Japan Bond Risk Nears Year-High as China Hongqiao Markets Debt

Japanese corporate bond risk rose to the highest in almost a year ahead of a survey expected to show deteriorating confidence among manufacturers. China Hongqiao Group Ltd. (1378), Malaysia’s Sarawak state and Industrial Bank of Korea (024110) are marketing dollar-denominated bonds.

An index of credit-default swaps on 50 Japanese companies is on track for its highest close since Oct. 5, while bond risk around the Asia-Pacific region surged, according to Markit Group Ltd. and data provider CMA. The worsening in sentiment comes as aluminum manufacturer China Hongqiao considers a sale of dollar debt yielding in the high 11 percent area, a person familiar with the matter said. Sarawak is offering 10-year notes and South Korea’s IBK is marketing a three-year note, both at about 300 basis points more than similar-maturity Treasuries, people said.

Japan’s biggest manufacturers probably grew less confident about the economy this quarter as China’s slowdown and Europe’s debt crisis sapped exports, according to economists surveyed before the release of the Tankan report on Oct. 1. While U.S. dollar bond sales in the Asia-Pacific region slowed to $3.5 billion since Sept. 24 from $5.1 billion in the same period of last week, offerings this month are the most for any September in at least a decade, data compiled by Bloomberg show.

“Bond risk in Japan has risen due to concerns around the technology, commodity and manufacturing sectors,” said Krishna Hegde, Singapore-based head of Asia credit research at Barclays Plc.“Corporates in the rest of Asia however are unlikely to be affected and the pullback we have seen in new bond sales isn’t a surprise given the large amount of issuance in previous weeks.”

Bond Risk

The Markit iTraxx Japan index rose 6 basis points to 228 as of 17:08 p.m. in Tokyo, on course for its highest close since Oct. 5, according to Markit and CMA.

Outside of Japan, the region’s debt risk headed for its highest in three weeks as Federal Reserve Bank of Philadelphia President Charles Plosser said bond purchases recently announced by the central bank probably won’t boost growth and may jeopardize its credibility.

Doosan Infracore Co. priced $500 million of revolving 30- year notes, which are callable from 2017, to yield 265 basis points more than five-year Treasuries yesterday, according to data compiled by Bloomberg. South Korea’s biggest construction equipment maker was the only Asian borrower to complete an offering yesterday after issuers sold $3 billion of debt on Sept. 24.

Order Book

Doosan received seven times more orders for the bonds than what it sold, a person familiar with the matter said, asking not to be identified because the details are private. Funds bought 59 percent of the securities while private banks took 27 percent, the person said.

If Doosan doesn’t call the bonds, the coupon will reset from 2017 to 7.65 percentage points more than Treasuries, data compiled by Bloomberg show. The coupon increases by an additional 2 percentage points from 2019, the data show.

The notes also have an investor put in the first five years, which requires a special purpose vehicle backed by Korea Development Bank, Woori Bank Co. and Hana Bank to buy the bonds from holders under certain conditions including if the company doesn’t call the securities or enters bankruptcy, according to an offering document. Coupons can be deferred and will accumulate, the document states.

The Markit iTraxx Asia Series 18 index of credit-default swaps on 40 investment-grade borrowers outside Japan rose 3.3 basis points to 144.4 as of 3:56 p.m. in Hong Kong, according to CMA prices. The index is on track for its highest close since Sept. 5, when the previous version of the gauge reached 148.7, the prices show.

Australian Swaps

The Markit iTraxx Australia Series 18 index jumped 9 basis points to 165 as of 5:56 p.m. in Sydney, according to Markit. The measure is also on track for its highest close since Sept. 5, when Series 17 of the index reached 166.7, according to CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the privately negotiated market.

New versions of the benchmarks are created every six months when companies are added or dropped depending on their ratings, the cost of protecting their debt and the ease of trading their swaps. The maturity date of the Series 18 indexes, which started trading Sept. 20, is December 2017, compared with June 2017 on the Series 17 versions.

Credit-default swap indexes are benchmarks for protecting bonds against default and traders use them to speculate on credit quality. A drop signals improving perceptions of creditworthiness, while an increase suggests the opposite.

The swap contracts pay the buyer face value in exchange for the underlying securities if a borrower fails to meet its debt agreements. A basis point is 0.01 percentage point.

To contact the reporters on this story: Rachel Evans in Hong Kong at revans43@bloomberg.net; Tanya Angerer in Singapore at tangerer@bloomberg.net

To contact the editor responsible for this story: Shelley Smith at ssmith118@bloomberg.net

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