Fears are growing that Asia’s bond market is reaching breaking point. Investors are starting to fill up their books. Some DCM bankers are looking out for the worst. It is hard not to share their doubts: Asian bond issuance has been going at a breakneck pace since the start of the year — it seems inevitable that things will slow down soon.
The secondary market started to feel the strain last week, with credits across the board moving wider as fears grew of weakening economic growth in China and volatile US Treasury markets pushed some investors to the sidelines. Things appear better this week, but many bankers are getting the scary sense that there will soon be a sharp slowdown in issuance.
This is happening just as a raft of Korean borrowers prepare to tap the market. Korea National Oil Corp priced a $1bn deal inside its own curve at the start of this week — and you can bet that more issuers from the country want to follow suit. Hana Bank, Samsung Electronics and Hyundai Motor are all considering dollar bonds. It will not surprise any bankers if these well-known companies push hard on pricing.
The problem is, they just might succeed.
US investors are likely to help these Korean issuers get away with a discount on their new deals. Asian investors may sometimes view Korean issuers as aggressive — but to US investors, using their own domestic comparables, these deals are often cheap. This is a big reason why new issue premiums can often be ignored.
These Korean issuers, then, can expect to keep pushing investors hard on pricing, even as order books start to fall, and execution gets tougher. Good for those borrowers. No-one can blame them for being aggressive. But those issuers from countries not so favoured by investors are likely to watch the impressive pricing of their Korean counterparts, and expect the same. That is bad news for syndicate bankers, and for the market overall.
There is a sense in which Korean borrowers are the best ones to tap the market right now, just as there are early signs of a jittery market. After all, they are top quality credits. But when it comes to pricing, they set a bad influence for the rest of Asia. These issuers may paper over the cracks in the market for the next month — but in the longer term, they could push those cracks even wider.