Bond markets are always the same at this time of year. Investors have lots of cash they need to invest and smart issuers take advantage of the liquidity, paying sensible new issue premiums and generally being flexible and accommodating. It is a happy time.
As January rolls on, borrowers get greedier and premiums come down. El Paso, an American junk-rated natural gas producer, is a particularly good example of how the rally has affected pricing. In December it paid investors a yield of 15.25% on its $500 million bond. Last week, it paid 9.25% on a carbon copy trade. Nothing had changed to make the company a less risky proposition -- it was exactly the same credit.
During the past six or seven weeks the market has got tighter for purely technical reasons, say some debt capital markets bankers, and the rally is not supported by market conditions. At some point very soon, investors are going to start thinking the market is over-bought and issuers who have yet to raise money could find themselves caught short.
"My perspective is fairly simple," says one debt syndicate head in Hong Kong. "Just look at the economic backdrop. For every 50 or 100 companies that say they're in trouble, there's one company that says they beat estimates and did better than last year. In that environment I'm not sure this credit rally will last."
A few deals have come to the market in Asia so far this year. The two big Korean agency issuers, Kexim and KDB, have launched benchmark deals, as has the Philippines, but most issuers are still sitting on the sidelines in the hope that the rally will continue to bring down borrowing costs.
"They're still in this thousand-cuts mindset, trying to do reverse enquiry here and reverse enquiry there, and foreign currency this and foreign currency that," says the syndicate head. "It's old-fashioned Asian tenacity. They just don't want to bite the bullet and get done with their funding."
After revamping its image somewhat in 2008, Indonesia could find itself a victim of the souring sentiment. Bankers from Barclays and UBS are travelling with finance ministry officials on a global roadshow at the moment to drum up support for a deal, but some bankers say it could struggle. "Indonesia will be an acid test," says one. "Investors are afraid to leave the rally behind and they're putting a lot of cash to work, but you're already seeing cracks. Some of the emerging markets deals that got done, like Brazil and Turkey, have not traded very well. I think you'll see that Indonesia will not get the reception it would have got a scant three weeks ago."
Korea is also eager to do a deal, but its stronger credit rating should make the deal an easier sell. Even so, it cannot afford the muddled execution that led to it cancelling a bond sale in 2008. Mongolia, which was heavily tipped to be interested in a deal a couple of weeks ago, is now sounding much less positive, says one banker.
Global sukuks were being touted as another ray of hope not so long ago and Posco has even mandated a US dollar deal, but some bankers remain sceptical about the appetite for such Islamic bonds. "It makes sense for Malaysia, which can sell into its domestic investor base," says one. "But I just don't know what international investor is going to buy a sukuk today."
The outlook for the rest of 2009 will turn bleak if the mini rally in the credit markets does indeed falter and early borrowers like the Philippines may once again look like the smartest guys on the block.
"It's always the case, we say it a hundred times: 'Go early, be prepared, be flexible, pay the price, get it done'," says the syndicate head. "Too many borrowers don't want to listen. It's a game of chicken, and nobody wants to go first."
