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Thursday, 18 July 2019

Outlook for asian credit: Changing tides

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Fishermen in their wooden boat try to cross waves in Bantul.

Source: Reuters/Dwi Oblo

Fishermen in their wooden boat try to cross waves in Bantul.

Breaking records may have almost become passé for Asian bond markets, but the fact that there are expectations that Asian issuance this year may even surpass the blockbuster levels of 2012 means it is going to be an eventful year.

Chinese property issuers Kaisa and Country Garden opened the 2013 US dollar market instead of the usual South-East Asian sovereigns and Korean policy banks. That began a frantic three weeks of issuance when a record US$4.5bn of high-yield paper was issued. January volume set the tone of things to come. The strong Asian private bank bid driving much of the demand showed that the market is changing and expanding. When signs of oversupply in the high-yield space emerged, the market shifted to investment-grade names with a seamlessness that bodes well for the year.

Many of the factors that drove last year’s record G3 issuance are still in play. Interest rates remain loan in most of the world, and investors’ hunger for yield is driving them into emerging markets. So, there are reasons to expect the deal flow and jumbo order books to continue. However, there are two threats to this rosy scenario. One is the prospect of the US government bond market entering a phase of secular price decline, which would push Treasury rates up. Given how low US rates are, this looks to be a relatively minor threat. A more likely threat is that global investors will turn their focus to equities, which will lower demand for bonds and make last year’s bonanza hard to repeat.

Banks across the region are likely to be among the busiest as they issue subordinated debt and hybrid capital in a bid to meet Basel III compliance requirements. Investors in Asia have already shown themselves to be receptive to Basel III-compliant loss-absorbing paper from European banks, so there should be demand for similar paper from Asia’s generally well-capitalised banks.

The story of Asia’s bond markets is one of development as much as growth and that development will be on display this year.  Singapore, for example, is expected to pass regulations that will allow covered bonds to be issued in the city state in a move that many thought would happen last year.

Asia’s local currency markets will likewise continue their impressive development of recent years. China, which already boasts the world’s third largest bond market after the US and Japan, will be busy. The government is expected to take measures to promote and develop the bond market to take some pressure off the bank market and the distressed equity market. This growth will not be without risks, however. There has never been a default on a local currency bond in China, so investors have no idea of their recovery prospects in the event of default. Given that various Chinese authorities have already stepped in to help several struggling companies in recent years, this risk is not idle.

The Singapore dollar market will also be very active, even if it fails to match the record S$30bn issued in 2012. More important than the headline volume number, however, will be the city state cementing its position as an attractive market for global issuers. Indian and Italian issuers have already issued in Singapore dollars this year, and liquidity remains flush.

Meanwhile, the Thai baht market will develop as more corporations issue in the perpetual format now that oil and gas company PTT has gotten investors familiar with the structure.

Other local currency markets such as Malaysia, Indonesia and Korea should also post strong growth as the story of Asia’s fast-developing bond markets adds another chapter.

To see the digital version of this report, please click here.

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