Asia’s international bond markets are witnessing a bifurcation that is opening up opportunities for the region’s higher rated issuers - but not for its lower rated ones - as investors become ever more selective in the run up to the year-end.
The trend became evident after market participants returned from their summer break, and bankers and fixed income analysts predict that it is likely to continue through October at the very least.
This means that deals by investment grade credits, which are able to draw on a wide international investor base, are trading well as long as they are priced to perform. During September, stand-out deals included a $1 billion 10 and 30 year issue by the Aa2/AA/AA- rated Republic of Korea and a $2.4 billion five, seven, 10 and 30 year deal by A1/A+ rated Sinopec.
Chinese credits at the lower end of the spectrum, however, are still finding market access extremely difficult. Pricing is being pushed to new lows as the government’s de-leveraging campaign continues to remove domestic issuers’ main source of demand – other domestic issuers.
During September, the biggest standout deals, for all the wrong reasons, came from Chinese property companies, Maoye International and Zhenro Properties. The B3/B- rated credits were respectively forced to pay 13.25% for two year paper and 13.7% for 2.25 years.
This represented the lowest public pricing for Chinese property credits in four years. Neither deal has also performed particularly well in the secondary market, with Maoye quoted around issue price and Zhenro up half a point.
“We predicted there’d be about $20 billion to $22 billion of dollar-denominated issuance from Asia Pacific credits in September,” commented Ernst Grabowski, head of Asia Pacific debt syndicate at Morgan Stanley.
“We were too conservative on the investment grade side and too optimistic about high yield,” he continued. “We thought there might be shoots of recovery in high yield towards the end of September.
“It hasn’t happened yet,” he added. “But if and when it does, my sense is that investors will view this as an opportunity to improve returns into year-end."
REFINANCING WAR
Owen Gallimore, head of Asian credit and research at ANZ in Singapore told FinanceAsia, that “investors can see a lot of value at the double-B point of the credit curve, but they’re not buying in the secondary market because they fear being swamped in the primary and the impact that will continue to have on spreads.
“There’s an ongoing re-financing war,” he continued. “Issuers need to fund, but the investor side is just not there and it’s creating a big imbalance.”
Investors remain all too aware of just how many National Development and Reform Commission (NDRC) approvals are still outstanding for Chinese property companies and local government financing vehicles. They are also conscious that with the onshore market all but closed, that large pipeline will quickly unfold onto the offshore market at the first sign of stability.
Bankers say that borrowers are trying to cope with current market conditions by printing deals off market. Some banks have also taken deals on their own books with a view to profiting if and when markets turn.
On the positive front, China’s Golden Week holiday may enable the market to catch its breath and digest a rare piece of positive news after Qinghai Provincial Investment Group announced that it had found the money to redeem a $300 million bond during the last week of September.
“That re-payment was a big relief,” Gallimore said. “As much as investors think they’re braced for the odd default, the reality is that many Chinese issuers rely on implicit state support and if Qinghai went down it could prompt a new crisis of confidence.”
Gallimore thinks that investment grade spreads should stabilize at current levels, and believes that Chinese BB rated property credits have found a pricing floor. He reckons, however, that single-B rated credits may test new lows, and reiterates the lack of upside even though a huge valuation gap has opened up relative to lower rated US high yield credits.
One example is Caa1/B- rated Chesapeake Energy, which priced an eight-year deal on a coupon of 7.5% in late September.
The repatriation of dollars back to its home market is benefiting US high yield in contrast to China where liquidity is being sucked out of the bond markets, leaving low single-B credits with no option but to price up to 500bp to 600bp wider.
EM CONTAGION
Analysts are more divided when it comes to Asia’s wider emerging markets universe. Across in Indonesia, low single-B rated credits like Lippo Karawachi are still touching yields of 13% even though the property group’s 7% April 2022 paper is up from a mid-September low of around the 16.5% mark.
JP Morgan for one is more optimistic about the country.
“We believe these pressures are mainly driven by sentiment rather than a fundamental shift, and valuations are starting to look interesting for some asset classes,” wrote fixed income analyst Soo Chong Lim in a recent research report. “While volatility could remain high in the near term, we believe fundamentals will eventually prevail.”
ANZ's Gallimore is not so sure. “Emerging market spreads have gone back to their decade averages,” he commented. “The whole sector has re-priced.”
Morgan Stanley falls into the more tentatively optimistic camp.
“Investors are still cautious and closely monitoring EM FX rates for any signs of stress,” Grabowski noted. “But I think there’s a much greater degree of realism and understanding about what trade tensions mean for the market and how to deal with them.”
He also believes that this is helping investors become less fearful in their desire to reverse losses, and make some money before year-end.
“There are plenty of spots to feel good about within EM,” he stated. “Investors feel they just need to be smart and selective about where they place their bets.”
One highlight in this respect was B2/B rated Papua New Guinea’s barnstorming debut at the end of September, nearly 20-years later than the country had hoped. But the wait appears to have been worth it after the sovereign built up a $3 billion order book for a $500 million10-year deal.
Grabowski also predicts a pick-up in FIG issuance across Asia, on the back of successful issues during September from the likes of the Philippines’ Security Bank ($300 million five-year senior notes), Bangkok Bank ($1.2 billion dual-tranche senior notes), State Bank of India ($650 million five-year senior notes) and Bank of China ($3 billion AT1 deal).
“This is a global theme, but will be particularly strong in Asia where a bit of a pipeline has built up on the senior funding side,” he concluded. “A lot of bank borrowers stayed away from the market during the second quarter as they didn’t want to be exposed to the macro headwinds we faced then. These deals are being well-received.”
