Southeast Asia’s first plan to back corporate bonds will lure pension funds seeking higher yields from investment-grade debt, according to Prudential Plc and PineBridge Investments LLC.
The AA+ rated Credit Guarantee & Investment Facility, formed by the Association of Southeast Asian Nations along with Japan, China and South Korea, began operations this month and will help sell two or three notes by Sept. 30, Chief Executive Officer Kiyoshi Nishimura said. That may include junk-rated debt to help attract new issuers, he said. PineBridge Investments’ Taiwan unit said it will consider buying such securities.
Investors are shifting funds from markets offering near-zero interest rates in Europe and the U.S. into higher-yielding bonds, adding $21 billion to emerging-market debt holdings in 2012, according to U.S.-based EPFR Global. East Asia’s local-currency corporate bond market grew 17 percent in the quarter ended December to a record $1.9 trillion, according to the Asian Development Bank, which helped set up the guarantee program.
“Any form of agency-guaranteed debt is a good thing as we are generally more cautious on corporate risks,” said Boon Peng Ooi, the Singapore-based chief investment officer of fixed income who oversees $16 billion at Prudential’s Eastspring Investments Singapore Ltd. “The more people you attract, the more buzz and talking you create and you can build the market.”
Hunt for Yields
The yield appeal of regional debt will add to the allure of the notes, according to Nishimura. The average return on South Korean, Malaysian and Philippine bonds was 1.73 percent this year, according to Bloomberg calculations based on debt indexes tracked by HSBC Holdings Plc. That compares with 1.3 percent for U.S. Treasuries and Japanese government debt, according to an index compiled by Bank of America Merrill Lynch.
With Asia’s elderly population poised to double within four decades, more money is being plowed into preserving wealth, boosting demand for the region’s bonds and driving borrowing costs lower. The number of Asians 60 or older will exceed 1.25 billion, or 24 percent of the population in 2050 from 10 percent in 2011, according to data compiled by the United Nations.
The average yield on Asian debt markets monitored by HSBC fell to 3.92 percent yesterday from 5.9 percent at the end of 2001. Local-currency bond issuance from East Asian companies jumped 44 percent to $211 billion in the fourth quarter from a year earlier, according to the ADB. The bank classifies emerging-market East Asia as China, Hong Kong, Indonesia, South Korea, Malaysia, the Philippines, Singapore, Thailand and Vietnam.
“These bonds will give you opportunities to invest in local-currency bonds that will offer yields that are higher than those in the developed markets while the credit risk is low,” Nishimura said in an interview while visiting Bangkok on May 22. “We are bringing in a very unique product for global investors. We would expect quite strong demand.”
Unlike Japan Bank for International Cooperation, which provides a partial guarantee on some yen-denominated debt sold by foreign governments and companies, the Asean program will pay both principal and coupon if an issuer defaults. Issuers applying to be covered must be based in Asean or Japan, South Korea and China.
While they may be rated junk by international rating companies, they must possess at least an investment-grade rating from a local firm. Local companies such as Malaysia’s RAM Ltd. may assign a higher rating to a domestic firm because they assume a lower probability of sovereign default.
Standard & Poor’s assigned the program, known as CGIF, a long-term foreign-currency rating of AA+ last week, its second-best. That means notes guaranteed by the organization will enjoy its rating. Moody’s Investors Service rates the Philippines Ba2, two levels below investment grade, while Thailand is rated Baa1, the third-lowest investment grade. Vietnam is rated junk at B1. Moody’s raised the Philippines’ sovereign rating outlook to positive yesterday.
“Asean companies aren’t that well known and it’s difficult for them to attract international bond buyers,” said Albert Ma, a fund manager at PineBridge Investments Management Taiwan Ltd. that oversees NT$5.3 billion ($178 million). “With ADB’s backing, these companies will enjoy better credit ratings, and I don’t think investors will have to sacrifice too much yield for less credit risk.”
PineBridge is interested in bonds of companies in the consumer industry, he said.
“Institutional investors like mutual funds and insurance companies are looking for high-quality investment opportunities in the corporate bond sector,” Nishimura said. “Our main aim is to bring in more new issuers to the market.”
The average five-year yield for AAA-rated Malaysian ringgit corporate bonds has dropped 12 basis points, or 0.12 percentage point, this year to 3.87 percent on May 21, according to Bank Negara Malaysia’s index. The rate on the 7 percent peso note of Petron Corp., the Philippines’ largest oil company, has dropped 31 basis points in 2012 to 7.09 percent today.
Currencies of the five biggest Southeast Asian nations dropped this quarter on concern Europe’s debt crisis will worsen. Indonesia’s rupiah dropped by the most at 4.6 percent, followed by the Malaysian ringgit’s 3.3 percent decline, according to data compiled by Bloomberg.
“Investors’ risk appetite has been deteriorating and it’s harder for them to buy emerging-market bonds, especially the local-currency debt as the currencies have been depreciating,” said Tohru Nishihama, an economist at Dai-ichi Life Research Institute Inc. in Tokyo.
The five major Southeast Asian nations will grow 5.4 percent this year, compared with 3.7 percent for Latin America and 1.9 percent in central and Eastern Europe, the International Monetary Fund said last month.
Thailand’s recovery from the worst floods in almost 70 years in 2011 is contributing to the region’s growth, according to Bert Hofman, the World Bank’s chief economist for the East Asia and Pacific region. Domestic demand is holding up “quite nicely,” Hofman said on May 23.
“Being involved in Asian corporate bonds in emerging markets is a slight mitigation to the risk in Europe because the exposure to Europe is not extreme,” Hong Kong-based Michael Wilson, head of Asia Pacific client portfolio management in global fixed income at JPMorgan Asset Management, said in an interview in Singapore today. “Longer term, there is a market view that emerging-market currencies are still undervalued and Asian currencies are still undervalued.”
High Quality Backstop
The cost of insuring Asian corporate and sovereign bonds from default has fallen from a more-than-two-year high in October 2011. The Markit iTraxx Asia index of 40 investment-grade borrowers outside Japan dropped 85 basis points to 192.5 as of yesterday in New York, according to data provider CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market.
“When you have a guarantee by a high-quality institution, your liquidity should be enhanced,” Daniel Janis, a global fixed-income portfolio manager who oversees about $11 billion at Manulife Asset Management in Boston, said in an interview on May 9. “That should make your ability to buy and sell easier because you have the backstop of a high-quality issuer.”