Asia-Pacific borrowers sold the lowest amount of bonds for 18 months in May as investors shunned risk and shed assets amid Europe’s sovereign debt crisis.
Issuers in the region outside Japan sold the equivalent of $31.6 billion in bonds, the least since November 2008 and down 23 percent from April’s sales, according to data compiled by Bloomberg. The extra yield investors demand to own corporate bonds in the region rather than government debt last month rose to the most since at least September, according to JPMorgan Chase & Co.’s Asia Credit Index. Asian loan transactions fell to the lowest since February 2009.
“Investors have and are reducing risk very quickly by selling the most recent issues, since they’re the most liquid assets,” Viktor Hjort, Morgan Stanley’s Hong Kong-based credit strategist, said in a telephone interview. “While they’re reducing risk they’re unlikely to have much appetite for new deals.”
The fiscal crisis in Europe, which prompted rating downgrades for Greece, Spain and Portugal, is driving investors from credit markets on concern worsening government finances in the region may undermine the global economic recovery. Investors are unloading riskier assets because they’re concerned European governments won’t be able to coordinate a response to surging levels of debt from Greece to the U.K.
If companies had issued bonds two or three weeks ago they would have had to pay “something excruciatingly expensive,” Brayan Lai, a Hong Kong-based credit analyst at Credit Agricole CIB said via telephone yesterday. “This is why the primary market dried up.”
Corporate debt in Asia lost 1.54 percent in May, snapping 18 months of positive returns, according to JPMorgan’s Asia Credit Index. The spread on the bonds widened 78 basis points to 361 basis points in May, according to the index. A basis point is 0.01 percentage point.
“Companies are likely to have to price in a liquidity premium if they want to sell new debt now,” Lai said. “This would be on top of what they would normally pay the market for specific company fundamentals.”
Syndicated loan transactions in Asia-Pacific outside Japan were the lowest since February 2009, at 35 deals, Bloomberg data show. Loan volumes last month totaled $10.9 billion, in line with February this year and the lowest since January 2009 when they totaled $7.3 billion, the data show.
“Whilst demand for good quality loans is still high, there’s nervousness creeping in over the potential fallout from Greece and higher bank funding costs,” Phil Lipton, HSBC Holdings Plc’s head of syndicated finance for Asia-Pacific debt capital markets, said in a phone interview.
Wary of Lending
The three-month London interbank offered rate for dollars rose to 0.53844 percent on May 27, its highest since July 6. Citigroup Inc. said on May 21 the rate may reach 1.5 percent by September as mooted regulatory overhauls in the U.S. increase banks’ uncertainty about how they fund themselves.
Investors pulled more than $1 billion from high-yield funds during the third week of May, after redeeming $2.1 billion the previous period, according to EPFR Global, a Cambridge, Massachusetts, research firm that tracks funds.
Flows into Asia-dedicated credit funds are now lower than they have been, and in some cases are negative, Morgan Stanley’s Hjort said.
“Investors typically don’t put money in funds when volatility is high,” he said. “Typically situations that involve systemic issues such as funding markets and sovereign risk do not necessarily heal overnight.”
The Chicago Board of Options Exchange Volatility Index, also known as the Wall Street fear index, surged 45 percent in May, to 32.07 on May 28. It dropped back after reaching 45.79 earlier in the month, the highest in more than a year.