The outlook for Asia’s G3 bond market remains on track to hit a record issuance of corporate bonds in 2017, despite Moody’s recent downgrade of China’s sovereign rating, an industry conference heard last week.
Investors’ desperate search for yield helps issuers to repair their balance sheets, and the profile of the investor base has firmly shifted from developed markets to regional demand, such as China, market participants said.
“The hunger for yield regionally and internationally has provided a stable backdrop in the regional G3 bond market, as has China’s push into Southeast Asia due to diversification purposes,” Michael Seewald, managing director and lead analytical manager for corporate ratings in Asia-Pacific at S&P Global Ratings, told more than 160 attendees at the 6th Borrowers and Investors conference in Singapore last week.
Seewald said that while offshore issuance by Chinese corporations has doubled this year, their onshore issuance has been cut by half because of Beijing’s attempt to rein in credit growth.
In the past few months, Chinese regulators have halted the approval process of some offshore bond sales by property developers and local government financial vehicles, part of a regulatory crackdown to discourage the use of borrowed money to invest in over-priced land bidding.
Sitting on the same panel, Owen Gallimore, Asia head of credit ratings at ANZ, said he expects the National Development Reform Commission’s clampdown on issuance by property developers and LGFVs to be temporary. "It doesn't make sense to shut the offshore channel competely because it will lead to many defaults," he said.
“The offshore issuance of investment-grade credit from Chinese corporates is growing very rapidly and we remain convinced the growth should continue,” Gallimore added.
Companies in the region have raised $130 billion worth of G3 bonds so far this year, representing 67% of the $193.4 billion raised in 2016, according to data provider Dealogic.
Looking at the current pipeline, seven Chinese banks, including Postal Savings Bank and Harbin Bank, are looking to raise at least another $14 billion worth of bank capital in the offshore market, keeping bankers and investors busy throughout the next 12 months.
In early May, Bank of America Merrill Lynch revised its prediction for 2017's Asian dollar bond supply to $215 billion, up from its last estimate of $178 billion. The bank cited a pickup in high-yield bonds and financial instititutions’ senior notes.
After the 2008 global financial crisis, the center of dollar bond demand continues to move from the West to the East, allowing Asian issuers to complete their fundraising exercises within the region. According to bankers’ estimate, 90% of the deals in the region take the Reg S route only, without meeting 144A investors in the US.
Returning from a recent global marketing trip, Gallimore of ANZ said London investors now are more receptive to Asian and China G3 credits, while US investors remain keen on AA or A names in the oil and utilities sector. “Over the years, there has been a notable increase in the investor base and appetite for Asia credits, including some of the more cyclical names,” he said.
“There is a large demand growth in Asia, particularly from China,” said Gallimore. “There were only a few investors in Shanghai three or four years ago, but now we have back-to-back meetings with investors having very large offshore books to invest,”
“Besides Moody’s action on China’s sovereign, there is still very strong demand and supply from China,” he added.
Diversification push
Asian G3 bond issuers have benefited from the ongoing search for yield, as credit spreads have shrunk significantly over the past year. The Asia ex-Japan iTraxx IG Index dropped to 92bp last week, down from about 150bp from its level a year earlier.
The macroeconomic backdrop looks favorable too. Indonesia’s sovereign credit ratings were upgraded by S&P earlier this month, lifting the country’s status to investment grade from high-yield for the first time since the 1997 Asian financial crisis.
Amit Ganju, head of the business and relationship management group in the Indian Subcontinent and ASEAN at Fitch Ratings, said a group of Indonesian rookies are now looking to tap the dollar market as they seek to diversify their funding sources. “A number of first-time single B rated issuers from Indonesia are looking to monetise the favorable market conditions,” said Ganju.
Maiden issuers like Saka Energi and Pan Brothers, a garment manufacturer, ventured into the international bond market for the first time earlier this year, both receiving a warm welcome from investors. Saka Energi, an oil and gas producer, raised $625 million from a seven-year bond, an usually long maturity that suggests investors are willing to take a long-term view in the credit.
“I would expect investors are more receptive to IT and pharmaceuticals, while industrial and oil companies should also find plenty of interest,” said Ganju, adding that much would much depend on the overall cost for issuers after swapping dollars into their local currencies.
Gallimore said regional investors now have a more flexible mandate to invest, allowing them to take on riskier names to earn a higher yield.
“In part due to the low yield environment — even insurance companies have to go down the credit curve in search for yield,” he said. “It is not just a China story. We have seen growth of assets under management in Hong Kong, Singapore, Korea and elsewhere. Mandates have been broadened from investment-grade only into sectors that were once viewed as risky."
