Asian G3 bond markets getting more selective

Series of pulled deals suggests investor interest in riskier corporate debt may be waning.

Signs are mounting that parts of the Asian G3 primary debt market may be taking a breather.

For much of the year it's been a case of almost anything goes, from super-low yielding safe sovereign bonds to higher-yielding but still tightly priced bonds issued by corporate first-timers. But some fixed-income investors have turned more discriminatory of late after a global sell-off in government paper.

At least four companies have pulled their debt sales in the past two weeks, providing further evidence that investors may be losing some of their appetite for riskier types of debt.

A $300 million five-year bond sale for Indonesia palm oil producer Sawit Sumbermas was pulled on November 14 after two weeks of marketing, while Inner Mongolia BaoTou Steel Union, a Chinese state-owned steelmaker, withdrew its $200 million three-year bond sale in the same week, citing adverse market conditions.

Adding to the casualty list, two Hong Kong-listed companies scrapped their proposed bond offerings too. Concord New Energy, a BB-rated manufacturer of wind turbine and solar panels, withdrew its bid to raise $300 million by selling green bonds, while Lifestyle, the operator of SOGO department stores in Hong Kong, said on Monday that it would not proceed with its own plan.

“There is certainly a bit of fatigue in the market right now and with the year-end approaching, investors are becoming more selective with respect to the kind of deals they are willing to buy,” a Singapore-based fund manager told FinanceAsia. “You don’t see the massive 5-10 times oversubscriptions that you did a month ago – suggesting that the demand [has been] waning in recent weeks.”

“Some solid, high-quality names can still get deals done but debut issuers could suffer from the choppy market conditions,” the investor added.

Otherwise healthy

Despite the high-yield hiccoughs, November has so far been one of the best months for new Asian G3 debt – bonds issued in one of the world's three main convertible currencies, typically dollars – with $4.4 billion-worth of bonds sold so far in 13 transactions, up from $3 billion in 8 deals in all of October, Dealogic data shows.

With a week to go, the November volume could yet even surpass the record of 15 bonds in June, when China’s largest property developer Evergrande sold $3.8 billion-worth of bonds, the largest high-yield bond of the year. 

Dig deeper, though, and it seems that investors, while hungry to invest, are discriminating more about where they put their money to work, wary of the distress signals popping up in places. 

India's Reliance Communications, for example, failed to pay $9.75 million coupon on the 2020 bond on November 6, as it struggles to survive in the world’s second-largest telecom market due to cut-throat competition. It has reportedly been followed by rival Aircel, while Singapore-listed commodities trader Noble Group was downgraded by Fitch on November 17 to two notches above default, saying that “default of some kind appears probable".

“In addition to rising default risk in emerging markets, the recent selloff in some high-yield names has impacted the technicals (markets-specific factors such as liquidity and volatility) and increased investor risk aversion,” another Singapore-based investor with a European house told FinanceAsia

Some analysts and investors also believe that the risks are building that the compression in spreads seen across both investment-grade and high-yield corporate bond markets in recent years will start to reverse after the US Federal Reserve put investors on alert for a December interest rate hike.

“Globally investors have started factoring in a December rate hike by the Fed and coming of inflation from a spike in crude oil prices,” the second fund manager said. “As professional fund managers, we would have to be taking a view that the markets will go down to buy back [when] cheaper."

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