This time last year, bond bankers in Asia ex-Japan were already churning out deals, pricing eight dollar corporate bonds worth a combined $2.9bn, according to Dealogic. That momentum continued throughout the year as activity went through the roof, with a record $106bn raised via 193 deals as companies rushed to lock in low US interest rates.
This year the numbers tell a very different story, with not a single Asian corporate issuing a syndicated dollar bond yet.
There are several reasons for the slowdown. On a macro level, investor sentiment has been hit by a stumbling eurozone economy and Greece’s potential exit from it, which sparked fears of a huge political fallout.
Oil prices, which have been in freefall since July, have also hurt markets. Brent crude, for example, has lost more than half its value and was trading at $51.15 a barrel on January 8.
The Chinese property sector has added to the woes, with Kaisa Group Holding defaulting on a HK$400m ($51.6m) loan and widely expected to miss the 10.5% coupon of its $500m 2020s that falls on January 8.
A staple of the Asian bond market, the Chinese property sector represents more than 40% of the region’s high yield sector. But thanks to the controversy surrounding Kaisa, yields have risen sharply since the start of the year, with the JACI non-investment grade index widening more than 30bp, to 7.75%.
“No one wants to brave the market in these conditions and what’s worse is that there’s nothing anyone can do apart from wait,” one Hong Kong based head of DCM said.
Narrow window
Amid the jittery markets, bankers are concentrating their efforts on pushing out safer credits such as sovereigns and financial institutions.
The Republic of Philippines printed a $2bn 3.95% 2040 on January 6, while the Republic of Indonesia (Baa3/BB+/BBB-), Sumitomo Mitsui Banking Corp (A1/A+) and China Huarong Asset Management (Baa1/BBB+) were receiving bids for their respective dollar bonds as GlobalCapital Asia went to press.
This focus on lower beta names is likely to spread to the corporate sector, said bankers.
“In the short term, I think we’re mostly going to see corporate investment grade names, and only the strongest high yield credits such as the BB+ rated guys will be able to come,” said the head of DCM. “I think things will return to normal once that first deal crosses the line, but as it is, everyone is just waiting for the other guy to move first.”
Despite the troubles, market participants still expect the first half of 2015 to be busy, because of the region’s huge refinancing needs. Around $12.4bn of bonds are due to mature or be available to be called back in 2015 for high yield issuers alone.
However, since many will be trying to get their dollar financing done before the eventual rise of US interest rates, one head of syndicate predicts a tough year ahead, as banks will have to do well to pick the right day to launch deals.
“If this negativity drags on, we will have a shorter window to work with and I think everyone on the Street is starting to get a bit worried of going into a situation where we will see multiple deals launching on the same day once the market recovers,” he said.
Finding opportunities
With the dollar market looking a difficult sector to navigate, one Singapore-based banker explained that the current situation could be an opportunity for companies to diversify their funding sources into other currencies. Aside from dollars, the other two currencies Asian companies tend to issue in are offshore renminbi (CNH) and euros.
For the time being, said bankers, issuers prefer to print in euros, but they expect CNH funding costs to fall as the Chinese central bank attempts to support its slowing economy by trimming policy rates, an action it last took in November, 2014.
The People’s Bank of China (PBoC) cut policy rates for the first time in two years, bringing down its one year benchmark deposit rate by 25bp to 2.75% and one year benchmark lending rate by 40bp to 5.60%. Another cut in the policy rate is expected in the first quarter.
“It’s sort of the opposite situation to dollars, since companies are waiting for the rate to drop before making any moves,” the Singapore banker said.
That leaves issuers with the euro option, which the banker said could offer a much lower borrowing cost than dollars thanks to the European Central Bank’s decision to cut its benchmark refinancing rate to by 10bp to 0.05% and the deposit rate to minus 0.2% from minus 0.1% last September.
The five year interest rate swap for euros stood at 0.36% — far lower than the 1.64% Bank of Ireland quoted for five year dollars on January 8.
“Obviously, it all depends on how receptive the European audience is towards Asian credits, so not everyone can expect to issue successfully in euros,” the Singapore banker said. “But if it’s a strong investment grade credit, I don’t think demand will be a problem.”
Government-owned State Grid Corp of China, for example, is looking to issue in euros and will meet investors over a three day roadshow in Europe starting on January 12 (see separate story).
Last year was a record for Asian corporates raising capital in euros, with eight deals worth a total of $6bn. Among those was Hong Kong conglomerate Hutchison Whampoa, which raised €1.5bn ($1.9bn) from a 1.375% 2021 in October.