Asian bond issuance up in 2007

Higher investment-grade volumes and a strong private-debt sector point to a more sophisticated Asian bond market.
Corporate and high-yield bond issuance stands at $31 billion (with 80% of that denominated in dollars) in the first half of 2007 compared to a total volume last year of $38 billion, showing strong growth in Asia's public bond market.

Korean issuance remains approximately the same as last year, and combined with India accounts for 50% of the total volume.

India and Greater China, meanwhile, account for 32% of the total, compared to just 7% in the same period last year. ICICI India priced a $2 billion offering earlier this year, while Chinese high-yield property developments have had a strong presence in the market.

In terms of corporate high-yield, issuance is tracking last year's supply at $5.5 billion, after sub investment-grade borrowers tapped the market earlier this year when credit spreads were tight. These included GT Tire, Lai Fung, Indika, Citic Resources, Parkson Retail Group, Gajah Tunggal, Central Proteinaprima, Berlian Laju Tanker, Neo-China Group and Road King.

Investment-grade offerings have increased by $14 billion in 2007 year-to-date to $26 billion, with sovereign issuance accounting for $3.25 billion, and bank capital totalling $8.8 billion.

This year marks a substantial increase in first-time issuers, especially in the high-yield space, away from traditional bank capital or sovereign borrowers that have characterised Asia's bond markets. New names account for 15% of the issuance volume.

The growth of the public Asian bond is notably accompanied by a substantial increase in private-debt finance. Currently, sources estimate the private financing space year-to-date at $6-$8 billion, compared to $8 billion for the whole of 2006. A bigger investor pool with an interest in Asian paper is helping companies to raise money in the bond markets when they were unable to do so last year.

ôAs well as an increase in liquidity, the flexibility to forfeit covenants is attractive to opportunistic investors and hedge funds looking to buy unlisted, highly-structured paper from issuers whom they believe have a good credit story to sellö, says a syndicate banker.

This growth has occurred against a backdrop of high volatility this year, with very low yields in the first quarter, followed in June by a substantial market correction and a 40bp lurch in the US Treasury yield curve.

Says Brett Williams, a director of fixed income credit research for BNP Paribas: ôThe weight of liquidity and current flight to quality have shifted the yield curve lower. We expect a reversal in risk aversion as quality Asian companies riding the commodities boom will entice investors back into the fold. Resurgent fears over subprime issues and derivative losses however could be with us through the summer.ö

But this risk aversion is not all negative. Bookrunners and issuers are bringing instruments to market which had previously only been used in pre-IPO funding or in the private sector, as sweeteners for skittish investors. This month Neo-China priced a bond-plus-warrants package, giving savvy investors more buck for their risk but also allowing a wider choice.

A syndicate banker who spoke to FinanceAsia also expects Payment-In-Kind bonds to become more frequent in the public market. These pay interest in additional bonds, as opposed to cash payouts and are traditionally used for issuers with cashflow problems.

ôInvestors in Asia are becoming more sophisticated. They are not just taking credit risk, they are also taking multi-asset class risk,ö says another banker.

An increase in collateralised debt obligations (CDO), and the resulting increase in credit defaults swaps (CDS) also reflects the growth of a broader, deeper market.

ôItÆs a two-edged sword,ö continues Williams. ôCDOs reflect increased sophistication in a developing market, but they also lead to distortions in credit spreads and valuations that are inappropriate to the credit risk.ö

This leads one banker to complain: ôSophisticated investors still take positions mainly through CDS and index products rather than through cash when they want to be long or short the market.ö

He says that although more global participation in deals from Asia borrowers is evident, companies with a good credit story and from desirable areas cannot price benchmark high-yield deals without the support of the US investor base.

ôThere is still a long way to go before Asian risk can be reliably and fully distributed in Asia. The technology will evolve, but borrowers need to evolve with it,ö he added.
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