Asia’s G3 bond markets face some serious challenges in 2015, but bankers remain optimistic that the region’s primary debt markets can continue to grow
Braving the odds
Source: REUTERS/Tyrone Siu
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Primary G3 bond markets in Asia have grown explosively since the 2008 crisis, with the US Federal Reserve’s monetary-easing measures giving the region’s issuers an unprecedented opportunity to borrow US dollars at low fixed rates.
Asia ex-Japan G3 bond issues surged to US$210bn from 371 deals in 2014, smashing the 2013 record of US$143bn, according to Thomson Reuters data.
However, the tables are now turning against Asia’s credit markets. One of the biggest risks is the normalisation of US monetary policy, which will push up borrowing costs for Asian issuers in US dollars. There is also the likelihood that investors will start favouring US credits over Asian ones to take advantage of the economic recovery.
Markets have already begun preparing for higher rates, which may come as early as mid-2015. This has been priced in to the US dollar, sending it to the highest level against its major peers in 11 years.
The end to historically low interest rates is not the only negative facing Asia’s credit markets. The electoral victory of the left-wing Syriza Party in Greece also threatens to reverse austerity measures put in place in exchange for the country’s €240bn (US$272bn) bailout package.
Cooler heads
Germany and Greece have also been kicking up conflicting rhetoric, suggesting that difficult negotiations lie ahead on debt repayments. This has already begun to rattle sentiment in the eurozone.
In addition, concerns over geopolitical risks related to Russia and falling oil prices continue to weigh on global financial markets. Issuers, bankers and investors will have to adjust to a market backdrop with many more challenges than previously.
Still, despite worries that these events can throw Asia’s G3 momentum off track, senior debt capital market bankers are keeping faith in the resilience of the region’s primary market.
Structured solutions
Standard Chartered and JP Morgan expect Asian G3 volumes to reach last year’s record level. Barclays is expecting volumes to rise 10% come yearend.
“Asia credit, notably Asia IG credit, continues to outperform as an asset class,” said Devesh Ashra, head of debt syndicate for Bank of America Merrill Lynch. “I do not see a material dampening of that in a strong dollar environment.”
DCM bankers were expecting the unwinding of US quantitative easing to unsettle the pace of primary issuance on bets that 10-year US Treasury yields would hit 3% at year’s end.
However, issuance hit a record last year, and 10-year yields hovered at 2.12% at the beginning of 2015. They have even dropped to as low as 1.73%.
“Now that QE is official in Europe, I would be surprised personally if the Fed tightens as much as people expect,” said a senior DCM banker. “With Japan and Europe both expanding, pressure will be off the Fed to do anything. I’d be surprised if the Fed is more proactive in raising rates, and I don’t think they will be.”
“We could see a greater variety of structures because of the search for yield. There could be non-recourse, project-related credits, enhanced and repackaged credit, as well as structured subordinated bank capital and corporate hybrids.”
Mark Follett, head of high-grade DCM for Asia at JP Morgan, is watching to see if local currency markets take some of the business away from G3, especially in times of volatility. However, he does not expect a material impact on primary activity, even in the face of increased uncertainty over the fate of Greece’s finances.
“The market is not as worried as it was previously about a Grexit because the risks are pretty known, but there is a potential increase in tension in Russia, which could impact risk sentiment,” said Follett.
The availability of the 144A format to Asian issuers also demonstrated its handiness as a way to give Asian issuers access to offshore markets – even in bouts of volatility, Ashra pointed out.
“If anything, the benefits 144A extends to issuers will become even more apparent through the first half of this year,” said Ashra, who expects bank capital issuance and financing for mergers and acquisitions to help support a healthy year in G3.
The increased probability of higher rates and intensified volatility mean investors will be looking for higher returns, and bankers are prepared to match that demand. The run for higher-yielding appetite was witnessed when the region’s first high-yield deals of the year, from Delhi International Airport and China Auto Rental, clinched order books that surpassed expectations.
“We could see a greater variety of structures because of the search for yield,” said Follett. “There could be non-recourse, project-related credits, enhanced and repackaged credit, as well as structured subordinated bank capital and corporate hybrids.”
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