Dollar-denominated bond sales in Asia could reach $1 trillion within three years as companies shift their focus to the debt capital markets from bank loans.
Note offerings in the region year-to-date total $121.2 billion, 97 percent of 2013’s record, and issuance for the full year may hit $150 billion, according to Morgan Stanley. Breaking through the $1 trillion mark in 2017 is feasible as slow deposit growth shrinks syndicated lending, Viktor Hjort, the bank’s head of Asia fixed-income research said.
“Asians aren’t saving as much and are borrowing more,” Hong Kong-based Hjort said. “Why keep money in the bank when rates are so low and inflation is high? Banks just don’t have the spare liquidity for loans they used to. Out of the 100 biggest companies, their share of debt in bonds is growing.”
Although political turmoil has curbed bond sales globally over the past month at a time when offerings are historically subdued, borrowing costs less than 20 basis points off record lows mean issuance will start accelerating come September, the region’s top underwriters say. HSBC Holdings Plc, the No. 1-ranked arranger in Asia ex Japan, expects $133 billion of sales in 2014 while Bank of America Corp., ranked sixth, predicts $160 billion.
“Supply is usually around the five-year tenor but evidence shows more shorter-dated offerings lately due to market and U.S. Treasury volatility,” Dilip Shahani, HSBC’s Asia-Pacific head of research, said.
In emerging Asia, $212 billion of rated financial and nonfinancial debt will mature between now and the end of 2019, Standard & Poor’s said in an Aug. 13 report.
“Led by China, the emerging Asia region continues to increase its footprint in global credit markets,” said Diane Vazza, the head of S&P’s global fixed-income research. “While loans remain the region’s favored form of corporate financing, bond markets have seen increased activity in recent years.”
Syndicated loans in the Asia-Pacific region outside Japan total $286.2 billion since Dec. 31, more than double dollar bond sale volumes, according to data compiled by Bloomberg.
As nonperforming loans rise, banks in Asia are tightening their lending standards, the Institute of International Finance said in a July 30 market-conditions survey. In the second quarter, “credit standards tightened notably in emerging market Asia, particularly for consumer and real estate loans,” according to the report. “Banks expect nonperforming loans to accelerate in the third quarter.”
Junk v High-Grade
Margins for U.S. dollar loans globally average 330 basis points over the London interbank offered rate this quarter compared with 325.3 basis points the first six months of the year, Bloomberg-compiled data show.
Companies typically require a credit rating to access international debt capital markets and it helps if they’re larger and well known outside their home country. Smaller, unrated corporates in emerging economies often find it easier to use their relationships with local banks to secure funding.
Investment-grade bond sales will dominate the region in the second half, Morgan Stanley said, predicting they’ll account for more than 50 percent of issuance compared with 88 percent the first six months of the year, data show.
Speculative-grade notes will make up just 20 percent of full-year sales, according to Soo Chong Lim, JPMorgan Chase & Co.’s Hong Kong-based head of Asia ex-Japan credit research. Junk sales total $16.7 billion since Dec. 31, about 13 percent of total issuance.
Edwin Chan, head of credit research at UBS AG, expects the split between investment and non-investment grade in 2014 will be 70:30, and forecasts some $60 billion of sales from July until the end of the year.
New rulers in India and Indonesia who have pledged to accelerate infrastructure development and cut red tape, making it easier to do business in two of Asia’s biggest economies, should also spur corporate bond supply.
“For the rest of the year, I’m expecting more deals out of India and Indonesia, on the back of both countries’ elections,” said Hital Desai, a Hong Kong-based director in Bank of America’s Asia debt syndicate team. “Both high yield and investment grade will grow, but I’m expecting the latter to grow a bit faster.”
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