Asia's G3 bond market started the year strong with jumbo deals, but the slower pace in recent weeks shows issuers have switched into wait-and-see mode as many have turned to cheaper funding channels like local currency markets and bank loans.
The panellists at IFR Asia's Outlook for Asian Credit Roundtable on February 14 noted how rising rates, geopolitical troubles and a still weak high-yield sector are keeping borrowers at bay.
January opened with a bang, with sentiment helped by China's shift away from its zero-Covid policies. Deals included a US$2bn multi-tranche bond by South Korean steelmaker Posco and the equivalent of US$5.8bn raised by the Government of Hong Kong in green notes. Supply for Asia Pacific ex-Japan hit US$51bn in G3 currencies as of February 16, slightly less than the US$54.6bn raised during the same period in 2022, according to Refinitiv data.
Panellists noted a number of reasons the Asia G3 primary market has gone quiet, even though Europe and the US remain strong. The brief January surge came from deals that were initially planned for late 2022, but rolled over into the new year, they said. Issuers are holding back from new trades, which they see as expensive.
The strong local currency markets and bank market in Asia has given issuers flexibility. "Asian and international banks are able to provide loans to companies at very competitive rates, a lot of which are inside where bond markets are pricing them," said Rishi Jalan, head of Asia debt syndicate at Citigroup. Jalan said that a lot of the expected G3 bond volume is being replaced by local currency markets, especially in ASEAN, India and China.
Even borrowers from other markets are tapping Asian local currencies, as they offer some pricing advantage and relative stability. On Wednesday, German agency KfW issued Rmb1.5bn (US$219m) three-year green notes at a yield of 2.9%, while it also tapped its 2% February 2027 Kangaroo bond for A$100m (US$69m) the following day.
"Many issuers found a safe haven in local currency markets from a pricing perspective," said Daniel Kim, co-head of APAC DCM at HSBC.
Muted optimism for G3 deals remains as there are some positive signs in the market, such as China's reopening.
"Over the last three months within the region, one material change is the accelerated pace at which China has re-opened its economy ... The benefits of which is a more positive growth outlook for the region," said Leonard Kwan, vice president at T Rowe Price Group. "Our outlook for the year was about the handover from inflation fears to those about growth, which have now been delayed or tapered to an extent," he said.
Vikash Halan, associate managing director at Moody's, said the agency has a stable 2023 outlook for corporates in Asia ex-China, and a negative outlook for corporates in China, the Americas and Europe. However, he is hopeful that things could improve, particularly for China, whose reopening and policies to support the economy offer a glimmer of hope.
In terms of sectors, electric vehicle batteries, data centres, renewable energy and healthcare could add diversification to the traditional FIG, corporate, and sovereign/quasi-sovereign flow, said Kim. Geographically speaking, South Korea, Hong Kong and Australia are expected to remain key sources of deals, he said.
"We feel constructive on sectors within China, including consumption, industrial and selective tech," Kwan said.
Citigroup's Jalan said financials continue to have a strong pipeline across Asia, with deals across all capital structures lined up in countries including Australia, Japan South Korea, India and ASEAN.
But one remaining question is whether Chinese property companies can finally stabilise this year, after 18 months of liquidity pressure and numerous defaults.
"We will see a few more defaults this year particularly in the property sector, but the number will not be as high as last year ... So yes, things have improved, but we are not done with the pain yet," said Moody's Halan.
To view the recording of the webinar, click here.