Asia’s debt capital market bankers will continue to be busy for the rest of the year as the prospect of a rate hike draws closer and China continues its structural reforms.
Regional borrowers raised $130 billion from 231 deals in the dollar, euro and yen markets during the first seven months of the year, a 31% increase from the same period in 2013 and just 12% short of last year’s record annual total of $148 billion, according to Dealogic data.
“We think that 2014 is going to be a ground-breaking year from a volume perspective,” said Paul Au, co-head of Asia DCM at UBS. “We are likely to be breaking last year’s record in new-issue volume.”
Morgan Stanley estimates that Asia ex-Japan G3 supply will touch $150 billion this year, whereas HSBC projects primary dollar-denominated issuance between $115 billion and $133 billion.
Year-to-date dollar sales for the region currently stand at $109 billion, slightly short of last year’s total annual volume of $118 billion, HSBC said.
The market is also increasingly speculating as to when the US Federal Reserve will hike interest rates, especially given the recent improvement in the country’s economy. This will encourage Asian borrowers to tap bond markets for funding sooner rather than later.
“As the US Fed tapering comes to a completion, and our view is October, then people are going to be concerned about the underlying rate cycle,” said Dilip Shahani, head of research for Asia-Pacific at HSBC, adding that the first rate hike will occur in the second half of 2015. “That may create some market volatility.”
The US economy grew at an annual rate of 4% during the April-to-June period, latest figures released by the US Department of Commerce show. The growth reverses the contraction seen earlier in the year.
In a widely expected move, the Fed announced last Tuesday that it would cut its bond purchases to $25 billion a month from $35 billion. The benchmark 10-year US Treasury note yield rose to 2.56% on Thursday, from 2.55% late on Wednesday, according to Bloomberg data.
China’s structural reforms
Although Korean borrowers once dominated Asia ex-Japan G3 deal volumes, bond specialists said that Chinese issuers have overtaken their Korean counterparts during the past three to four years — a trend that is likely to continue for the foreseeable future.
“China’s domestic liquidity will become more stable gradually although it is not going to be as liquid as before ... that gives the need for more bond issuance by Chinese issuers [in the international space],” said David Chin, head of corporate client solutions for Asia at UBS.
“We also seen the gradual trend of relaxation for corporates’ foreign exchange management onshore, so that’s going to encourage more state-owned enterprises to issue more bonds.”
In April, the State Administration of Foreign Exchange, which manages the country’s $3.3 trillion foreign exchange reserves, expanded a trial programme to make it simpler for corporates to transfer funds within and outside the country.
The programme is applicable to any Chinese or foreign company with operations inside and outside China with an annual forex income of more than $100 million, the regulator said.
Chinese issuers account for 44% of total Asia ex-Japan G3 bond volumes year-to-date, this is significant compared to Korean borrowers’ 16%, according to Dealogic data.
Falling fees
While it has been a good start of the year for Asia ex-Japan’s G3 bond markets, the same cannot be said for fees generated from the space.
According to Dealogic data, fees in the first half of the year have fallen by 22% to $400 million from $600 million during the same period last year for Asia ex-Japan G3.
“What we have experience this year is the pickup in issuance from banks,” UBS’s Au said. “Because of their strong credit ratings, they tend to pay a slightly lower fee compared to other sectors like corporates or high-yield names.”
New supply from the banking industry is expected to increase during the next few years as financial institutions look to shore up extra funding to meet upcoming Basel III requirements, meaning that fees generated from the bond markets are likely to remain around the same levels unless corporate issuance rises at a faster pace.
In the dollar market alone, financial institutions account for 24.5% of the overall share year-to-date, up from 12.3% during the same period last year.
Also, the number of bookrunners on each bond deal has mushroomed during the past few years, indicating that bookrunners are earning a diminishing share of fees from each offering.
An average of six bookrunners now share the fee pool on dollar-denominated deals of $500 million or more, according to Dealogic — up 50% from an average of four in 2012.
