After a flying start to 2013, the question the Asian debt community is asking itself is: will this year be another record-breaker for Asia’s primary market?
While every reduction in credit spreads brings the chances of a correction that bit closer, regional bankers point to several factors that should keep the big picture bright. Analysts at Standard Chartered, for instance, believe the implementation of Basel III compliance will reduce bank lending in Asia by about US$340bn over the next five years. If this call is correct, then the trend of Asian companies turning to the bond markets rather than syndicated loans will only gather pace.
The big question hanging over the G3 primary arena is the direction of US Treasury yields and the increasing likelihood that the US government bond market is entering a phase of secular price decline. With an eventual rebound in Treasury rates looking increasingly likely in the near-term, low-rated high-yield bonds have become an increasingly popular investment, adding to the incentive for issuers to prefund their capital expenditure requirements and lock in lower coupons. On top of this, emerging-market bond funds have continued to register strong inflows in the first few weeks of the year, according to data firm EPFR Global. Inflows into global bond funds reached US$6.95bn in the week to January 16, the highest in 10 weeks, with emerging market funds accounting for nearly a quarter of that total. The question is whether the weight of liquidity will prop up demand for Asia G3 debt or whether a weakening Treasury market will remove the structurally significant long-only bid and in the process push up credit spreads.
Banks in focus
A regional DCM head said that he expected Asian banks to be especially active issuers in 2013. As well as senior unsecured deals in the global markets, the arrival of covered bonds in Singapore is poised to add to the flow of international transactions.
Asian banks are also likely to be keen issuers of subordinated deals and hybrid capital, as they rush to comply with Basel III capital rules and keep pace with their growing loan books. Asian investors have already demonstrated their appetite for Basel III-compliant, loss-absorbing clauses with a handful of Singapore dollar-denominated issues from European banks, and the arrival of Basel rules across Asia on January 1 is likely to spur more deals within the region itself.
While issuers regard loss absorption clauses as expensive – given the need to compensate investors for the risk of getting written down to zero should a bank’s capital ratios deteriorate – front-loading funding when Treasury yields are so low certainly makes sense.
High-yield has emerged as the hottest asset class among US dollar investors, who see global economic recovery around the corner and have an eye on rising Treasury yields. As many as 17 Asian companies launched US dollar bonds with no investment-grade ratings in the first three weeks of January, raising more than US$6bn.
Investment-grade Asian issuers have made a relatively slow start, however. Little more than US$5bn in investment-grade dollar issues priced out of Asia ex-Japan in the first three weeks of the year, versus almost US$10bn in higher rated bonds printed in January last year.
The year started with investors saying they were weary of the direction of rates and reluctant to buy investment-grade corporates. That sentiment, added to bottled demand for high-yield, helped prompt an unprecedented early flurry of junk bonds from the region. However, as bankers held back on the more rate-sensitive issues, the lack of investment grade is starting to add demand pressure in secondary.
That was part of the reason why Korean lender Shinhan Bank got such a good deal. It priced a US$350m five-year bond at 127.5bp over US Treasuries, a level which most put some 12bp through its outstanding curve.
A US$800m two-tranche sukuk from Malaysia’s Sime Darby provided further proof of that dynamic. Its books were almost 11 times oversubscribed in spite of offering the tightest ever coupon on a US dollar sukuk.
Asia’s sovereigns have also been slow starters this year. New issues, however, are coming from far and wide.
After a pair of public sector issuers re-opened the dollar market for India, corporate issuers in the country are lining up to take advantage of record tight spreads in the dollar market, according to origination bankers.
Bankers said that Bharti Airtel and ONGC Videsh were monitoring the market closely in late January as they look to pull the trigger on their offshore debuts. Power Finance Corp was also expected to hit the market imminently with its own debut, while speculation was rife that Reliance Industries could issue again after its bonds rallied during the month.
There are, of course, plenty of risks to this rosy scenario – including a rise in Treasury yields, especially if the Federal Reserve’s monetary easing triggers inflationary pressures, or a sharp rise in headline risk out of the eurozone. US lawmakers also have the potential to mess things up with the next round of discussions on the government’s debt ceiling.
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