The difference between now and the Asian crisis in 1997 and the dot-com implosion in 2001, he points out, is that this time the crisis is far more broadly felt: there is a confluence of factors, notably inflationary pressures, falling consumer spending and rising unemployment in the US, and the fear that the mortgage problem will spread to credit cards, and deepen the liquidity and credit squeeze. Within Asia, the greatest concern is inflation û although central banks are now acting to curtail it by raising interest rates.
The big worry at the moment is the after-shock of the Fannie Mae and Freddie Mac crisis; these agencies either provide or guarantee 50% of US mortgages, and have $1.5 trillion in outstanding debt securities, of which around $325 billion are held by Asian investors, including regional central banks. Their credit default spreads have ballooned from 20-30bp to 80bp. On the other hand, the market believes that the US Treasury will stand behind both agencies û shoring up equity, for instance, because they are institutions of such national importance.
Other reasons for feeling more sanguine include a falling oil price and appreciating US dollar in recent weeks. And the way the market has behaved so far this year suggests that the recovery can be sudden, says Armstrong.
Spreads widened in the first quarter of the year, then narrowed between March and mid-June as investor sentiment improved. Funds had high cash positions which absorbed new deals for the right credits and at the right price û although usually flat to secondary comparables. There was $8.1 billion worth of Asian bond issuance in the second quarter compared to just $4.2 billion in the first quarter of the year.
Supply is likely from regional sovereigns to help finance bigger fiscal deficits û for example, Korea (which might come to market as early as September), Philippines and an Indonesian sukuk issue. Interest rates have risen across Asia, for instance in Korea which had belatedly focused on inflation after an emphasis on growth earlier in the year, and Indonesia, where the BNI has hiked rates by 75bp in the last three months. And rising domestic yields make local currency borrowing less attractive to Asian corporates who might look to issue in G3 currencies following the lead of sovereigns.
But pending supply is not the real issue: investors will buy at the appropriate price. And Asian (and European) investors seem to be far more receptive to Asian credits than US investors, as evidenced by the allocation of the recent Hong Kong and China Gas single-A benchmark 10-year deal: 50% was placed with Asian accounts at a relatively tight spread of 237.5bp, while the absence of a 30-year tranche suggests a lack of interest among US funds. New issues will often be driven by reverse enquiries from investors, whoÆll say what price would be good value.
However, with credit default spreads at historical highs, the market remains pretty much closed to high-yield issuers, unless like earlier deals for Noble or Vedanta, there is a commodity theme, says Armstrong. Oil and gas, metals and mining companies can issue depending on the market tone and sentiment, while investors will look at them on their individual merits. Normally, issuers will pay 25bp-100bp yield premium to secondary comparables. But critically, sentiment can change intra-day, so timing is very important. Other sub-investment grade borrowers have to resort to the loan market for disintermediation.
On the other hand, while funds are cash rich and have moved into the usual safe havens of Treasury bills and short-term money market instruments, they are looking for opportunities to move into credit. The positive second quarter of this year shows how quickly the market can turn once sentiment shifts. During that period there was a swift pick-up in new issuance, yield spreads compressed and the market gathered a bullish momentum.
ôIt is volatility and uncertainty which kills the market, not its direction. Once signals become clearer, the turnaround can be very rapid,ö Armstrong stresses again.
As a measure of its belief that markets will turn, Credit Suisse has not significantly reduced its headcount dedicated to bonds, though along with other banks it has pared back a little. ôDebt capital markets remains an important franchise for Credit Suisse,ö he says.