As FinanceAsia was going to press, the Republic of Indonesia successfully raised $3 billion from the international bond market.
It is yet another example of the growing reliance of Asian governments, companies and quasi-sovereign institutions on tapping bond markets. This month’s edition of FinanceAsia showcases the financing strategy of Korea Export-Import Bank (page 26) and India’s Reliance Industries (page 32). In both cases they are making increasing use of international bond markets, to diversify their funding base and to secure favourable terms.
It is not all sunshine and roses in bondland, however. March saw the first-ever bond default from China, when Suntech Power Holdings said it wouldn’t meet payments on $541 million of debt. Suntech’s bankruptcy also affects many Chinese banks, to which it owes over $1 billion. Although Suntech’s demise may be isolated as a problem with solar power manufacturers, which suffer from overcapacity, it probably also signals the end of easy money in Asian high yield.
This could prove the thin end of the wedge for other high-yield issuers. As we heard at FinanceAsia’s regional debt conference, record issuance in high yield in 2012 and the month of January has shuddered to a halt, with more than half of those January deals trading underwater (see our wrap up on page 67).
The fact that Indonesia sought to obtain most of its 2013 funding needs in one go suggests a desire to raise financing while terms are still attractive.
Of course, Indonesia is now considered investment grade by Moody’s and Fitch. That’s a far cry from the likes of Suntech. But while the fundamentals for most Asian corporate and sovereign borrowers are solid, Fitch has just downgraded China to A+, that nation’s first downgrade since 1999. There is probably no greater medium-term risk to global prosperity than China’s shadow-banking system; George Soros warned at the recent Boao Forum for Asia that should one of these trust products ‘break the buck’, it could create a panic akin to that in US subprime mortgages.
The macro climate is grinding towards a change. The US recovery is on track, despite weak employment figures, and the Federal Reserve is openly pondering its exit from quantitative easing. That implies headwinds for long-term bondholders, at least for US dollar debentures.
The Bank of Japan’s bold announcement that it will double the size of its balance sheet by the end of 2014 sends a different signal: that monetary easing will continue to push investors and savers into risk assets. Both suggest challenges for bondholders, albeit in different ways, and investors should emphasise quality over yields.
For Asian institutional investors, such as central banks and sovereign wealth funds, the clear preference is to shift more of their US Treasury holdings into other assets. Divestments are taking place across the region, from the Indian government to consolidating Australian miners. There is a hunger, particularly in China and Japan, for continued outbound investments; in 2012, China ODI hit a record $78 billion, according to A Capital; see page 18 on our report on Chinese deals into Australia.
Bangkok SkyTrain and several Philippine companies have joined their Malaysian peers in making big IPOs. We have yet to see equity markets spark back to life elsewhere in Asia, but it feels like it’s just a matter of months, delayed only perhaps by the bungled European rescue of Cyprus.
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