High-yield and offshore currencies seen as key themes in 2011

Barclays Capital takes a look at what lies in store for Asia's bond markets in 2011 following last year's record issuance.
Jon Pratt, Barclays Capital
Jon Pratt, Barclays Capital

Jon Pratt, head of Asia debt capital markets (non-Japan/Australia) at Barclays Capital, gives FinanceAsia his thoughts on what lies in store for the Asian bond markets this year.

What will be the key themes for the Asian G3 bond markets in 2011?
This year will mark a watershed year for high-yield issuance. Increasing risk appetite on the part of investors and a need for diversification will create ideal conditions for Asian companies to search for growth capital from the international markets at a time when domestic interest rates are rising and local bond markets are increasingly expensive. 

We expect to see more hybrid issues by financials following the release of the Basel III guidelines in December and by corporations. We also expect global and regional corporate issuers and financial institutions to take advantage of the strong retail demand in the region. The recent Prudential tier-1 transaction is an illustration of this trend.  

Away from the G3 market, the growth and development of the offshore renminbi (also referred to as CNH) bond market in Hong Kong will also be one of the key themes of 2011. We believe that this market will continue its recent growth trajectory and provide unique funding opportunities for Chinese and international borrowers. Increasing liquidity should allow for longer-dated issuance and the development of the swap market should enable borrowers to look at more dynamic funding opportunities.

In addition, we expect Asian issuers to continue to gain access to an increasing number of offshore markets and see further acceptance from investors in new markets and new currencies. This theme was most recently demonstrated in a transaction that we completed for Union Bank of India in the Swiss franc market, and by issuers such as Kexim who are tapping into the Brazilian real, Mexican peso and Malaysian ringgit bond markets. Issuance in euro-clearable local currencies will continue to grow and this expansion will primarily be driven by the Chinese yuan.
2010 was a record year for the Asia ex-Japan G3 bond market and the Asia ex-Japan high-yield market. Do you expect this year’s issuance to exceed that of last year and what is your outlook for these two markets?
We expect issuance of G3 debt to moderate slightly in 2011 from record levels in 2010. While we expect fewer sovereign transactions and less overall issuance from Korean borrowers in 2011, we expect an increase in activity among high-yield issuers who see attractive opportunities in the US dollar market and high-grade corporate issuers who are looking to pre-fund debt maturing in 2012 and 2013. Notably, we see companies from China and India becoming much more active in the cross-border debt market with regulatory obstacles being removed. M&A-driven financing is also a potential area of upside in 2011.

Bank borrowings are difficult to predict. Banks have ample liquidity and how local regulators will adopt new bank capital guidelines remains highly uncertain. Opportunities in non-core currencies and other international markets as well as new markets such as the CNH market should also divert some issuance away from the G3 market in 2011. The Japanese yen could be the exception, with the increasing activity in the Samurai market and regulatory changes making it less onerous to issue in Japanese yen.

What are the key risk factors that could slow down the supply of Asian bonds?

I view the major risk to regional economic growth and borrowing activity to be an abrupt slowdown in China as a result of the government’s efforts to stem inflation. Additionally, domestic inflationary pressures could equally impact local currency markets. Another risk to Asian issuance is a sharp rise in US interest rates to combat accelerating global growth and rising inflation. This scenario could negatively impact investor demand and issuer activity.  

Are investors becoming more cautious about buying long-dated bonds?
For the time being we do not see investor appetite being negatively impacted by the recent rise in treasury yields. Demand for hybrid and longer-dated bond instruments has been strong in recent transactions that have come to the market. Investors remain open to longer tenors as a way to get incremental yield.

What’s your view on the synthetic offshore renminbi bond market? Will this format take off beyond the China real estate sector?
We do feel that this market offers significant potential beyond the Chinese real estate sector and we expect to see a broader range of private sector Chinese issuers exploring this market. However, significant supply in the synthetic RMB bond market could be perceived as undermining the development of the CNH market and therefore we see some challenges for public sector and government-linked issuers taking advantage of this market.

In 2010, we saw some interesting developments in the bond market -- perpetuals were introduced to Asia and we saw tenors stretching out to 30 years. Can we expect anything new in 2011?
We expect ongoing activity in the hybrid and perpetual market as long as interest rates remain low and investors see value in these instruments relative to other asset classes.

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