Later this week, the Port Authority of Singapore will be going to the international bond markets to raise a reputed $1 billion through the issuance of 10-year bonds. This is noteworthy because international bond issuance out of Asia has all but disappeared in the last few months.
There has been a confluence of forces over the past few months that have made this one of the bleakest times ever for the Asian international bond markets. Since April there have only been two dollar issues ûone for Singapore Power and one for Korea Exchange Bank. This is a deal flow that doesn't pay the rent.
Chief among the factors for this slowdown is interest rates. US interest rates are rising and no one knows when they will stop. In this environment it does not make sense to issue fixed rate debt. Moreover, local interest rates are still low, and if companies have to issue debt it is cheaper to issue it in local currency.
The low cost of local currency debt is reflected in a very vibrant local currency debt markets around the region, which give issuers a strong alternative to the international markets. If issuers are desperate to raise dollars, they can go to the loan markets which are having one of the busiest years ever. Flush with liquidity, commercial banks are lending dollars to Asian borrowers at rates sometimes as much as 200 basis points inside where the bond markets are pricing their debt. Philippine Long Distance Telephone recently secured a loan from ABN Amro that was priced roughly 195bp on a swapped basis inside its outstanding international bond issue.
Finally, there are international dynamics shaping the bond markets in Asia which are also hindering the new issue market. Redemptions by governments around the world û most obviously the repayments of US Treasuries by the US government û are making triple-A debt very scarce, and consequently treasury yields have collapsed. As a result, a new pricing mechanic has emerged where international bonds are now priced more tightly over a wide swap spread, while spreads have ballooned out over traditional treasury yields. For many CFOs with pricing targets in their heads, it is hard to accept this new dynamic.
Give it time
These forces have all converged at once. And they are making it very hard for everyone in the bond markets. But it is probably too soon to write off the market. If US rates do peak any time soon, and even start to come down, there will be renewed interest in dollar issuance. Moreover, as Asian GDP figures continue to grow, inflation could start to creep back into Asian economies. As a result, domestic rates should start to go up again from their recent, artificially low levels. This might make international finance more cost effective than local finance û a situation not seen in Asia for a few years now.
There is also a genuine need for dollars. The heyday of the Asian international bond market was around 1995-96. In 1996, $33 billion was raised for Asian issuers in the international bond markets, compared with only $19 billion in 1999. As the average duration of bonds issued in 1996 was 4.6 years, there are lots of bonds coming up for repayment this year and next. If these bonds are to be effectively refinanced, the issuers will have to go to the international bond markets.
