FT BeyondBrics: Asia’s hunt for energy will drive bond issuance

FT BeyondBrics, May 21 2013

One of the world’s largest fixed income fund managers expects Asia’s growing energy shortage to lead to investment opportunities in the credit markets.

Pimco, the US-based manager with $2.04tn in assets under management worldwide, said in a report released in Hong Kong on Tuesday that more oil and gas companies in Asia would tap the bond market, often to finance acquisitions outside the region as they come to terms with energy shortages caused by declining indigenous resources and increasing domestic consumption.

Pimco is hardly new in noticing this: Cnooc’s $4bn four-tranche deal this month was the largest bond in ex-Japan Asia since 2003, and followed a $2bn raising from CNPC and $3.5bn from Sinopec within the previous month. All three state-owned Chinese energy companies did so in large part to fund acquisitions.

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But Raja Mukherji, head of Asian credit research at Pimco in Hong Kong, tells beyondbrics that deals like these are here to stay. “What you’re seeing is not a cyclical theme here but more of a secular story, because the energy demand-supply outlook for this part of the world is that it is energy-short and will continue to be so,” he says. “We expect a focus on acquiring assets overseas, and expect companies to come back to the bond markets to finance that.”

Energy self-sufficiency is declining almost universally across Asia. Japan has the sharpest energy shortage and is the world’s largest importer of liquefied natural gas, its second largest in coal and third in oil. But China and India, both of which have natural resources of their own, have moved steadily further away from self-sufficiency as domestic demand has outgrown production. Shifts towards cleaner fuels are likely to increase the gap, the report says; in China, for example, there is a stated target for natural gas to move from 4 per cent of total energy use in 2011 to 12 per cent in 2020. Thailand is already importing liquefied natural gas and Malaysia’s first receiving terminal will open soon.

These dynamics have led to widespread acquisitions by Asian energy companies, and in particular those with implicit state sovereign support. China’s three national oil companies made 11 cross-border acquisitions in 2012 worth more than $30bn between them, most notably Cnooc’s $16.1bn acquisition of Nexen in Canada. The pace has continued in 2013, with Sinopec’s planned purchase of a 50 per cent stake in the Mississippi Lime exploration project operated by Chesapeake Energy an example.

From the investor perspective, the increase in issuance is interesting because it tends to bring an implicit or explicit sovereign guarantee while offering higher yield than pure sovereign debt. “We live in a world of very low absolute yields,” says Mukherji. “In this environment investors are looking to buy good credits at good yields.” Aside from China, he expects to see greater overseas acquisition activity by state-backed companies in India, Indonesia, Malaysia and Korea, among others, with all of them potentially likely to fund their investments through the global debt markets.