Asia wakes up to debt market new normal as vol recedes

This week saw dollar deals from a number of issuers , with Nonghyup Bank, Korea Gas Corp, Shanghai Construction Group and Tianjin Binhai New Area Construction & Investment Group, having raised a combined $2bn by the time GlobalCapital Asia went to press.

Volumes might seem meagre compared to some busier periods earlier in the year, but the deals were nonetheless a welcome sight for a region that had not recorded a single dollar transaction in almost three weeks.

The last dollar trade in Asia ex-Japan before the start of this week was a $1.28bn 4% 2075 C-ROSS tier two offering from China Life Insurance on June 26.

“The market was shut for probably the longest amount of time we’ve seen over the past two years, and it was getting a bit worrying because summer is arriving and all the banks have deals we wanted to clear before that,” said a Hong Kong based head of syndicate.

The no-show was the direct result of the one-two punch delivered by the Greece debt debacle and China’s free falling equities market, which knocked out the region’s DCM pipeline. At the height of the volatility, the five year spread of the Markit iTraxx Asia ex-Japan Investment Grade Index touched a six month high of 121bp on July 8. The index was seen at 112bp at the start of the month.

Market conditions have however now taken on a more stable tune, first with the Chinese government’s direct intervention to push stock prices up and, most recently, with the leaders of the eurozone finally agreeing on July 13 to offer Greece a third bailout worth €86bn over the next three years.

These two events provided DCM bankers in Asia with a far more accommodating environment in which to manoeuvre. The result was the resumption of primary issuance.

Another pair of issuers — Xinjiang Goldwind Science & Technology and China Minsheng Bank — are set to add to the improved volumes this week with their respective $300m SBLC-backed bonds, which were due to price on July 16 as GlobalCapital Asia went to press.

But in spite of the increased activity, DCM bankers said the market was still not where it was in the first half of the year — and was unlikely to reach those heights again in the second half.

“What happened in the past few weeks was actually a sell-off across all regions, all sectors and all asset classes,” said a head of DCM. “So it wasn’t like money was moving out of bonds, which means it wasn’t all bad for us.”

What is concerning, however, is the fact that investors have so far preferred to hoard cash and are only willing to put their money in the strongest credits, which was why all the dollar transactions so far this week came from investment grade issuers.

This suggests that it will take time before the market fully recovers and the banker expected investment grade credits to continue to dominate for the foreseeable future.

“High yield won’t die off completely, but I honestly only see the strongest BB or crossover names having a chance,” the DCM head said.

Something else will need to cover for the absence of high yield bonds, therefore, and the banker reckoned this would come in the form of another high beta product — bank capital.

“It is high beta because of the subordination to senior, but it’s also safe in the sense that no one really thinks the Chinese banks will ever default because of their state backing — at least, not the biggest four or five banks that tap the international market,” the DCM head said.

Sure enough, one of China’s big four banks, Bank of Communications, has announced it will be going on the road for a dollar-denominated additional tier one (AT1) preference share offering starting on July 20 (see separate story).

In the eyes of one syndicate banker, the successful execution of such a high profile transaction could really kickstart the entire market, although he still expects issuance to be intermittent due to a number of potentially market changing events later this year.

Top of the list of possible interruptions is still going to be the Greek debt debacle, as it remains to be seen how the country will be able to conform to its austerity programme.

“I don’t think it’s over yet and sooner or later it will rear its ugly head, and markets will once again be quiet when that happens,” he said. “It’s really going to be a case of no news is good news.”

Then there is the possibility of a US interest rate hike in September and the performance of the Chinese equities market once the government gradually tones down its supportive measures. These two events also have the potential to bring markets to a halt.

As a result, he thinks it will be normal to see several weeks of consistent deal flow followed by periods of absence. And that pattern will mean that bankers will have to pay extra attention to the timing of deals.

“A lot of the time this year and last year, we didn’t really have to pay too much attention to what else was out there because we knew there was more than enough support to absorb multiple deals,” he said.

But such exuberance is expected to be less common this year, and a better example of things to come would be how events transpired this week.

KoGas and Shanghai Construction were the first ones out on July 14, followed by Nonghyup and Tianjin Binhai the next day.

“Nonghyup was riding the momentum of KoGas, and Tianjin Binhai did the same with Shanghai Construction,” the banker said. “It’s going to be a lot more calculated from now on because we will have to be more mindful about whether to go for first-mover advantage, or ride the momentum of earlier deals — and also not to clash with similar credits.”