Year-to-date Southeast Asia bond issuance has dropped substantially as investors become more selective towards credit quality and demanding higher premiums but issuers should make use of relatively cheap funding as yields could rise back to 2008 levels.
Southeast Asia debt capital market (DCM) volume totals US$59.5 billion year-to-date, down 26% from the record US$80.4 billion issued during the same period in 2012, according to Dealogic data. This is the first year-on-year decline in the region’s volume in over a decade and the largest percentage decrease on record. The figures include local and hard currency debt.
June was the second lowest month in terms of issuance volume this year, which stood at US$4.35 billion after the Chinese New Year lull in February, at US$4.15 billion. July month-to-date issuance has also more than halved to US$4.5 billion from levels seen during the similar period in 2012 (US$11 billion).
The general increase in benchmark rates across the board has impaired bond market activity, especially in the last two months. This is a result of market uncertainty rising from the potential tapering of quantitative easing (QE) by the Federal Reserve (Fed), which market participants expect to happen come September, as well as concerns of an economic slowdown in Asia.
“Benchmarks have moved quite substantially, taking the bid out of the market particularly as investors become more conservative and weary,” said Winston Tay, Singapore-based director for syndicate at ANZ to Asiamoney PLUS on July 30. “There’s a lot of potential issuance out there, where a couple of them have done road shows but have not come to the market.”
A syndicate manager with knwoledge of the market agrees: “China is in a slowdown, especially its commodity sector, and this impacts Indonesia which is very commodity biased. We used to see a lot of bond issuance from Indonesian coal companies but now they don’t need the funds as they are not making the money that they have projected to make.”
The five-year US Treasury (UST) yield surged to as high as 70 basis points (bp) in the second quarter and has tightened slightly to 50bp to 1.37% on July 30, but spreads have overall have increased by 50bp from the first to second quarter.
This implies an additional total cost of approximately 100bp or 1% in absolutely yield terms – a price that issuers are unwilling to pay, note syndicate bankers.
As a result of the huge backlog of bond supply that is supposed to come to the market in the last few months, experts note that there will be increasing pressure for issuers to come to the market in September.
Corporate borrowers are advised to tap the DCM market while pricing remains favourable as the chance of yields rising in the near future is high, especially as the Fed looks to withdraw QE.
“Come September, there will be a lot of pressure for them to issue before the fourth quarter because they have to close funding before the end of the year,” said the syndicate manager. “It’s either that or they go to the loan market."
“Typically when you go to the loans market in the fourth quarter, the banks are going to squeeze you as well,” he added. “You don’t want to be in a situation where the funds become a lot more limited. At that time you will be paying more.”
Five-year USTs could easily touch 2% by year-end, while 10-year could reach 2.75%, note experts. And although the base rates are expected to remain low until 2015, the pull back of QE will lead to the widening of 10- and 30-year yields.
“If I was a smart issuer, I will pay now. A lot of them are very short-term in their view, which is wrong,” said the head of DCM. “The five-year yields were around 4% back in 2008. What makes you think that the market won’t go back to where it is?”
Only issuers from five Southeast Asia countries have tapped the bond market in 2013 year-to-date: Thailand, Malaysia, Indonesia, Philippines and Singapore, according to Dealogic.
Of these nations, Singapore recorded the largest year-on-year drop in volume with US$9.6 billion raised so far, down 52% in the same period in 2012 and representing the lowest year-to-date volume since 2009, which recorded US$2.8 billion.
“A lot of Singaporean investors are very name focused and are being very selective in this uncertain environment,” said Tay. “You get some small caps from the domestic market, but they enjoy the name recognition and are able to get away with levels that are probably quite tight compared to foreign names from Indonesia and India as we have seen in the Singapore dollar space.”
“[Indonesian and Indian issuers] are technically larger, but because they are foreign names, they need to pay more,” he added.
Investors tend to command a higher premium for unrated issuers. For those unwilling to pay extra and obtain a credit rating, the loan market could be a better option although tenors will comparatively be shorter than a bond – generally five years or less for the latter product.
“Because of the higher costs, a lot of the corporates are not borrowing long tenors and as a result and they would have to go for the five years in the loan market,” said Chan. “There is a mismatch of the potential supply and the demand that is out in the market. You can still get 10-year paper but you would have to pay up. “