Asian banks safe but investors remain nervous

MoodyÆs says the US sub-prime exposure of Asian banks is limited. Nonetheless, investor nervousness causes one high-yield bond issue to be postponed.
Asian bonds dropped steeply again yesterday, as risk aversion spiked due to more fears about the US sub-prime crisis. This follows weak US labour data on Friday and more mortgage-related rating actions that spurred a sharp rally in US Treasuries. According to a BNP Paribas report released Monday, the yield curve steepened +8bp on the day to +27bp as the futures market priced in higher odds of a Fed rate cut.

Today, the US Federal Reserve will announce its assessment on the health of the countryÆs economy, and review interest rates.

This heightened risk-aversion comes despite MoodyÆs announcement on Friday that the fallout among Asia's investment and universal banks due to the US sub-prime mortgage crisis was likely to be limited. The credit rating agency reports that despite some exposure among banks to the US sub-prime market, this has been small relative to capital and manageable within the banks' current earnings.

MoodyÆs therefore sees little risk of contagion in this sector, which is currently one of the major concerns in the global financial markets. Should investors be forced to sell securities at a loss, they may need to sell other (unrelated) holdings to fund those losses. This may lead to falling asset prices across the board.

But Asian investors are nervous. A survey conducted by Citi among 21 of the regionÆs largest institutional investors in global bonds released on Friday shows considerable risk aversion due to contagion concerns and on-going volatility. Survey results show that most investors expect rising yields and spread volatilities, and are likely to remain risk averse in the future.

As a result, the survey shows, investors are favouring cash and government bonds over MBS/ABS and high-grade corporate bonds, and have become very bearish towards high-yield Asian bonds, as they move to a defensive position.

ôInvestors are so nervous that I donÆt think any high-yield deal can get done in this market,ö says one source on the buy-side.

Sure enough, Pakistani textile and fertilizer manufacturer Azgard NineÆs scheduled $260 million offering was postponed on Friday. Other companies in the pipeline such as Chinese property developer Hong Long Holdings, Indonesian mobile phone operator PT Mobile-8 Telekom, and Indonesian power company PT Cikarang Listrindo are also likely to experience considerable difficulties clearing their high-yield transactions.

Nevertheless, chief investment officer Asian fixed-income and portfolio manager at Fidelity Funds, Andrew Wells says that credit spreads on Asian high-yield securities are now lower than for US high-yield. This indicates that investors view US high-yield as more risky than Asian high-yield.

Indeed, Wells states that his outlook for credit quality and company fundamentals of Asian companies remains, in the medium-term, mostly positive, in a report released by the institution last week.

ôI think the sound fundamentals of Asian corporates will support a recovery from the current price levels and lead to the reasonable performance of Asian high-yield once credit markets become less volatile,ö states Wells.

If the high-yield bonds currently in the pipeline do price, they will mark the recovery of the Asian bond market, it seems.

ôOn the assumption that volatility will revert to a moderate mean and interest rates (and yields) remain historically low, the pipeline for quality Asian issuance will not stay suppressed for long. Imminent benchmark-size high-yield bonds hold the key to reopening Asia's primary market and, we believe, resurrecting secondary trading,ö states Brett Williams, a director in fixed-income credit research for BNP Paribas, in a credit report.
¬ Haymarket Media Limited. All rights reserved.
Share our publication on social media
Share our publication on social media