Asia's dollar bond pipeline hit by widening spreads

Asian borrowers are kept at bay as bond spreads widen.
PLN could tap the market soon (AFP)

Volatile credit markets are making it extremely difficult for Asian borrowers to tap the dollar bond market and regional debt bankers are fervently hoping that markets will stabilise.

“Most borrowers in the pipeline, particularly the banks, are focused on spreads as opposed to absolute yields, and with spreads moving around so much, it makes it very hard to price a deal,” said one Hong Kong-based debt banker.

According to a Morgan Stanley credit strategy report, investment grade cash bond spreads widened by about 20bp in the US, Europe and Asia last week, while Asian high-yield cash bond spreads widened by a whopping 153bp to the highest levels since August 2009.

The report added that Asian investment grade credit indices are the widest among the investment grade indices traded globally. Taking into account the roll-over from the iTraxx Asia Investment Grade series 15 to series 16, the index widened by 35bp last week.

Meanwhile, Asian sovereign credit default swaps (CDS) have also swelled to the highest levels seen this year. The Indonesia five-year CDS, which stood at 150bp at the start of this year, had more than doubled to 320bp as of yesterday. Korean five-year CDS, which was at 100bp in January, is now quoted at 214bp.

Against this volatile backdrop, unsurprisingly, most bankers are advising their clients to hold off on new issues. “We’re not advising our clients to tap the market at this time. Even if they can print a deal, the pricing will not truly reflect their credit,” said one syndicate banker.

DBS Bank and Maybank have both recently been on the road, but unless markets stabilise, it is unlikely that either bank will tap the market. Regional banks look at pricing from a spread-over-Treasuries perspective, as many of them plan to swap the proceeds to floating rate notes in order to match their floating-rate loan portfolios.

Korean lenders, including Shinhan Bank, which has been ready to launch a deal, have also remained on the sidelines. The Kexim 2021, which priced earlier this month at Treasuries plus 245bp and is viewed as a benchmark bond, has since widened by 85bp to Treasuries plus 325bp/330bp.

At the same time there are concerns over the imminent supply of new bonds. “The market is being weighed down by supply. We’ve seen Kookmin Bank announce roadshows but other Korean banks that have already concluded roadshows have yet to price," the banker added.

Kookmin Bank started a series of fixed-income meetings in Asia and Europe yesterday. The lender has mandated Bank of America Merrill Lynch, Credit Suisse, J.P. Morgan, Royal Bank of Scotland and UBS to arrange the meetings.

For now, the main hope appears to lie with the corporate borrowers, which are less sensitive to the widening spreads. The current low rate environment offers companies the opportunity to lock in coupons at low yields. “In this market environment, it makes much more sense for a corporate to issue than (for) a bank,” the banker added.

One company that could potentially tap the market is Indonesia's state-owned electric utility PT Perusahaan Listrik Negara (PLN). The quasi-sovereign borrower kicks off roadshows to Asia, Europe and the US today via joint arrangers Barclays Capital and Citi, and is expected to conclude them by the end of this week or early next week.

However, Indonesian sovereign bonds have also been affected by the market turmoil. Indonesian equities fell close to 9% over the course of last week as investors pulled out of risky assets and emerging market currencies, such as the rupiah. This sell-off had a knock-on effect on Indonesia’s sovereign bonds, which had been performing well until last week.

The Indonesia 2021s, which were hovering around a cash price of 104 early last week, were quoted at 100.75 yesterday. “Indonesia's sovereign bonds have shed about four to five points. Those are pretty big moves for what is considered a low beta bond,” said one Singapore-based banker.

In the meantime, investors are also holding on to their cash. “Anecdotally, discussions with numerous credit investors across regions suggest a sharp build up of cash of up to 5% to 10% in the case of real money (funds), and up to 50% to, in some cases, as high as 70% in the case of hedge funds,” an Asian credit commentary report by Nomura said.

¬ Haymarket Media Limited. All rights reserved.

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