As September approaches, several Asian companies are roadshowing and deals in the pipeline are building up but investors believe the market is unlikely to open fully until the end of September and that the high yield space could remain largely shut for the rest of the year.
Sri Lanka’s National Savings Bank and Korean companies SK Global Chemical and Korea Western Power are currently on investor roadshows with US dollar bonds, the Indonesian sovereign is marketing a USD sukuk and signs of life are picking up in the local currency space, suggesting that the Asian bond market could re-open towards the end of this week.
September is traditionally a busy month for bonds and bankers hope that next week things should pick up, particularly if the situation in Syria remains under control and if US data between now and then supports a continuation of the Federal Reserve’s (Fed) full quantitative easing (QE) programme beyond this month’s Federal Open Market Committee (FOMC) meeting.
“There’s a huge pipeline out there for investment grade and high yield for all of Asia across the street, but at present it’s very much in question as to when or how it’s going to happen. We’re all waiting to see what happens next week when the traders get back and we get some liquidity and see how things trade,” said one head of DCM for Southeast Asia.
But investors are more concerned about forward timing from Fed about the degree and the timing of QE tapering, and many are not so sure that issuance is going to pick up materially.
“Honestly I think it will remain low through the year, because of US Treasury volatility and the fear of how the Fed is going to taper, is putting a lot of our clients on the sideline,” said Elaine Ngim, head of fixed income for Asia at Coutts Private Bank.
However, despite the fact the market is volatile at the moment, data from the US over the next couple of days could provide enough temporary stabilisation for the higher-end of the investment grade space to come out with some opportunistic issuance, said one Hong Kong-based fixed income fund manager.
“But the issue for an investment grade company is that while US Treasuries have rallied a bit, so the UST component of it is alright, the credit spread component would have widened. It’s also very sentiment driven so if we get a weak patch then most of those things can’t print,” he said.
“On the investment grade side it’s difficult to pick a pipeline as it happens more quickly, but if you take Indonesia, it has done its sukuk roadshow – its dollar bond is trading very widely at 6.5%, but while that looks expensive, on a historical basis it’s not, it’s just where yields are today,” said the DCM banker.
Over the next three months there are a number of high quality Korean mandates such as the Korean sovereign and oil refiner GS Caltex as well as Chinese state-owned enterprises which could come to the market opportunistically during periods of relative calm. Investors say they could well be happy to take on the supply.
“A number of Chinese state-owned issuers are still looking to come potentially before September or in September,” said Hayden Briscoe, director of Asia Pacific fixed income at AllianceBernstein.
“The only people who will have to pay up are Indonesian and Indian firms – the rest are all trading reasonably well for the background market conditions that we’re facing.”
But others believe that paying a premium will be one of the only ways to get deals out.
“Many of our clients believe equity is the space to be in, so with bonds they only want five years and below and depending on the yield, they will take some good quality names. If you come up with something at least 50 basis points (bp) cheap they would consider it if it’s an acceptable quality and maturity. A lot of names are trying to come but nothing has stood out yet,” said Ngim.
No high yield
For the remainder of the year, investment grade is likely to dominate Asia’s primary market as there is a pricing gap which means high yield pricing is currently prohibitive for issuers, said Bryan Collins, fixed income portfolio manager at Fidelity Worldwide Investment.
“An issuer that might usually come at 200bp might need to have a 20% to 30% spread premium on top of that to make it worthwhile, and sometimes that’s just the bid-ask spread. But once you go down the scale towards high yield it would have to be pretty punchy to make it worthwhile versus seasoned issuance which has shown weakness in the last few days, in Asia and EM [emerging markets] especially,” he said.
There are several companies in the high yield space looking to refinance existing deals. Pacnet is looking issue a new bond, as are Berau Coal and Indika Energy, as well as several Chinese property names, including Fantasia Holdings and Evergrande Real Estate Group but investors believe these deals are very unlikely to happen.
“That’s all pie in the sky kind of stuff,” said the fixed income portfolio manager in Hong Kong. Bankers agree that high yield activity could be fairly limited.
“There is a risk that it’s pretty quiet for the high yield space for the second half. It’s very difficult to tell and because of the lack of liquidity so no one wants to make a call. But in the high yield space there are really only two markets, China and Indonesia,” said the DCM banker.
“But Indonesia and the IDR have been absolutely hammered so until there is some stability in EM itself it’s very hard for investors to make a call on bonds from companies from the country.”