An increase in refinancing as well as M&A activity is likely to spur Asia ex-Japan G3 bond volumes in 2014, potentially beating this year’s record-high.
Dollar-denominated debt in the region is expected to reach $150 billion in 2014, with a bulk of gross issuance – or $106 billion – to come from corporates across investment grade and high yield sectors, according to Morgan Stanley. Another $34 billion is envisaged to come from financials and the remaining $10 billion from sovereigns.
Refinancing needs are going to be one of the key drivers for G3 bond supply next year. “Redemptions are high next year because 2009-2010 were fairly large issuance years. So it’s natural for them to look to recycle,” a Hong Kong-based syndicate banker told FinanceAsia.
About $21 billion of corporate debt will be maturing in 2014, which is 60% higher than redemptions in 2013, predict bankers. For financial institutions, $14 billion will be maturing in 2014 and more than $20 billion maturing in 2015 and 2016 individually, they estimate. Also, close to $7 billion of sovereign dollar debt matures next year, more than double the redemption this year.
“Redemption pressures would be specifically high in Korea, which should result in more senior refinancing from Korean banks,” said Viktor Hjort, credit analyst at Morgan Stanley. “Also, unlike the past three years when net bank capital issuance has been negative, clarity in Basel III rules should result in higher bank capital supply going forward.”
Morgan Stanley forecasts $9 billion worth of bank capital supply in 2014 versus about $1 billion this year.
However, some banks are more pessimistic. Deutsche Bank highlights that Asia credit conditions could become weak due to the anticipated rise in the rates environment, especially given the fact that 10-year US Treasury (UST) yields have touched the highest point in a week. Deutsche Bank forecasts 10-year Treasury yields will trend up to 3.25% by end-2014.
“We forecast Asia ex-Japan G3 issuance to be flat to slightly down on this year's levels as a rising interest rate environment may result in some replacement of bond financing with loan financing,” said Herman van den Wall Bake, head of fixed income capital markets, Asia at Deutsche Bank.
“We still expect institutional money management mandates to stay invested in this region, mitigating the retail fund outflows that we have been witnessing for the past six months. Overall we are constructive on growth and credit spreads; however, we do expect ongoing volatility with periods of limited new issue activity.”
Ten-year UST yields rose to 2.885% on Monday from 2.87% on Friday before the Federal Reserve (Fed) decides at a two-day meeting whether to start slowing bond purchases used to keep borrowing rates low and sustain economic recovery, according to Bloomberg data.
Year-to-date G3 bond volumes for Asia ex-Japan reached an all-time high of $147.5 billion, up 5.7% from 2012’s full-year volume of $139.6 billion, according to Dealogic data.
Buoyant M&A activity
According to our seventh annual M&A survey, conducted in partnership with global law firm Clifford Chance, next year could be a game-changer for M&A in Asia as a number of trends materialise.
Chinese outbound deals are back on the agenda after the leadership change this year, inbound deals continue to target the region’s growing consumerism and Asian tycoons continue to look for ways of unlocking value from their expansive business empires.
As a result, this trend is likely to drive up more demand for debt capital market products, believe syndicate bankers.
“More cross-border M&A will lead to some of that debt activity take-up and could be a bridge between the high-yield loan market and debt issuance for some companies further down the line,” said a Hong Kong-based syndicate banker.
Volumes for cross-border announced deals targeting Asia ex-Japan in 2013 touched $99.3 billion year-to-date, a 3.4% increase from 2012’s full-year volume of $96 billion, according to Dealogic data.
Chinese corporates to dominate
Although HSBC does not have an overall house prediction for total G3 Asia ex-Japan DCM volume for 2014, the bank believes that Chinese corporates will again dominate the primary calendar, easily sustaining a gross issuance at a new record of $133 billion in a relatively subdued environment.
Issuance from Chinese property borrowers will likely remain elevated at $10 billion in the first quarter of 2014, with a skew towards January. For the full year, the bank sees another record year and expects more than $15 billion of new issues from Chinese high-yield developers.
“The US dollar market will be attractive to Chinese issuers as financing costs are still expected to be lower than in the onshore financial markets,” said Dilip Shahani, head of global research for Asia Pacific at HSBC. “These issuers are unlikely to be dissuaded by the still unquantifiable implications of potential Fed tapering for the US term rate structure.”
According to Morgan Stanley, US dollar bond funding is nearly 350bp more attractive than onshore loans for China state-owned enterprises (SOEs), not accounting for cross-currency swap costs, and 100bp more appealing than the onshore bond market.
