Asia’s bond problem is technical, not fundamental
The botched bank job in Cyprus has clearly thrown in a spanner in the works for Asian bond bankers, but they have shown before that they can work around problems from Europe. The biggest hurdles are not fundamental, they are technical. The sheer scale of supply building up now means bankers are in for a rocky ride over the next few months.
Cyprus rarely gets a mention among debt bankers in Europe, let alone Asia. But last weekend the island nation dominated the headlines, after its citizens decided they were not all too keen on the government’s plans to impose a levy on deposits — and many opted instead to take out their money and hide it under their pillows.
The country may have a population of little over a million people, but a bank run is a bank run, and the impact on equity and credit markets was predictably dire at the start of this week.
That scuppered plans among Asian debt bankers to bring a rash of issuers to the dollar bond market and left them watching closely how markets reacted overnight, as well as praying that the Cypriot government stops delaying the vote and gets this whole thing over with. The impact of the bad news from the country will, though, be short-lived. The Asian bond market has been through much worse.
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Portugal. Italy. Greece. Ireland. Spain. These countries have all generated enough bad news to derail primary deal flow in Asia. But in no case did it take long for the region’s investors to get over the news. The events of Europe soured many investors’ views of the global economy, and may have made them push harder on price. But it did not stop them coming back to the market en masse. They simply had too much money to put to work.
The same is the case now, but the see-saw of supply and demand is starting to tip as more issuers join the queue. There have been plenty of inflows into Asian credit funds, but the percentage amount of supply out there means that spare cash held at funds is still not moving above average historical levels, according to Morgan Stanley analysts.
Potential supply, on the other hand, is increasing, bankers say. There was a salivating supply of bonds in January — when $23.7bn of dollars bond were sold by issuers in Asia ex-Japan — but things have slowed down since then. It is a sign of how far Asian bond markets have come that this slowdown has still meant multiple deals a week, and sometimes multiple deals a day. But the list of banks and companies waiting in the wings is piling up, and the pipeline does not look likely to be relieved anytime soon.
India’s IDBI Bank made the right move on Tuesday, pushing ahead with a dollar bond while the rest of the market watched and waited. But since many issuers are sticking to firm price targets, some bankers worry that many of the deals that were due to come this week will actually end up being priced after Easter, exacerbating the looming supply problem.
This heavy supply will not derail the Asian bond market, but it will make the business of execution a lot more difficult. That should lead to bigger rewards for those banks that prove they can fight through the crowds, but knowing the reluctance to pay decent fees among most issuers in the region, that is unlikely. Bankers will instead have to settle for the knowledge that every successful deal they manage to close today means one less headache tomorrow — a headache that will throb whether there is bad news from Europe or not.