Asian DCM heads for record year

Emerging Markets ADB editions, May 3 2013

Asian debt capital market issuance is on track for a record year as borrowers take advantage of plentiful liquidity and cheap funding.

According to data compiled for Emerging Markets by Dealogic, dollar bond issuance from Asia ex-Japan borrowers in 2013 up to May 3 reached $74.33 billion, compared to $52 billion for the same period last year, putting the region on track to beat last year’s $130 billion, itself a record. The momentum comes despite widespread expectation of the so-called great rotation away from debt markets into equities. But it also fuels fears of a bubble developing in emerging market debt.

The trend was illustrated by a $4 billion bond issue from CNOOC, the Chinese state-owned oil company, which priced on Thursday night – the largest international bond issue from Asia in a decade. Despite its size, people close to the deal said it achieved an initial order book of $24 billion. The deal followed bonds worth US$3 billion apiece from each of Sinopec and CNPC.

In particular, Asia’s high yield market, which has been largely moribund since the global financial crisis, has staged a revival, once again dominated by Chinese deals for issuers including Shimao Property, Agile Property, Shui On Land and CITIC Pacific. According to Dealogic, year to date high yield issuance actually stands at $19.4 billion, compared to $6.74 billion for the whole of 2012.

“Even if the market slows down a bit, we could end up in excess of $40 billion of high yield issuance,” said Herman van den Wall Bake, head of fixed income capital markets for Asia at Deutsche Bank. “That would be by far the busiest year on record.”

Van den Wall Bake attributes the boom in high yield issuance to “a drop in spreads, particularly in China. Last year there were concerns about a hard landing in China, and the real estate space in particular. Since then we’ve seen that China’s economy is still growing at a healthy rate, real estate developers are performing well and have seen borrowing costs drop 2-300 basis points in a year, and you no longer have the uncertainty of a transition of power in China.”

Rogerio Bernardo, director on the bond syndicate desk at RBS in Singapore, added: “On the demand side, the technicals are very good for asset managers and hedge funds. We’ve seen a lot of inflows into fixed income portfolios in Asia.” He highlighted US and European fund managers establishing offices in Asia, and the growth in private banking wealth there.  “There is a lot of cash that needs to be put to work.”

In other emerging markets, issuers have benefited from renewed appetite for unfamiliar credit. This is nowhere more evident than Africa, where debut international issues from Rwanda and Zambia, and a debut dollar issue from Morocco, are shortly to be followed by a new international deal from Ghana; all have been exceptionally well received.

This ardour, though, is worrying some investors who fear a bubble in emerging market debt. Charles Robertson at Renaissance Capital argues that fears of a bubble in dollar bonds have already pushed investors into local debt, creating another bubble there. “I’m told Ukraine has seen the issuance of 10 corporate dollar bonds so far this year, Rwanda’s 10 year debut bond came in below 7% yield despite its single B rating, and Nigeria’s 2021 dollar bond yields 4%,” he said. “What we are now getting very close to is a local currency bond bubble too.”

That said, issuance may tail off in the second half of the year. Van den Wall Bake expects relatively limited sovereign issuance, fairly flat FIG issuance with some subordinated issues taking place, and notes that for corporates, “ a lot of the funding has already been done and you won’t necessarily see elephant trades like the ones seen in the earlier part of the year. I’m not sure we’ll see another $65 billion between now and the year end.”

Bankers vary on their views about a market bubble. “What constitutes a bubble?” said one. “Unreasonable valuations and excessive speculative capital? I wouldn’t say I see evidence of that.”

But others disagreed. “I think there is a risk, certainly,” said Bernardo, highlighting the risk of a change in the outlook for rates. “If US Treasury yields start to rise it will put a lot of pressure on fixed income funds and hurt a lot of portfolios. The bubble is certainly there and we could see a rapid shift away from fixed income assets if base rates are rising.”