Asia's dollar bond market often feels like it works at two paces — frenetic or slow.
As the volume of new deals grows year after year, the syndicate and origination teams in the region are kept on their toes, churning out bonds when issuance windows are open. This is generally a good thing. Asian dollar bonds are booming, and the market and its issuers are increasingly becoming more sophisticated.
But this year, Asia’s G3 debt market could do with a much-needed break in August.
Just a few years ago, the "summer slowdown" would allow DCM bankers to step back and give investors a chance to take stock of their portfolios and returns. They could also look closely at the secondary market performance of deals, spot pipeline opportunities and build up momentum for the rest of the year. The summer gave everyone in the market a natural motivation to take a breather from pushing out deals, before returning in full force in September.
In 2020, the markets reacted differently, due to the Covid-19 pandemic. Issuers forced to put deals on hold in the first half of the year — when cases were soaring across the world — ventured out with bonds during the summer, while bankers who couldn’t travel for holidays were eager to get the market going again. Public dollar bond volume in the region reached $23.8bn in August 2020, compared to less than $10bn in August 2019, according to Dealogic.
But this year, all the signs show that a market slowdown would benefit issuers, investors and DCM bankers.
The Asian bond market has had a rocky few weeks. China Huarong Asset Management Co and China Evergrande Group have both attracted negative headlines this year, raising investor concern. In May and June, keepwell structures and weaker Chinese state-linked credits were viewed with more scrutiny. In June and into July, most high yield property borrowers were forced to hold back from selling new notes, as indebted developer Evergrande’s troubles spilled over into even some investment grade-rated real estate deals.
Last week, when high yield property companies attempted to return to the market, issuance was confined to short tenors and small sizes, as well as a need for 25bp or more of new issue premium.
Kaisa Group Holdings, for example, sold a $200m 364-day bond on the back of a $900m order book. Even Korean borrowers, which generally price their notes very tight, have paid premiums. KT Corp's $300m 1.375% 2027 bond came with a 5bp-7.5bp premium last week.
The market volatility has already created a sort of natural pause for new deals. Bond pipelines, while still strong, are not getting larger. High yield borrowers continue to stay on the sidelines. Some bankers are even heading back to Europe for summer holidays, despite the lengthy quarantine times in Hong Kong and other places.
Now is the perfect time for the market to embrace the quiet.
Many of the deals getting done are heavily anchored, with little true market participation.
A handful of bankers even recently admitted to GlobalCapital Asia that many of their transactions are standard and boring, essentially checking the boxes to source funding. The current market backdrop is simply not suited to innovative deals or jumbo investor-driven transactions.
Having a lull now could bode well for later. It can allow investors to analyse new developments at Huarong and Evergrande in more detail, without triggering a knee-jerk reaction in their bond or stock prices.
Likewise, more work can be done to assess the contagion risk for other Asian issuers. Investors can also digest the volumes so far this year and make decisions about what the second half of the year can bring.
There's an argument to be made for the need for a summer break in deal flow across the industry, especially as the latest spike in Covid cases in many parts of Asia and around the world raises fresh concerns. Just as importantly, a break for Asia's bond market can only mean a healthier return in September — and a strong positioning for the rest of the year.