Dollar Bond Sales Stall in Asia as Costs Soar on Debt Crisis
Asian companies and sovereigns sold no dollar-denominated bonds last week for the first time since January after yields surged on the deepening debt crisis in Europe and slowing industrial output in China.
China Petrochemical Corp., the refiner known as Sinopec Group, sold the last securities in the U.S. currency on May 10, before the slowest week since the Lunar New Year holidays in January, according to data compiled by Bloomberg. While yields on U.S. Treasuries dropped to near record lows, average yields on Asian corporate debt have surged 24 basis points to 5.31 percent, the biggest weekly gain since the period ending Oct. 7, Bank of America Merrill Lynch indexes show. Funding costs increased an average 10 basis points to 3.42 percent globally in the same period, the indexes show.
Asian companies with the equivalent of $326 billion of debt maturing this year must refinance as the crisis in Europe deepens, with Greece facing new elections and Spain trying to boost confidence in its banks after taking over Bankia SA. German and French leaders will meet this week to map out a revised plan for the euro after Group of Eight meetings exposed disagreements on a rescue strategy.
“The market is increasingly nervous so more and more people are trying to get out and that’s starting to push down pricing,” said Endre Pedersen, a managing director in the fixed income team at Manulife Asset Management in Hong Kong. “Everyone is watching what’s playing out in Greece and Spain.”
Global Sales Slow
From the U.S. to Europe as well as Asia, company bond sales are declining as concern mounts borrowers will find it more difficult to meet their obligations amid shrinking global growth. China’s industrial production grew the least since 2009 last month while April retail sales in the world’s second- biggest economy missed analyst estimates.
Global corporate issuance dropped 9.46 percent to $68.9 billion last week, according to data compiled by Bloomberg. China ZhengTong Auto Services Holdings Ltd. (1728) and Baoxin Auto Group Ltd. (1293), Chinese luxury auto dealers, canceled dollar deals that were slated to help repay existing loans citing “current market conditions.”
The yield premium investors demand to hold Asian corporate debt denominated in dollars rather than similar-maturity government securities widened 29 basis points last week to 443 basis points, or 4.43 percentage points, according to Bank of America Merrill Lynch indexes. Spreads on high-yield bonds globally rose 54 basis points to 713 basis points in the same period, the indexes show.
Dollar Costs Rise
The cost to borrow in dollars surged last week by the most in two years. One-year cross-currency basis swaps, the rate banks pay to convert euro interest payments into dollars, widened 15.4 basis points to 70.6 basis points below the euro interbank offered rate today from 55.2 on May 11. Costs to exchange payments in South Korean won and South African rand for dollars reached the most expensive levels last week in at least three months. Negative spreads show a premium for dollar funding.
“Funding markets are paramount. The interbank markets where the financial sector accesses wholesale funding and the cross-currency swap markets where banks, corporates and governments access hard-currency funding,” Viktor Hjort, head of Asia fixed income research at Morgan Stanley, wrote in a May 17 note to clients. “Those taps provide important lifeblood to markets and when they’re turned off bearish sentiment turns into real default risk.” Funding is so far holding up better than expected, he said.
Spanish Bank Downgrades
Spain’s borrowing costs surged last week on concern banking losses will widen amid an increase in bad bank loans, the recession and restricted funding access. Moody’s Investors Service downgraded 16 of the nation’s lenders last week including Banco Santander SA and Banco Bilbao Vizcaya Argentaria SA. The ratings company said it may cut seven of them again because of the state of the economy and the government’s deteriorating credit.
Spain’s 10-year bond yield rose 26 basis points last week to 6.27 percent, after surging above 6.50 percent for the first time since Nov. 29.
Asian companies still have about $46 billion of dollar- denominated bonds outstanding that must be repaid on Dec. 31 or before, according to data compiled by Bloomberg. Some debt has already been refinanced with PT Pertamina and Cnooc Ltd., state- owned oil and gas companies from Indonesia and China, leading $15.5 billion of sales in April, the most for any month in data compiled by Bloomberg going back to 1999.
Economies in emerging Asia may grow 6.9 percent this year and 7.5 percent in 2013, the International Monetary Fund said on April 27. It defines emerging Asia as China, Hong Kong, Taiwan, Korea, India, Indonesia, Malaysia, the Philippines, Singapore, Thailand and Vietnam. The region’s issuers have about $280 billion worth of local currency notes outstanding as of May 21 that are due by the end of the year, the data show.
ZhengTong Auto may try to extend the equivalent of $315 million of loans beyond this year to fill the funding gap left by its postponed bond sale, Sarah Zhang, a Beijing-based investor relations manager at the company said in a telephone interview last week. Banks have extended the equivalent of $67.1 billion in loan facilities this year to Asian companies outside of Japan, down from the equivalent of $126.7 billion in the same period last year, data compiled by Bloomberg show.
Companies may seek loans or local currency-denominated bonds to refinance, according to Anthony Arnaudy, Hong Kong- based regional head of capital markets, north-east Asia at Standard Chartered Plc.
“We may see a more active syndicated loan market, albeit for a price,” said Arnaudy. “Local currency markets are getting caught in some of the downdraft and are still small in size, but they will provide some alternatives.”
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