Asian debt capital markets have entered a pivotal period, with the large autumn pipeline unfolding onto a market uncertain whether it has reached bottom, or is about to sink lower because of heightened geopolitical risks and emerging market contagion.
Market participants believe the success or failure of deals executed over the coming few weeks will stamp the rest of the year ... for good or for ill.
“The first half was long and difficult,” said James Arnold, head of Asia Pacific debt syndicate at Citi. “The summer break punctured that and gave markets time to heal.
“The next few weeks will be critical in setting the tone for the rest of the year,” he added.
And there will be plenty of paper, raising the question of whether investors will be able to absorb it all without spreads widening.
Arnold forecasts $20 billion to $25 billion of G3 issuance for the month, spanning the last week of August to the last week in September (after which Asia will be closed for a number of public holidays). This compares to $40.4 billion for the whole of September 2017, according to Dealogic figures.
However, Arnold told FinanceAsia that he is far more confident now than he was when he last shared his outlook back in March. Back then, he noted a wide gulf between issuers and investors pricing expectations.
“It took a while for issuers to adjust to a new pricing dynamic at higher levels,” he continued. “But I feel we’ve reached an equilibrium now and that bodes well for the way upcoming deals will be received and traded.”
Sreenivasan Iyer, Deutsche Bank’s head of corporate finance for South East Asia and co-head of financing and solutions for Asia Pacific, also notes how the pricing dynamic has shifted thanks to a change in the investor mix.
“US investors are becoming increasingly more important as price setters for 144a/Reg S bonds from the region as the local Asian bid has pulled back due to China’s deleveraging campaign,” he said.
The Beijing government’s clampdown on the shadow banking sector is progressively and permanently removing a big chunk of demand from China. Across the rest of the region, a cluster of smaller hedge funds ($1 billion or so under management) have also pulled back after being wounded by some of the region’s worst-performing credits.
Then there are the family offices and high-net-worth investors who helped underpin tighter pricing during the bond bull market. Will the autumn pipeline tempt them back?
Iyer thinks it might be a while. “They’ll be looking to stay long cash until they see a sustained period of stability and decreased headline risk,” he said.
One factor in the immediate pipeline’s favour is its diversity in terms of issuer type and geography. In addition to the never-ending run of Chinese property companies and local government financing vehicles, there are mandates for sovereigns at either end of the credit curve (South Korea and Papua New Guinea), plus a slew of banks from across the region (Bangkok Bank, Bank of China and Security Bank to name but three).
PNG ENTERS STAGE LEFT
Roadshows for Papua New Guinea began on September 5 and a five- and 10-year benchmark bond is expected by the end of next week under the lead of Citi and Credit Suisse. On the surface it seems like an extraordinarily strange time for one of Asia’s lowest-rated sovereign credits to try to execute a debut international bond deal.
As FinanceAsia has previously reported, the B2/B rated sovereign has tried and failed to access the international bond market three times previously over the past 20 years.
Its last attempt was in 2016. If it could not achieve it then when bond markets were much stronger, what hope does it have now when large parts of the emerging markets universe are being roiled by crisis?
Yet Papua New Guinea may well turn expectations on their head in a topsy-turvy world where globalisation is mutating into protectionism and quantitative easing into tightening. For the country is also changing and this will be showcased in just a couple of months when it hosts the next Asia Pacific Co-operation Meeting (APEC) in the capital, Port Moresby.
On the political side, its pro-investment prime minister, Peter O’Neill, is beginning his second term — providing investors with the reassurance of stability. More importantly, Papua New Guinea is undergoing an economic transformation — underpinned by large investments from the likes of ExxonMobil (a $19 billion natural gas project) and China, which funded the APEC conference centre and a six-lane highway to it.
This means the country is fundamentally a stronger credit now than it was a few years ago, even though the US rating agencies have either downgraded it or put it negative watch over the past year. In both instances, the ratings trigger was the country’s reliance on short-term debt.
A successful bond deal would help reverse that by reducing overall borrowing costs. This may well forestall Moody’s, which has Papua New Guinea on negative outlook, creating positive secondary market momentum.
It would also benefit the wider market, underlining that investors are still receptive to credits right across the spectrum if they are positioned correctly. In this case, the key issue will be whether Papua New Guinea can price closer to fellow resource-rich Mongolia (6.4% for B-/B3 rated May 2023 paper), or is bracketed with cash-strapped Pakistan (7.566% for B/B3 rated December 2022 paper).
Arguments favouring selective optimism across emerging and frontier markets find support from Andre de Silva, HSBC’s global head of rates research.
On the one hand, he believes it is too early to become more positive given Argentina and Turkey’s current woes. But he argues that “stable high real yields and sound macro fundamentals could support some pockets of EM high yielders".
SINO-US TRADE TENSIONS
As ever, market sentiment will be hypersensitive to the US and shifts in its trade policy. Throughout August, bond markets had a good day if the US made progress in talks with any of its trading partners and a bad one if they did not.
“It is the monkey on our backs, the biggest issuer facing our market sector,” Citi’s Arnold reflected.
Public consultations for a next round of tariffs concerning $200 billion in Chinese goods end on Thursday (September 6). Many hope that if there is no breakthrough, the Chinese government will at least reassure financial markets with new monetary easing policies.
However, as Bank of America Merrill Lynch rates strategist Yang Chen points out, the counter-balancing effect is likely to be short-lived. He concludes that while policymakers may announce more measures to restore risk appetite, questions around a wider deterioration in asset quality remain to be addressed.
One thing, which has become clear, is that 2018 will not live up to 2017’s G3 issuance volumes even if markets remain stable over the next four months. Both Cit’s Arnold and Deutsche’s Iyer are now projecting about $250 billion to $275 billion, down from $300 billion earlier in the year.
