Asian bonds hit records, but pace to slacken

Bankers expect debt issuance north of $100 billion in 2013, but the pace is expected to slow down.

Bankers expect Asian dollar bond issuance to exceed $100 billion again this year, but the pace is expected to slacken in the second half. Last year, Asian borrowers outside Japan raised a total of $130 billion. Year-to-date, they have already raised $68 billion, which puts them on a firm footing to exceed last year’s volumes.

However, most bankers are predicting a slowdown during the second half. “I’m expecting north of $100 billion this year,” said one debt head. “I expect it will be fairly broad based, with activity from Hong Kong and China, Southeast Asia and India,” he added. “But it will be hard to maintain the momentum seen in the first quarter.”

At $100 billion, the debt business in the region is sizeable. And, in spite of talk of the Great Rotation, debt markets look like they are here to stay. At the moment, there is plenty of liquidity in Asia, driven by growing wealth in the region and a broadening investor base.

As a result of this, an increasing number of borrowers have opted to issue in the Reg-S only market, with order books heavily driven by Asian investors. Similarly, more European and US borrowers have also targeted the Asian investor base.

With another strong year expected for debt markets in 2013, investment banks have focused on building their debt franchises. “A lot of banks have gone from the perspective of the debt capital markets business being a hobby, to a $100 billion business,” said the debt head. “There are real revenues to be made.”

So far this year, China dollar bond issuance has dominated, with a surge in volume from investment-grade borrowers in April. According to Dealogic, the total China bond issuance stands at $21.7 billion, a record high and more than double the previous year’s $10 billion for the same period.

Much of the recent issuance is being used to fund mergers and acquisitions — Cnooc’s jumbo bond offering of up to $4 billion (due to price last night) being the latest example. The oil-and-gas company will use the proceeds to repay a $6 billion bridge loan taken for its acquisition of Nexen. The four-tranche deal is set to exceed Sinopec’s $3.5 billion bond that priced in April as the biggest bond in a decade.

But high-yield bonds have also had a strong run. Total dollar bond issuance from Asia ex-Japan has chalked up $19.4 billion, already exceeding the $15.8 billion seen during the whole of last year.

Looking forward, bankers are expecting the pace of issuance to taper slightly due to the region’s lower than expected economic growth. “A lot of the bond activity this year has been driven by refinancing,” said another debt head. “As economic activity is not picking up as quickly as expected, we are not seeing as many new transactions being initiated. I think what will drive future activity is M&A, or if economies pick up, capital expenditure,” he added.

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