Slowing Down

Asian corporations remain hesitant to sell bonds denominated in international currencies amid jitters over emerging markets.

South-East Asian bonds denominated in international currencies have become scarcer and there appears to be no sign of a turnaround in sight.

Bankers and analysts see 2014 as possibly one of the slowest years for dollar bond issuance out of the region since the global financial crisis. Volatility and widening spreads amid a general unease over emerging markets and the prospects of rising rates in the US have prompted most issuers to put debt offerings on hold.

“I would say that pure corporate issuance out of [South-East Asia] may be as little as US$4bn–$5bn for the year,” said Ani Deshmukh, director of credit research at Bank of America Merrill Lynch. “Spending plans are mostly on hold across the region.”

Most non-sovereign offerings out of South-East Asia have been from high-yield issuers, but unease in the markets is making these issuers skittish, according to Henrik Raber, global head of debt capital markets at Standard Chartered.

“A fair number of those issues are currently on hold after the emerging-market volatility that started last year,” Raber said.

Indonesian corporations, which account for most high-yield issuers in South-East Asia, held off on issuing new bonds starting last May after the first hints from then-chairman Ben Bernanke that the US Federal Reserve would start reducing its bond-buying programme.

Since then, the Indonesian rupiah has depreciated more than 15% against the US dollar and spreads for state-owned oil and natural gas corporation. The yields on Pertamina’s 2023 bonds, a benchmark for Indonesian corporate offshore borrowing costs, went from 4.30% to 5.72%, peaking at 7.22% in August.

The Indonesian economy has, however, shown signs of improvement since the beginning of the year and that has helped the currency appreciate about 6%, making it the best performing in Asia. Similarly, the spread on the Pertamina 2023 bonds has tightened about 40bp.

The better environment has prompted a small revival in issuance, with some offerings already mandated and a few more expected to surface before the end of the first half. Most of the issuance from Indonesia, though, is expected to happen in the second half of the year, on completion of parliamentary elections, set for April, and presidential elections two months later.

“Issuance could pick up in the second half, but it still will be a slow year,” said Deshmukh.

Trickle of bank capital

Bankers had hoped bank capital issues throughout the region would make up for the lack of high-yield corporate issuance out of South-East Asia this year. However, most nations expected to generate deal flow are also facing hurdles to global issuance.

In Thailand, for instance, most of the large banks have mandated Tier 2 subordinated bonds to be issued in US dollars, according to a banker who focuses on financial institutions.

As protesters continue to take to the streets seeking the overthrow of Prime Minister Yingluck Shinawatra, spreads for Thai corporate bonds are widening and Basel III-compliant mandates are being put on the backburner.

“How do you even price a bond that has a writedown if the government determines the bank is non-viable when you have no idea who will be the government come the end of the year?” the banker asked.

Similarly, bonds out of banks in the Philippine are also expected to be scarce since the local regulator, the Bangko Sentral ng Pilipinas, has been dragging its feet to approve issuance of bank capital deals.

So far, only two approvals have been granted for such issues with only the Development Bank of the Philippines selling one in the local market. Most issuers are expected to raise capital-eligible debt mostly onshore. “They have the benefit of a well-developed local currency market,” said the banker.

The first US dollar bank capital offering of the year from Singapore was in the market earlier this month. United Overseas Bank was selling a 10.5-year non-call 5.5 Basel III-compliant Tier 2 bond. A few more are expected to come, although there will not be many.

Banks are also expected to sell their first covered bonds. Singapore’s regulators approved a framework for the securities earlier this year.

Sovereign pick up

Bond offerings from sovereigns and state-owned companies are expected to make up for the lack of corporate issuance.

The year started with the Republic of Indonesia pricing its largest transaction on January 7, a two-tranche US$4bn bond that attracted US$18bn in orders across the 10-year and the 30-year pieces. The deal had been earmarked for US$3bn, but Indonesia increased the size to meet the strong demand.

The Republic of Philippines followed Indonesia closely with a US$1.5bn 10-year bond printed on January 9. The Philippines offering also triggered blockbuster demand.

Both these bonds rallied about US$10 since issuance, signalling that investors are receptive to more.

“The big question mark on issuance in the region is whether or not Indonesia and the Philippines will return to the market this year,” said a DCM banker.

Both sovereigns, though, have indicated that they have mostly met their offshore funding needs for the year.

There was talk last year of some of the frontier issuers, such as Vietnam, looking at the market, banking on the reception that African issuers have been getting. Those plans were on hold for now amid higher spreads, bankers said.

State-owned companies, however, are expected to come to the market. Indonesian oil giant Pertamina is in the process of mandating an offering, while Perusahaan Listrik Negara, an electric company, is also said to be looking at the market.

All in all, it will still be a slow year in the region.

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