The dollar bond market in Asia has been trading poorly for months, but it wasn’t until last week that traders suffered from prolonged, panic-driven selling pressure that pushed secondary prices sky high. That has put the funding plans of companies and banks in the region on hold indefinitely, and has made some investors pessimistic about even the top issuers (see separate story).
So what are issuers to do? Some will be able to fund in their domestic market, although the widespread dumping of emerging market assets by foreign investors will make that tougher. Some will turn to their relationship banks for loans, but unless they are good credits willing to offer great pricing they are likely to hear a lot of encouraging talk but not see much cash.
Most will struggle, and will rely on inventive and impressive feats of distribution from their bankers. That means privately placed MTNs will be an important source of funding for some time.
It is true that the public bond market is shut, but even bearish fund managers in Asia are willing to consider private placements. These deals tend to lack any secondary liquidity, something which can be a very bad thing for funds forced to wind down, but a good thing for those who know they can survive the crisis but are tired of taking mark-to-market losses on public bonds they hold.
Private placements can also offer more attractive pricing to investors, and the bespoke nature of these deals means they can be structured to fit into their portfolios, most importantly by offering hedges against other assets they are exposed to.
This could be the time for the private placement market to take off — and banks will be able to show their skill to issuers and investors alike by finding good matches between the two.
There are some problems, of course. Investors who are willing to buy private placements still question the benefit of structured protections. For example, principal-protected notes are only protected so long as the issuing company does not default, meaning that in this bearish market only high quality companies will be able to use that feature as a selling point.
But investors who tell EuroWeekAsia they are staying well away from public deals do show some appetite for private placements. It will not be easy for banks to find the right combination of issuer and investor, but they will earn a lot of respect — and a bit of money — from borrowers when they do so. That could help them start with a bang when the bond market re-opens again.