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Asia CommentGC Asia View

Maturing Asian DCM can go it alone

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The performance of the Asia bond market over the past couple of weeks, despite the macro moves elsewhere, has shown that it can drive forward independently of events in the west. With European and US political volatility waiting in the wings, Asian DCM’s self-sufficiency bodes well.

It took Asian bond markets days to recover from the Brexit vote last June, and hours after the US election results in November. When the US Federal Reserve decided to hike benchmark interest rates in December 2016 — the second time in a decade — the iTraxx Asia ex-Japan investment grade five year spread widened 5bp, before crawling back to the level before the rate hike some 20 days later, according to data from IHS Markit.

However, following last week’s Fed hike, both Asia IG and high yield spreads continued the trend of tightening, seen since the beginning of the year. The same iTraxx index tightened to 89bp from 93bp following the Fed’s announcement last Wednesday, compressing further to 85bp on Monday.

Bond supply also remained undisturbed. The market barely touched the brakes before or after the Fed meeting. Bollywood film maker and distributor Eros International was forced to pull its debut dollar bond the week before the FOMC meeting, but the high yield flop had no wider impact, with primary issuance continuing unabated.

DCM bankers and investors were, for the most part, optimistic even in the week of the Fed, pushing out transactions from the likes of high yield Guorui Properties and Fujian Zhanglong Group on Tuesday and Wednesday last week. Supply was lower compared to the week before, but buy-side interest, and overall sentiment, was positive. Guorui found $1.3bn of peak demand for a $300m bond.

High yield first

High quality investment grade names are typically expected to reopen the market after big events that mark a change in risk sentiment. High grade issuers were first out in Asia following Brexit and the US elections. But this time around, it was high yield names that rushed into the market at the end of last week.

Fosun International launched a five non call three at the Asia open last Thursday and raised $800m, followed by single-B rated China Evergrande Group on Friday. It wasn’t until Monday this week that an investment grade credit finally hit the market, accompanied by other high yield issuers.

Highly leveraged Chinese property developer Evergrande has been through a series of credit downgrades over the last couple of years, and has outstanding notes rated as low as CCC+, investors still gobbled up its new bonds — resulting in a $5.4bn final order book and a $1.5bn deal size.

The market's strength is reflected in the buy side’s appetite for longer tenors. Numerous investors have told GlobalCapital Asia over the last few months that their preference is largely for shorter bonds. But when the likes of Bank of Communications Financial Leasing Co and unrated Lenovo Group offered longer dated notes and a perpetual bond, respectively, investors jumped in.

All this goes to show that when it comes to Asia, the rules don’t seem to apply. While the region has, for a long time, been considered self-sufficient, the last few weeks have reiterated Asia DCM’s growing maturity. 

Although not completely immune from events elsewhere, it has shown resilience that has sometimes even surprised market participants.

Something could, of course, go horribly wrong. South Korea is set to pick a new president following Park Geun-hye’s recent impeachment, China will be witnessing a transition of power this year, North Korea could heighten tensions in the region and many companies in Singapore and elsewhere are facing rising debt burdens.

But for now, market watchers expect DCM volume in Asia Pacific ex-Japan this year to surpass 2016’s $1.45tr — already the highest annual number on record. The region is growing up, and is well placed to handle it.

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