Asian dollar bond issuance hits record high

There are still four months of the year yet to go, but dollar-denominated bond issuance by Asian borrowers has already entered the record books before the third quarter is even out.

Dealogic data shows that total issuance from Asia (ex Japan, ex Australia) hit $209.71 billion at the end of August, sweeping past 2016's record breaking $208.71 billion total (see table 1).

Issuance is up across the board, but the high-yield market has clearly been the standout performer, which is always good news for bankers since this segment is where the biggest fees lie.

According to Dealogic, corporate high-yield issuance volumes have quadrupled compared to 2016, with investors' quest for yield enabling even the odd triple-C rated borrower to access the market. More remarkably still they have almost equalled investment grade corporate issuance on a split of 55% and 45%.

At the end of August, corporate high yield issuance hit $44.77 billion via 118 transactions compared to $10.71 billion from 44 transactions during the whole of 2016.

Source: Dealogic

The gulf is even starker when non-investment grade financial issuance is also thrown in the mix. There has been $3.5 billion from four issues in 2017 compared to $859 million from four in 2016. 

It is shaping up to be a year in which stubbornly low US Treasury yields, stable credit spreads and consistent emerging market inflows (an unbroken run until a brief wobble in mid August) keep investor demand for yield assets high. Meanwhile, Asian borrowers maintain a full-to-bursting issuance pipeline in fear of higher rates ahead. 

As a result, investment-grade corporate issuance has been strong too. A total of $63.02 billion was raised to the end of August from 94 transactions, slightly less than double 2016’s $38.74 billion total.

Where FIG volumes are concerned, the difference is less marked, with $54.17 billion of volumes compared to $35.4 billion in 2016.

Unsurprisingly, Chinese borrowers continue to account for a larger and larger percentage of overall volumes, representing 57.7% of the total in the year-to-end August compared to 50.12% over the same period in 2016 and 46.21% as recently as 2014 (see table 2).

The biggest increase has come from Indonesia, thanks in part to Standard & Poor’s upgrade to investment grade status in May and a re-opening of the high yield market for the country’s higher preponderance of commodity-based issuers. Indonesian borrowers have consequently claimed a 6.26% market share compared to just 2.59% last year.  

Momentum maintained?

The key question for market participants is whether this momentum can continue over the last four months of the year. Two recent events present contrasting signals.  

On the plus side, Asian credit markets barely flickered after Kim Jong-Un successfully flipped the switch on an intercontinental ballistic missile in late July and tensions flared across the 38^th parallel throughout August. Fund tracker EPFR said the crisis contributed to a brief turnaround in emerging market flows in mid-August, but inflows resumed again towards the end of the month.

In fact, US high yield spreads reacted more strongly than Asian ones, demonstrating how the region’s increasingly powerful Chinese investors are often far more impervious to global geopolitical events than their developed market counterparts.

Even Korean spreads remained fairly stable. According to JP Morgan Credit Index (JACI) figures, they tightened 2bp during the first week of August, before widening 4bp across two weeks in mid-August, then traded flat during the week ending August 25^th.

Korean issuers were also far more active during August than they have been of late, with bond offerings from Lotte Shopping, Hyundai Capital and KEB Hana. However, they have still been overtaken by the Philippines as the region's second most active borrower in recent years, with a year-to-date percentage of 8.96% compared to the Philippines 9.07%.

Source: Dealogic

Overall, August issuance patterns demonstrate that the “summer lull” has become increasingly less meaningful in Asia, where it is hot all year round, than it does in Europe and the US where it is not. Again, Dealogic figures reveal issuance of $14.19 billion in August 2017 similar to the $13.8 billion raised the same time last year.

But issuance was down on July’s $24.58 billion ($19.96 billion July 2016), giving market participants some breathing space. How investors react if issuance picks up to July’s level again in September remains to be seen.

In late July, they completely rejected a handful of single-B rated deals and if this behaviour is anything to go by then their limits are clear. As FinanceAsia previously reported, investors would like to think the pricing power is swinging back in their favour again.

James Arnold, Citi’s head of debt capital markets syndicate APAC, agrees investors turned more cautious towards the end of July, but argues the reaction was very bond specific.

“They didn’t think certain credits had been marketed properly and were also unhappy about opaque cornerstone orders,” he told FinanceAsia. “There’s still appetite for single-B names, but the credit metrics need to be clearly explained and investors have confidence in the leads’ distribution abilities."

Jake Gearhart, Deutsche Bank’s head of debt origination and syndication, APAC, also suggests the August break has enabled investors to re-charge.

“The sheer volume of issuance in July made it difficult for investors to physically process all the deals put before them,” he commented. “That’s now dissipated and we’re getting queries about some of the deal’s which didn’t happen in July.”

In September 2016, US dollar-denominated volume amount to $31.12 billion. Gearhart and Arnold both anticipate September 2017 will be of a similar magnitude based on their visible pipeline.

This means annual issuance projections are now being revised up. JP Morgan recently revised up its forecast from $240 billion to $265 billion. Both Citi and Deutsche anticipate similar levels, although they believe issuance could tail off during the fourth quarter similar to 2016.

In the second and third part of the series, FinanceAsia will examine what kinds of credits will dominate for the remainder of the year and the risks, which could hinder them.