After a blowout start to the year in January, Asia’s bond market has been in a lull since Covid-19 spread rapidly across the region, before hitting Europe, the US and the rest of the world. By mid-April, the virus had infected more than 2m people globally, according to the World Health Organization.
The toll on people, hospitals, governments and corporations has been hard. Equally hard has been the impact of the pandemic on Asia’s debt market.
New deals have only been possible with a decent premium, or by finding anchor investors. High yield credits in particular have suffered, with debt bankers in Asia uncertain that issuers too low down the credit curve will be able to tap the public bond market anytime soon.
“We’re going through an unprecedented time at the moment,” says Jimmy Choi, DCM head, global, and head of capital markets for Asia at ANZ in Hong Kong.
Even for industry veterans such as himself — Choi has been a capital markets banker for about 20 years — there is no playbook.
While bankers and investors can find similarities in other market crashes, most recently being the global financial crisis, they don’t offer nearly enough insight to how the Asian markets can hold up against a fast-spreading pandemic.
For Choi, that means dealing with clients like this was any other market dislocation. DCM bankers across the street are confronting clients’ liquidity needs head on, looking for options to fill the gaps until the bond market reopens if necessary.
For some issuers, that means considering loans and bridging facilities to tide them over. But for most, that means taking a wait and see approach.
“People just don’t know where the bottom is at,” says Choi, speaking to GlobalCapital Asia in late March. Asian issuers still lack the willingness to venture into the primary market and pay the large new issue premiums that their counterparts in the US are paying, he adds.
Slow uptick
A small revival came at the tail end of March, when the bond market reopened with investment grade rated credits naturally leading the way.
On March 31, Hong Kong’s AIA Group, an insurance company rated A2/A/AA-, sealed a $1bn deal. A day later, Chinese technology firm Baidu, rated A3/—/A, raised the same.
AIA offered about 25bp in new issue premium, while Baidu coughed up about 15bp.
In early April, the Indonesian sovereign tested the waters for a $4.3bn triple-tranche bond to tackle the Covid-19 pandemic, with Malaysian oil and gas company, Petronas, raising a jumbo $6bn in mid-April.
Despite these high profile transactions, deal flow was only trickling into the market by mid-April as markets continued to remain volatile. But the pipeline is nothing but robust.
“If you look at the pattern of every other crisis, if the market closes, the advice usually is to get your documents ready and as soon as there is a window, issuers will jump at that opportunity and take advantage of the liquidity,” says Choi.
But what advice are banks giving to issuers hesitant to take the plunge into the bond market?
Loans have been an obvious choice for many, given its resilient nature amid turbulence and the low margins that borrowers can often get away with.
ANZ is also discussing potential buybacks with companies, says Choi. “That’s something that’s a pretty good idea, to show the market that you have liquidity,” he adds.
Alan Roch, head of bond syndicate for Asia at Standard Chartered in Hong Kong, says his team is speaking with high yield clients about liability management options.
“That is smart for issuers and is [liked] by investors, because they welcome the liquidity,” says Roch. This option is, however, not suitable for all companies given how volatile secondary spreads have been.
Some issuers are also keen to explore local currency options. The Chinese renminbi market, for instance, seems relatively open, with domestic investors still willing to buy deals.
“The only thing we can do is provide the best advice we can and get them ready for potential open windows in the market,” says Choi.
Investors respond
Those windows appeared in late March and early April, when Asia’s debt markets started to turn a corner.
Given that China faced the worst of the Covid-19 outbreak from the end of January, by about the end of March, companies were slowly resuming operations and people were returning to work.
Asia high yield has held up relatively well when compared to the US and Europe, says Sheldon Chan, associate portfolio manager in T Rowe Price’s Asian credit bond strategy team in Hong Kong. “That’s in part a reflection of how the spread of the Covid-19 virus has progressed from China to the rest of the world.”
In March and April, the virus spread rapidly across Europe and the US, forcing countries into lockdowns.
Chan says there are opportunities to buy good paper in Asia, given valuations have fallen so much. Some BB rated credits fell up to 30 points, numbers that under normal circumstances would be pricing in a default, he says.
Jamie Grant, head of emerging markets and Asia fixed income at First State Investments in Hong Kong, says his team began looking at the supply chain and the impact of the virus in mid-February, given their experience in dealing with the fallout of the 2008 global financial crisis.
While the Chinese economy is much different today than 12 years ago, Grant and his team are still cautious about declines in China.
This meant that in the weeks before China announced its purchasing managers index (PMI) data on February 29, Grant’s team began to derisk their portfolios, without going underweight.
“People invest in fixed income because they need income,”he says. “We felt we were heading into a significant liquidity crunch and if you sell your bonds, there is a risk you can’t buy them back.”
For the time being, Grant is positioned in neutral credits. Valuations are cheap, but in distressed markets, they can get cheaper still.
The effect of the quantitative easing measures may also be felt for years to come.
Grant adds that his team’s decision to cut risk early and position in neutral credits has been “proven correct” already, but the question is “what happens next”.
