Asia’s bond market is virtually shut for high-yield borrowers in Asia — a few bankers remain confident they could pull off deals, but even they do not think it would make sense to. Sovereigns and investment grade corporations, on the other hand, can still raise cash, but many treasury officials are holding back, sticking to aggressive price targets they were pitched when mandating bonds months ago.
This is just pig-headed. Now is the time to adjust price expectations, and pull the trigger. Indian Oil Corp did just that this week, selling a $500m 10 year bond at the tight end of guidance set between 275bp and 285bp over Treasuries.
There was some debate amongst bankers as to quite how generous that was, but it was clear that the company did not need to pay an outlandish rate to get a deal done. It appeared to offer investors a new issue premium of less than 10bp, a level that should not be balked at.
The company benefited from another important factor that should encourage other companies to the market: low Treasury rates. Indian Oil made the most of a bad market by locking in a yield of 5.72% for the next decade. It is time for more Asian companies to follow suit.
It makes little sense for them to gamble on the market, which is what they are doing if they sit on the sidelines for weeks and months, waiting for markets to tighten. They should sell bonds if they like the pricing, and find other sources of financing if they don’t.
That doesn’t mean that waiting is always a bad thing: sometimes you need to wait for supply to level off in order to ensure you can get the size you want. Sometimes event-risk is big enough that it makes sense to just wait for an event to happen (this is arguably the case at the moment with US debt ceiling negotiations, but this should be just a momentary hesitation). But those funding officials who are waiting only for secondary bonds to rally are acting too much like traders — and not enough like funding officials.
Companies typically seek conservatism in their treasurers more than they look for bravery. But in the current environment, the brave choice is the conservative one. No-one knows what the market will look like in six months time — but what we do know is that there are deals available now at prices that should not be sniffed at.