First-time bond issuance in Asia ex-Japan has more than tripled year-on-year in 2012 and dealers see no signs of this stalling as Asia’s debt capital markets look increasingly attractive to corporates.
Bond deals from companies new to the market look set to increase at record pace, particularly from China but also from Indonesia and India as rates remain low, loan market prices rise and bonds continue to outperform across the region.
Debut issuers in Asia ex-Japan have raised a record US$111.3 billion in 2012 year-to-date (YTD). The figure is more than triple the US$30.9 billion raised by first-time issuers over the same period last year, according to Dealogic data.
Inaugural issuers make up 15% of total Asia ex-Japan DCM volume year-to-date, up 6% from last year. Ninety percent (US$99.6 billion) of the total was raised in domestic markets, more than four times the US$22.8 billion raised in domestic markets in in 2011 YTD.
A majority of that was issued by domestic Chinese companies, who raised the equivalent of US$93.4 billion, up from US$22.2 billion over the same timeframe last year, said Dealogic. Dealers believe that this upward trajectory is set to continue, for several reasons. Firstly, loans are not as attractively priced as they have been in the past.
“There has been a reduction in bank lending in the region and the pricing has gone up in the loan market relative to the bond market so a lot of traditional bank borrowers are coming to the bond markets for funding,” said a DCM syndicate banker at an Asian bank.
In addition to this, he pointed out that due to the outperformance of Asian bonds this year, investor appetite for debt has increased, which has created a virtuous cycle in which more first time issuers will jump in as bonds continue to perform. Furthermore, falling yields have created an ideal environment for debut issuers.
“Because yields were so low on treasuries and swaps, people were willing to look at new credits and lower rated credits in order to get a bit more yield. They are happy to be going down the rating scale to get a bit more juice,” he said. Others agreed, arguing that the surge in debut debt is long from over.
“There will definitely be more debut issuers coming from all around Asia. I would expect a number especially out of Hong Kong and Singapore and debut issuers from India and Indonesia as well,” said Frank Kwong, head of syndicate for Apac at BNP Paribas.
He argued that a gradual relaxing of restrictions in India will entice new companies to come to the market. In Indonesia the driving force behind this will be companies choosing to refinance bank loans with bonds.
“A number of borrowers in the Indonesian bank market will come to the bond market now that it looks open. Indonesian banks have been giving out loans over the course of the crisis in dollars and some of those are coming due," he said.
In addition, he expects that the number of debut issuers in the dollar bond market will increase, particularly in China, where a majority of the debut deals this year have been denominated in renminbi.
“We are not even at the tip of the iceberg in terms of Chinese corps tapping the offshore bond market,” he said.
However, bankers pointed out that much of this depends on the Fed’s movements over the next two years. If rates in the US are raised before 2015, this could scupper the chances for first-time issuers.
“The statistics out last night [November 15] for Europe were not particularly encouraging but the US and Asia are a little less clear [and] if things really do pick up over the next 12 months, which they could, we could see a pretty dramatic reversal and the market could get burned,” said the syndicate banker.
“People are so convinced that rates are going to stay low, but when the market becomes accustomed to anything for too long it tends to get a big slap in the face. I can see people unloading positions as soon as any of the central banks indicate that the loosening trend may come to an end, which I think could be as soon as the end of the first half next year.”
On November 15, the European Union reported that the eurozone economy had contracted 0.2% in the third quarter.