Falling inflationary pressure and rising expectations that US interest rates would start to edge lower over the course of 2024 prompted a wave of enthusiastic and committed fixed income and credit buying in the second half of 2023. But while the wall of demand for credit at attractive absolute and relative yields was met by record levels of supply in the US corporate market, the same dynamic did not play out in Asia.
Asia Pacific ex-Japan G3 currency bond volume reached US$212.4bn in 2023, falling short of the US$251.9bn raised in 2022, and well under 2021’s US$433.6bn, according to LSEG data.
Those figures reflect a lack of activity from Chinese issuers, the mainstay of the US dollar bond market in Asia. China G3 issuance dropped 45% over the year to US$36.2bn. That was partly because credit spreads for all borrowers were negatively affected by difficulties in the property sector, raising funding costs, and partly down to attractive rates in the local currency market.
Bank capital issuance also slumped. Again, some financial institutions were able to issue more cheaply onshore, but part of the problem stemmed from Europe, where the demise of Credit Suisse – and the regulator’s decision to write off the Swiss bank’s Additional Tier 1 bonds without inflicting the same pain on equity holders – sent shudders through the entire market.
High-yield issuance in 2023 also disappointed. Asia Pacific ex-Japan produced just US$5.5bn of deals in 2023, down from 2022’s total of almost US$7bn. In 2021 high-yield volume hit US$41.4bn. Fears for the strength of the global economy in an inflation-fighting ‘higher for longer’ interest rate cycle kept investors risk averse. In any case, they were already being well rewarded with attractive returns in the more secure higher grade sectors.
Cross-border issuance from South Korea, however, was one of the bright spots, with corporates continuing to fund offshore capex requirements in the international markets. South Korean issuers raised almost US$40bn from G3 bonds last year, surpassing 2022’s US$33bn and 2021’s US$34.5bn totals.
For many issuers in Asia, going to the US dollar bond market still remains an opportunistic exercise, so for those borrowers the high costs of offshore borrowing were enough to see them seek alternative funding avenues. There were options.
Borrowers turned to a very liquid bank market, the local currency markets – and not just their own domestic markets – as well as the private credit sector, where borrowers and investors were able to structure deals to suit both sides of the equation.
In February, IFR Asia brought together a panel of experts to reflect on the credit dynamic that played out in 2023 and look ahead to prospects for the market in 2024.
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