Hong Kong: Asia bond issues jumped 48% to a record in the first half as companies went on a fund-raising spree, but business has slowed due to rising yields and jittery markets.
June was the slowest month this quarter as the near-collapse of two mortgage-related hedge funds rattled global financial markets.
One change in the market’s dynamics is investors getting into a position to dictate terms, as shown by two issues being delayed this week: deals by South Korean car maker Kia Motors Corp. and Malaysian shipping company MISC Bhd KL.
“The balance of negotiating power, which was with issuers before, has shifted a little towards investors, who are asking for more to get transactions done,” said Ananth Ramachandran, head of debt capital markets coverage, South & Southeast Asia for JP Morgan.
Bankers are still betting on a rebound in the second half.
“We are headed for a record year. I expect the second half to be as action-packed as the first ... there is a lot of fund raising yet to be done,” said Ramachandran.
That means the region could end with a tally well in excess of 2005’s record $40.6 billion, according to Dealogic, as banks and Korean issuers continue to drive growth.
Asia ex-Japan borrowers sold dollar-,euro-, yen- and sterling-denominated bonds worth $29 billion in the January-June period, up 48% from the same period last year, according to data provider Dealogic.
South Korea was the most active, accounting for nearly a third of the region’s volumes followed by India which comprised a fifth of the tally.
While improving government finances mean frequent issuers such as the Philippines and Indonesia have slipped in the top deals table, robust economic growth and a rush to boost their capital to meet Basel II requirements have vaulted banks to the top.
DBS and ICICI Bank had the top two deals in the region with $2 billion transactions. Indonesia’s $1.5 billion offering took third spot.
Banks were the most active by issuer type, raising $15.8 billion, of which Indian banks alone accounted for $5.4 billion.
“The big credit story this year has been the oversupply and underperformance of Indian deals; almost without exception the Indian bank deals have underperformed the broader market,” said Fergus Edwards, director of Asia syndicate at UBS.
It’s the liquidity, stupid!
Investor appetite has ensured overall credit spreads remained at record low levels.
Risk premiums as measured by JP Morgan’s Asia Credit Index (JACI) shrunk to their narrowest level ever on June 7 to 110 basis points over U.S. Treasuries. Now, they have widened out to 128 basis points over U.S. Treasuries.
“If the market volatility continues as it is now it will definitely impact supply at both ends,” said Eugene Kim, chief investment officer at Tribridge Investment Partners.
“Higher-quality names will be reluctant to do deals due to increased costs whereas the lower-rated names won’t find demand as people will lower the risk in their portfolios.”
The next market test will be China Glass Holdings Ltd.’s $120 million, five-year dollar-denominated bond. Price guidance is expected next week.
“Investor appetite may adjust to market movements in terms of pricing and valuation but the availability of liquidity for Asian credits remains strong,” said Mark Leahy, Asian debt syndicate head at Deutsche Bank
“Any cooling we see is likely to be from the U.S., where domestic concerns may keep liquidity at home.”
Deutsche Bank led the regional volume rankings with $4.9 billion worth of deals arranged, followed by Citigroup with $4.2 billion, UBS with $3.2 billion and JPMorgan with $2.9 billion, Dealogic said.
“Abundant liquidity has benefited the high yield market in Asia. The number of first-time issuers has increased this year and that is likely to continue into the second half,” said Jon Pratt, Managing Director and Head of Asia Debt Capital Markets at Merrill Lynch.
He expects the aggregate issuance to surpass last year’s total with a revival in property sector offerings from countries like China likely to lead a busy high yield sector.
Chinese property companies’ bonds have become a dominant segment in the high yield sector both in terms of trading liquidity and wide investor base. They are considered a high yield sector barometer.
But deal flow has ebbed, with the sector raising only $650 million so far this year after raising more than $2 billion in 2006. That sector accounted for over 80% of offshore issuance volumes from China last year.