the lower reaches of the credit curve, Wharf is a Single A issuer (A– by Fitch).
Investors aren’t getting carried away, and even the hottest order book will come with strings attached.
Bond salespeople are now inputting order information online, which is more specific about price and size than has typically been the case in the past. So, a client will now specify that his or her order is at an absolute yield level and in a size contingent on both the final yield and the ultimate size of the trade. Clients will specify that, at a tighter yield or an enlarged deal size, the order will be reduced, with a US$10m ticket becoming a US$5m ticket if the terms of the deal change between initial guidance and pricing.
This may explain a notable phenomenon at the start of this year – that the days of an issuer pricing through its implied curve are gone and that investors are demanding steep new-issue premiums before they step up to the plate. So, for example, the Wharf deal came at a Treasuries plus 23bp concession, a level which indicated that the company was willing to leave a lot on the table for investors. This was reflected in the deal’s secondary market performance, with the paper tightening 20bp in secondary after the break.
Hutchison Whampoa’s tap of its fives and 10s during the same week was again notable for the spread left on the table, with each of the US$500m tranches of the tap tightening 20bp in secondary.
Hopes for high yield revolve around Indonesia. This is based both on the country’s recent promotion to investment grade by Fitch and Moody’s and on securities regulator Bapepam’s scrapping of a restrictive ruling on corporate bond issues. That ruling had stipulated – impossibly – that shareholders needed to approve the size and pricing of any substantial bond issue before marketing could begin.
Those two positive developments, however, came alongside an unwelcome reminder of the risks involved in Indonesia’s corporate sector. Shipping company Berlian Laju Tanker is sinking towards an imminent default on US$400m of high-yield bonds following news of a debt standstill, while fellow shipper Arpeni Pratama Ocean Line was lurching towards an eventual restructuring of its US dollar debt at an 82% haircut.
“The tailwind in Indonesia is certainly there for high-yield on the ratings dynamic and the scrapping of the Bapepam ruling, but you need nerves of steel to commit to the Indonesia high-yield space, given the country’s poor corporate governance and its long history of default and debt restructuring,” said a Singapore syndicate head.
