Western Sees Half-Point Yield Jump Easing Drought: China Credit
Chinese high-grade companies may have to pay half a percentage point higher than current yield premiums to revive dollar-denominated bond sales amid the longest pause since February, Western Asset Management Co. said.
The two-week hiatus comes as average yields on Chinese debt in the U.S. currency soared last week to an 11-month high of 6.03 percent, the most among the major Asian nations tracked by JPMorgan Chase & Co. indexes. Borrowers from China and Hong Kong have still sold $44.2 billion of dollar bonds since Dec. 31, accounting for a record 54 percent of regional issuance in the busiest first half for any year in figures compiled by Bloomberg dating back to 1999.
“Chinese companies will continue to take the lion’s share of bond sales this year because the need for funds continues to be quite large and liquidity onshore is tightening,” said Desmond Soon, a Singapore-based fund manager at Western Asset, which managed $459.5 billion as of March 31. Still, “there will be a significant drop-off in sales until companies acknowledge they need to offer investors a fairer price.”
China’s dollar bonds have erased this year’s gains amid signs the Federal Reserve plans to rein in the supply of cash. A measure of capital inflows into the world’s second-largest economy fell to a six-month low in May just as Premier Li Keqiang tightens control on lending to curb a property bubble.
Investors may demand credit spreads on Chinese investment-grade debt that are 40 to 50 basis points wider than current levels if risk aversion continues, according to Soon.
The premium to hold Chinese corporate notes with a BBB-score or higher from Standard & Poor’s and Fitch Ratings Ltd., or the equivalent Baa3 from Moody’s Investors Service, climbed to 212 basis points on June 14, matching the highest in nine months, Bank of America Merrill Lynch index data show. The spread on speculative-grade company bonds jumped to a near six-month high of 784 basis points, the data show.
No Chinese companies are currently marketing dollar bonds. The most recent offering was on June 4, when China Huaneng Group Corp., which isn’t rated by the major assessors, sold $400 million of notes, data tracked by Bloomberg show. The 3.375 percent coupon on the electricity generator’s debt due June 2018 compares with a rate of 13.875 percent on five-year notes sold in November by China Aoyuan Property Group Ltd. (3883), which holds a B2 score from Moody’s, five levels below investment-grade.
The extra premium investors demand to hold China Huaneng’s securities over government debt is 268 basis points compared with a sale spread of 240 basis points, Bloomberg-compiled prices show.
“Companies are refraining from selling at this point because there won’t be major investor demand in the current environment,” said Raymond Chia, the Singapore-based deputy head of credit research for Asia fixed-income at Schroder Investment Management Ltd., which oversaw more than $359 billion as of March 31.
A JPMorgan index tracking Chinese company bonds in the U.S. currency has posted a 1.65 percent loss this year as of June 14, compared with a 1.03 percent decline for a gauge tracking debt by firms in Asia outside Japan.
Even with the recent slowdown in bond sales, Chinese firms raised more than half of the $82.3 billion in issuance from the region in 2013, up from a 42 percent share last year, according to Bloomberg-compiled data.
Nomura Holdings Inc. predicts China will lead a revival in Asian corporate bond sales, which the Japanese lender expects to rise to about $140 billion by Dec. 31, according to Pradeep Mohinani, the bank’s Hong Kong-based global head of emerging market corporate credit analysis.
“With bank liquidity being generally quite tight, we’re expecting issuance to remain high within the Asian dollar space,” Mohinani said in a June 10 interview. “It’ll still be very China-dominated for sure.”
The cost to lock in short-term borrowing rates in China, as measured by the one-year swap contract, jumped to 3.97 percent on June 18, the highest since September 2011, according to data compiled by Bloomberg. That’s 22 basis points more than the five-year interest-rate swap.
Five-year credit-default swaps insuring sovereign debt against non-payment have risen 24 basis points this year and were at 90.5 basis points on June 17, according to CMA, which is owned by McGraw-Hill Cos. The swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to debt agreements.
Economic expansion in China has held below 8 percent for the past four quarters, the first time that has happened in at least 20 years. The World Bank lowered its 2013 growth forecast for the nation to 7.7 percent last week from 8.4 percent, Morgan Stanley cut to 7.6 percent from 8.2 percent and UBS trimmed to 7.5 percent from 7.7 percent.
China’s Finance Ministry failed to sell all of the debt offered at an auction for the first time in 23 months last week owing to the cash squeeze. The ministry sold 9.53 billion yuan ($1.56 billion) of 273-day bills, less than the 15 billion yuan target, according to Chinabond, the nation’s biggest bond-clearing house.
Corporations in Asia’s biggest economy will increasingly have to turn to dollar bonds as an alternative source of cash, according to HSBC Holdings Plc.
“With bank liquidity tighter, bigger companies can get loans but it will be difficult for small and medium-sized enterprises,” said Crystal Zhao, a Hong Kong-based fixed-income analyst at HSBC. “Issuing bonds offshore is still a very attractive option for companies unable to get strong support from banks.”
Lenovo Group Ltd. (992) said in a May 31 exchange filing it intends to sell notes in the U.S. currency. The company was planning to meet investors in Hong Kong, Singapore and London from June 3, a person familiar with the matter said May 31. Chief Executive Officer Yang Yuanqing said on June 7 the world’s second-biggest maker of personal computers will use proceeds from its possible dollar offering to fund the growth of its consumer business.
“There has been a new-issue discount for many of the Asian deals that printed in the first half of 2013, including those out of China,” Aaron Russell-Davison, the Singapore-based global head of bond syndicate at Standard Chartered Plc, said. “That ability to price through existing curves is currently off the table, and there will certainly be an additional price premium when sales resume.”
Junk-rated Central China Real Estate Ltd. (832) sold $400 million of notes due June 2018 on May 22 with a coupon of 6.5 percent, Bloomberg-compiled data show. Yields on its October 2015 bond offered in 2010 climbed to 8.45 percent on June 3, the highest this year, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.
Citic Pacific Ltd., a steelmaker whose shares have slumped 27 percent over the past 12 months, offered 6.375 percent securities due in April 2020 in March. The yield on its April 2021 debt jumped to 7.26 percent last week, the highest in a year, Bloomberg prices show.
As Treasury yields retreat from their highest levels this year, signs of potential dollar bond sales are emerging. Poly Real Estate Group Co. (600048), which develops and sells residential homes in China and holds the third-lowest investment-grade rating of BBB+ from S&P, planned to meet investors from yesterday for a possible dollar offering, a person familiar with the matter said on June 14.
Pacnet Ltd. also may offer U.S. currency notes due 2018 after June 21, following investor meetings in Singapore, Hong Kong, London and the U.S., a separate person said on June 10. The operator of undersea phone and Internet cables in Asia is rated B by Fitch, five levels below investment-grade.
“I expect a stabilization of U.S. Treasuries for a few days would mean the starting gun is about to get fired,” Luc Froehlich, a Hong Kong-based portfolio manager with Manulife Asset Management’s Asia fixed-income team, said in an e-mail interview on June 14.
“The primary market is likely to remain an unwelcoming and hostile neighborhood,” he added. “Only the strongest and the ones ready to pay up for protecting their books are likely to be witnessed.”
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