Fears of a protracted credit crunch in Asia look overdone as borrowers in the region are rushing to tap the international bond markets. Absolute and relative interest rates have plummeted as investors, flush with cash, have started to see signs of economic recovery and have become more confident about the problems ahead and how they can avoid them.
As yields have fallen, state-owned entities, banks and corporations are more prepared to lock in long-term funding, indicating that 2009 could be a record year for bond issuance in the region.
Asian borrowers had raised more than $45 billion through bonds denominated in G3 currencies by October 19, according to data provider Dealogic. That compares with just $16.8 billion last year, and already exceeds the previous all-time high of $43 billion in the whole of 2005.
"There has been a phased recovery in the international capital markets. High-grade Asian borrowers with pressing funding requirements tapped the markets first, while more opportunistic issuers have only recently launched deals as spreads have narrowed," said Fergus Edwards, Asia head of syndicate, global capital markets, at UBS.
This trend is reflected in the performance of key indices. The iTraxx Asia ex-Japan investment-grade credit default swap index tightened to 103bp on October 14 from more than 340bp at the beginning of the year.
In fact, "the chronology of issuer-type and quality this year follows the orthodox pattern of credit markets gradually regaining confidence: first, sovereigns; then state-owned entities; then high-grade corporates, government-supported banks, single-A and even BBB corporates", said UBS's Edwards.
Korean entities have issued around 50% of Asia's dollar bonds this year, up from 20% in the same period in 2008, which was a five-year low. They have raised more than $18 billion so far this year -- more than the previous full-year high of $14.9 billion in 2007.
The IMF upgraded its forecast for Korea's GDP for the second time in two months on August 9, predicting a 1.8% contraction this year compared with its July forecast of a 3% decline. The Korean government has set aside more than W67 trillion ($54 billion) to support the country's financial system.
Export-Import Bank of Korea (Kexim) and Korea Development Bank, two Korean policy banks majority-owned by the government, opened up the Asian bond markets at the start of this year, attracting large order books and momentum for historically wide yield spreads, which allowed them both to raise jumbo-sized deals ($2 billion each).
Kexim's five-year transaction was sold at 677.7bp over the US Treasury benchmark yield, yet it was able to come to the market six months later with a slightly longer deal at just 362.5bp over Treasuries, achieving an absolute yield of just under 6% compared with 8.2% in January.
Posco, the first pure private corporate deal in 2009, was well received in March despite initial concerns about the cyclical nature of the industry it operates in. In fact, analysts were surprised by the level of demand for the $700 million five-year deal, anchored by one $200 million order from the US. "But in retrospect, we can see that Posco was the right issue from an international perspective, achieving widespread name-recognition and benefiting from a credit rating [A1/A] that was through the sovereign rating," pointed out a banker close to the deal.
Hana issued the first government-backed bond by an Asian bank in April, despite worries about the health of the Korean economy - although investors could clearly see that Korea in 2009 was very different from Korea in 1998, following widespread sustainable reforms during the past decade.
But if Hana was the first step in convincing investors about the solidity of the Korean name, then the $3 billion global issue by the sovereign a few days later was a watershed, setting the benchmark for a flood of issuance by Korean state-owned utilities at ever tighter yield spreads during the early summer.
New deals also included Kookmin's $1 billion five-year covered bond (backed by residential mortgages) in May. This was the first such structure in the region, but it wasn't replicated by other Korean banks because by then credit markets globally had strengthened so there was no need for enhanced forms.
Borrowers from other countries within the region have also been successfully tapping the markets, buoyed by impressive Asian demand for paper issued by well-known European and US names. Regulars, such as the Philippines and Indonesia launched benchmark deals, and Hong Kong leaders such as Hutchison Whampoa, Henderson Land and Kowloon-Canton Railway raised cash with US dollar issues.
Asian credits still look cheap compared to similar US and European borrowers that have tapped the dollar market this year. For example, Colgate Palmolive, rated BBB-, raised funds at Treasuries plus 60bp in August, according to market participants.
Meanwhile, the market is opening for lower quality regional credits. At the end of July, Indonesian retailer Matahari Putra Prima raised $200 million in a part-exchange of old bonds and new paper - the first high-yield US dollar issue in the region since July 2008.
"The success of the recent Matahari bond exchange and new issuance demonstrates that the high-yield market is reopening slowly, with borrowers from Indonesia and the Philippines now sounding out potential demand," pointed out Edwards.
They are encouraged by strong secondary market performance of seasoned issues, leading to lower absolute costs for new funding. "Asian high-yield bonds have been one of the best performing asset classes worldwide in 2009. Yields have fallen from 20% to 30% at the beginning of the year to high single digits in some cases, so we expect issuers to take advantage of the improved terms and borrow," said Herman van den Wall Bake, Deutsche Bank's co-head of global risk syndicate in Asia.
Sean Henderson, HSBC's head of debt syndicate in Hong Kong, agreed that the high-yield market is currently accessible, particularly for well-liked and less cyclical companies such as those from the utility, telecom and commodity sectors.
"At this point it mostly comes down to whether or not the borrower is prepared to pay the necessary yields to term out. That decision is always going to be quite issuer-specific, but the pressure has eased a bit with some still preferring the shorter-dated loan markets," he said.
Chinese property developer Country Garden became the first sub-investment grade borrower to tap the Asian high-yield market on a completely standalone basis in early September, when it raised $375 million with a five-year bond paying an 11.75% coupon. Indonesia's second biggest coal miner, Adaro, then attracted strong demand among international investors for an $800 million 10-year deal in mid-October, yet only had to pay a yield of 7.75%.
Adaro's deal was priced on the same day that Sri Lanka managed to issue its first sovereign US dollar bond since 2007. The five-year deal raised $500 million and paid just 506bp over US Treasury yields. And late on October 16, the Republic of Philippines, which had opened the market back in the second week of January with a $1.5 billion deal, raised a further $1 billion from a 2034-dated bond - its third dollar issue this year.
In general, the fourth-quarter calendar looks busy, with more Korean borrowers likely to access the dollar market and standalone high-yield corporate issuance coming out of Indonesia or the Philippines. After the temporary late-summer lull and correction in the market, spreads for high grades could tighten.
"The new issue pipeline looks pretty full, with plenty of issuers looking at the international bond market during the next six months; the more obvious and regular borrowers, however, have completed a good proportion of their needs for 2009, and so most issuance is likely to be quite opportunistic in nature," said Henderson.
Perhaps the market was ready for a correction when Petronas, Malaysia's national oil and gas company, raised $4.5 billion in early August through tranches of 10-year conventional bonds and five-year sukuk (an Islamic structure), although there were plenty of critics who complained about the handling of the deal by the lead managers when the yield spreads widened.
Deutsche's Bake argued that, "credit spreads have tightened materially in the course of the year so the pace of spread contraction should moderate from here on out. All-in costs will be largely a function of whether rates stay where they are or start rising as a result of a pickup in [economic] growth".
But, he added, "issuance should continue at the same pace during the second half of the year, led by the regular Korean quasi-sovereign borrowers". Expected new Korean bond issues during the next few months include, Korea National Housing, Kexim, Korea Expressway (issued October 16) and Woori Bank. Other issuers expected by the market include State Bank of India, the Noble Group and the Chinese chemicals company Lumena Resources.
Looking further ahead, UBS's Edwards is confident that "the smart, active borrowers, looking for relative value trades or arbitrage possibilities are likely to come back in the first quarter of 2010".
A version of this article first appeared in the September 2009 issue of FinanceAsia magazine.