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Pulled deals: a warning sign for Asian bonds

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By Morgan Davis
21 Jan 2020

The Asian bond market has been red hot since the start of 2020. With nearly every day bringing a number of blowout deals, it would be easy to overlook the three borrowers that have fallen short of completing their proposed transactions. But the failed deals may be a sign of things to come.

January's market boom has been helped by a buoyant global backdrop, with international problems like those between the US and Iran having quite a muted impact on investors. In Asia, the flurry of deals was boosted by the early Chinese New Year, set to begin on January 25. Chinese issuers have rushed offshore to fund before the lengthy holiday break, and investors with fresh new year cash to put to work have eaten up the new offerings.

The old saying tells us "as goes January, so goes the year," but it seems very unlikely that the heightened volume of international bonds and support from insatiable investors will carry on apace. Just look at the three borrowers that have already had deals pulled this year— India's Lalitpur Power Generation Co, Chinese industrial company China ZhengTong Auto Services Holdings and Vietnam's Southeast Asia Commercial Joint Stock Bank.

In the span of just over a week, all three would-be inaugural borrowers met resistance from investors. Each came from a different country and sector, but each faced a disconnect between what the issuers were willing to pay and what investors wanted. It's easy to pass off one or the other with various excuses — China's industrial sector has been trading poorly, for instance — but there is more to it than that.

The failure of these transactions is a testament to the skill and care still needed to execute deals. Despite widespread investor enthusiasm, this isn't a market where anything will stick. Investors are still cautious about taking on new risk, especially if it doesn't come at a generous price. This will only become more evident as the year continues and investors move beyond the new year rush.

Last year, investors absorbed a $300m debut from Vietnam Prosperity Joint Stock Commercial Bank against a weaker backdrop than that of recent weeks. Likewise, other South and Southeast Asian power companies have closed new bonds this month. It should raise questions, then, as to why the three would-be borrowers fell short of their bond aspirations, and why investors were so willing to move on to one of the many other dollar deals in the market last week.

China ZhengTong Auto returned to the dollar market a few days after it was forced to postpone its deal, this time pricing a $160m two year bond. But the change in the borrower's approach to the trade was obvious. While it had leaned on JP Morgan as the sole lead for the initial sale, it later returned with China Citic Bank International, China Construction Bank International and Haitong International supporting JP Morgan as fellow global co-ordinators. One can assume that these Chinese banks were able to use their balance sheets to push the transaction to completion.

That approach to execution is not uncommon for Chinese issuers, and is often deployed as the market becomes tougher. It seems likely that we can expect more such executions as the year progresses.

There is no reason for panic. The occasional pulled deal should be considered a good thing for the market. A primary market that goes without any pulled deals is likely to be erring on the side of caution, which is not desirable for a region like Asia that has plenty of debut borrowers from new countries and sectors in need of offshore funding. Banks have to take calculated risks; sometimes those risks backfire.

But the fact that three deals were postponed during such a short timeframe this month should raise a few eyebrows. Debut dollar trades are rarely a slam dunk, and the blowout January market should not give bankers or borrowers a false sense of security. The post-Chinese New Year market is going to bring its own waves of change. Asian borrowers should be ready for a bumpy ride.

By Morgan Davis
21 Jan 2020