DCM bankers tackleworking from home The Covid-19 pandemic, and the social distancing measures and the lockdowns it has brought, have forced everyone around the world to adapt rapidly. In capital markets, banks, investors and issuers have been dealing with video calls and delayed conversations as they are largely working from home. Trading has been difficult, admits Sheldon Chan, associate portfolio manager in T Rowe Price’s Asian credit bond strategy team. With many traders stuck at home, conversations about risk are isolated. “That affects how markets are being priced,” says Chan. At the same time, many in the finance world say that their jobs are shifting to be more digital anyway, with asset managers and bankers in Hong Kong having first-hand experience of being forced to work from home in the second half of 2019, when protests rocked the city. Chan says that he has found it important to schedule regular discussions with his team, and keeps in touch constantly through technology including internal chat rooms, emails and phone calls. Many people say the Covid-19 related isolation offered a surprise “test case” for remote work. “We’ve gone through a mass trial period of how this can be done,” says Jimmy Choi, DCM head, global, and head of capital markets for Asia at ANZ. Hong Kong’s protests provided the “fire drill,” he says. “We’re well adapted now,” he says, adding that he does not think there has been any problems getting in touch with people as needed. Avinash Thakur, head of debt origination for Asia Pacific at Barclays, says that roadshows have been conducted in remote ways for some time. “The industry will move increasingly toward a less travel required roadshow,” he says. This is especially as there are plenty of advantages to using virtual roadshows. Cutting down on in-person meetings means quicker turnaround to get into the market when a window opens. Nevertheless, the sooner we get back to normal the better, says Chan. Only time will tell what the new normal would be. GC |
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Bond volumes
Given Chinese firms are the biggest bond issuers in Asia, they naturally reopened the offshore debt market. But they were given a helping hand by the country’s central bank and regulators, which have taken numerous measures since the outbreak to shore up the economy, ease costs for borrowers, and keep its domestic capital markets open.
For instance, in February China rolled out Rmb500bn of quota to be used for re-lending and re-discounting for commercial banks to on-lend from the central bank to small businesses.
The government added another Rmb1tr about a month later, alongside a cut to the reserve requirement ratio (RRR) for small lenders to boost liquidity.
Many anticipate more action to come from the Chinese government, given the country’s GDP growth for the first quarter of 2020 contracted for the first time in decades.
“They’ve moved swiftly and they’ve moved broadly,” says First State’s Grant of China’s stimulus actions. But, “it takes time to see a material impact in the economy.”
Outside of China, things look shakier.
There hasn’t been much reliable data regarding Covid-19 in Southeast Asia and South Asia, leaving investors concerned that they don’t have the full picture over how much the countries are struggling and when they will recover.
Additionally, more so than renminbi, Indian rupees and Indonesian rupiah tend to be more sensitive to global and emerging market stress.
This naturally means that year end bond volumes in Asia will fall well short of 2019’s numbers, say bankers. But what is key is to take a long-term view on Asia’s debt market.
“Offshore Chinese investors have been through a couple of these volatility spouts,” says Choi. Chinese investors, who are comfortable with bonds from their home country, continue to give the market some liquidity.
“It’s been resilient so far,” says Choi.
Default risks
Fortunately, many Asian issuers took advantage of the strong market in late 2019 and January 2020 to pre-fund their upcoming maturities.
“A lot of the funding requirements that they have now, the majority of them are not urgent,” says Avinash Thakur, head of debt origination for Asia Pacific at Barclays in Hong Kong.
He says that most of the clients he works with will be able to hold off going to capital markets in the near future.
Thakur adds that his clients are not considering other funding routes yet, but that may come later if the primary bond market remains rocky.
In many ways, refinancing pressure is easier to deal with because it is clear to identify. But Thakur says that the dents in the economic market will take some time to appear.
“There’s an element of panic and some of that is driving the market,” he says. “The real impact on the economy? No one is focused on [that] yet.”
As the market weighs the economic impact, and the potential for companies to be devastated financially, conversations about the possibility of defaults have become commonplace.
Chan admits he was fairly sanguine about defaults from the Asia high yield sector before. But now, as the Covid-19 pandemic takes a toll on corporations, the risk is greater, particularly in areas like Indian commodities and Indonesian coal, but less so with Chinese dollar bonds.
“When we see the policy market action in China, there’s been a lot done to make liquidity available,” says Chan. Small and medium sized enterprises, and private sector corporates, have been able to tap the onshore market for the most part.
Chan believes that China has reason to keep sectors like high yield property stable, which will safeguard the market from mass defaults.
But a rise in defaults this year is only inevitable as the Asian market hasn’t had to contend with a downward credit cycle for an extended period, says ANZ’s Choi. Defaults may impact the primary market, but much still depends on how and when recovery takes place.
Grant, from First State, expects a wave of bankruptcies to happen over the coming months. Because of that, he is focusing on fundamentals, not valuations, when investing.
Some of the highest quality paper in the market is trading at distressed prices because the market is not functioning properly, Grant points out. Investors could be scrambling for yield as rates remain suppressed, even if credit spreads are doubled.
“Now isn’t the time necessarily to go all in,” says Grant. GC