Asian debt investors have been bullish for much of this year, helping drive $42.3bn in G3 bond volumes in the first quarter, a record amount and more than 60% above what was raised during the same period last year.
But rising fears over Spain, which has already declared it will not meet its deficit target for the year, have undermined the frenetic activity in bond markets and made investors a lot more jittery.
That has taken some of the power out of Asian issuers' hands, and forced them to be more realistic when negotiating with investors over pricing. The days of investment grade banks and corporations getting away with negligible, or even negative, new issue premiums are gone. It is time to pay up.
It is not just that investors are more skittish. The pipeline is still bustling, and borrowers from South Korea, Sri Lanka, China, Vietnam and Indonesia are all considering the market. But after an already jam-packed first quarter, most of the well-known investment grade credits have already tapped dollar bonds. The remaining supply is not all going to be from rare credits or first time issuers. But a fair amount of it will be.
That means that issuers should forget about the pricing precedents that were set earlier this year. Multiple borrowers were able to get away without offering any premium in the first quarter; the chance to grab some new supply was enough for investors. But the chance of paying a new issue discount is now off the cards, as it arguably always should have been.
This brutal new reality is particularly harsh among sub-investment grade and frontier issuers that are coming out into the international bond market hoping to cash in on the seemingly incessant demand for Asian credits since the start of the year.
High yield companies and lower-rated banks will always have to pay a new issue premium, but as pricing expectations for high-grade companies change, those lower down the curve are also likely to suffer.
Golomt Bank of Mongolia called off its planned debut in the global market this week after a lukewarm response from investors to its roadshow in Asia, the UK and the US. The B+ rated issuer had hoped to follow the successful debuts this year of Mongolian Mining and Development Bank of Mongolia, which drew $11.75bn of demand between them.
Vietnam Joint Stock Commercial Bank for Industry and Trade (VietinBank) also delayed its plan to tap the international bond market for the first time, citing the recent widening of spreads in the secondary market. VietinBank was suppose to revisit the market after the Easter holiday, according to bankers on the deal, but it has now gone silent.
Even Singaporean investors, touted as an alternative source of funding for those companies struggling to attract global investors, are becoming picky these days. Neptune Orient Lines postponed its plan to issue hybrid perpetual bonds and instead opted for a S$400m bond sale last week.
Bankers now have to convince issuers to listen to their advice. The market may be more expensive, but there is still plenty of demand for Asian issuers. It would be foolhardy to wait for funding unless it was not really needed in the first place. Asian issuers should be willing to adjust their price expectations, and close deals that — in any other environment — they would have been more than happy with.