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Bull market structures belie Asia bond risks

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By Morgan Davis
12 Mar 2019

Asia’s primary bond market has started the year with a bang. New dollar issuance has been steady, and issuers are getting increasingly confident in their ability to court investors with what can only be considered bull market deals. But the market isn’t strong enough to allow issuers to get away with such aggressive terms for long.

Is Asia’s bond market in the middle of a bull market? Those who endured the volatility that defined much of 2018 could be forgiven for thinking the answer is no. But the strong start to the year, when investors have effectively ignored any bad news and flocked to a spree of questionable deals, suggests that things are getting frothy.

In a bull market, it’s not uncommon to see issuers push the envelope with structures, trying to get away with deals that have overly issuer-friendly terms. The return of fixed-for-life perpetual bonds, as was seen with New World Development Co’s $500m transaction on March 4, is a clear sign that issuers feel that they have the upper hand. Such a structure would have been rejected only a month ago. New World’s non-property flagship company, NWS Holdings, sold a perp non-call five year bond in January, but it offered a 500bp step-up to close the trade.

It’s not just New World making the most of investors’ desperate need to put their money to work. Earlier this month, China State Construction International Holdings (CSCI) raised $500m from a credit-enhanced trade that left the market scratching its head. CSCI is no stranger to the offshore bond market, but the structure it offered buyers was new to everyone. Investors and analysts were left wondering how the repayment of the bond principal worked, given a complicated structure which featured the usual SPV, a newly-created JV and a standby letter of credit – but not to the issuer.  

Just days later, India’s ReNew Power “simplified” its deal structure from its previous transaction, cutting out the use of an SPV in favour of eight co-issuers. ReNew argued that its deal was more favourable to investors than its previous bond, since it was now offering a direct issuance structure. But the complicated layering of co-issuers and covenants was of little comfort to investors. Those that did buy the five year non-call two bond were attracted by the diversification play of high yield Indian paper, not the “more direct” structure.

The lack of enthusiasm for the deal should have been apparent when the order book only reached $660m when final guidance was announced. The issuer had said that it would take home up to $425m from the trade, but downsized to $375m at the end of the day.

That suggests the market is not quite as bullish as some issuers might think. These trades all successfully closed, but it would be a stretch to say they were embraced by investors. The market is not bullish enough that anything goes, and issuers looking to push boundaries will need to tread carefully.

This doesn’t mean that issuers shouldn’t try to sell difficult deals when the market is good. ReNew would likely need a bit of creative finagling to sell a high yield dollar bond in any case, given Indian regulations cap the spread of such deals. But the market is delicate. As bankers are quick to point out, some of the rush to raise funds early in the year stems from concerns that the market window could shut at any moment.

After the volatility of 2018, issuers know that the positive momentum that has spurred bond sales could peter out at any moment. Should the US-China trade talks fail, Chinese dollar bond sales could collapse. Likewise, any number of elections happening this year in Asia, starting with India’s general election in just a few weeks, could turn the market upside down. Now is not the time for borrowers to get difficult deals done. It is simply the time to get deals done, full stop.

By Morgan Davis
12 Mar 2019