A Big Appetite for Asian Paper

Hot bond markets suggest the bad old days are over

The Asian financial crisis hit South Korea's Kia Motors Co. so badly that in 1998 it couldn't afford to buy parts. Finally, it was auctioned off to rival Hyundai Motor Co. Even last July, Kia was seen as such a poor credit risk that to sell $200 million in bonds it had to pay 470 basis points above the interest rate on comparable U.S. Treasury issues.

All that has changed. Kia earned $420 million last year and eager investors have bid up its bonds, narrowing the premium over treasuries to 200 basis points. This is lower than the current spreads on both Ford Motor Co. (F ) and DaimlerChrysler (DCX ) bonds. And Kia isn't alone: The Development Bank of Singapore, for example, is trading at a 125-point spread, vs. J.P. Morgan Chase & Co.'s (JPM ) 150-point premium.

Asia's surging bond markets are proof of just how far the region has come since the bad old days of 1997-98, when one default after another hammered investors. In the past 18 months, Asia has seen a rising tide of corporate bond issues from South Korea, Malaysia, the Philippines, and even still-struggling Indonesia. Many companies are taking advantage of record-low interest rates and steadily improving credit ratings to strengthen their balance sheets, swapping bank loans for bonds with longer maturities. "Asia has been through hell and back and flushed out a lot of the bad companies," says Damien Wood, head of credit research for ING Barings in Hong Kong. "The ability of the survivors to tap finance is very good."

If the first quarter is any indication, Asia could be in for a flood of offerings the rest of the year. Many companies waiting on the sidelines now think that Asia has hit the sweet spot of low interest rates and rising economic growth, and will step up with bond issues this year, says Stephen H. Roberts, head of Asia Pacific Fixed Income at Salomon Smith Barney. U.S. dollar-denominated bond issues in Asia totaled $5.3 billion in the first four months of the year, compared with $4.1 billion during the same period in 2001, according to Thomson Financial. Dollar issues this year could approach the peak reached in 1997, when $19 billion was raised. In March, Philippine Long Distance Telephone Co. raised $350 million in an issue that was many times oversubscribed. Malaysian state-owned oil company Petroliam Nasional expects no trouble finding buyers for its planned $1.5 billion offering late this month. Even in Indonesia, whose government hasn't issued bonds since 1996 and is saddled with a very low rating from Standard & Poor's, a handful of companies have sold bonds, albeit at steep premiums. Mobile-phone operator PT Telkomsel collected $150 million in March, even though it had to pay 532 points above U.S. Treasuries.

Meanwhile, international fund managers and credit-rating agencies are increasingly optimistic about the region. In the past 12 months, Standard & Poor's and Moody's Investors Service have revised or upgraded the sovereign ratings of the Philippines, Malaysia, and South Korea, citing stronger economic fundamentals and more corporate transparency. The Philippines has raised $1.75 billion this year and Malaysia issued $750 million in bonds in March. The Malaysian bonds were sold at 175 points above treasuries, but that has narrowed to 160. Even Vietnam, which has never gone to international bond markets, plans to raise between $300 million and $500 million later this year. "Country risk premiums have certainly improved dramatically in Asia, and growth prospects here are much better than in North America," says Keith Ferguson, Fidelity Investments' chief investment officer for the Asia-Pacific region, which has just set up an Asia-based fixed-income team.

Unlike the pre-crisis days, when Asia racked up huge short-term debts to overseas banks, it's the region itself that is buying as much of 70% of the new bond issues. The leading purchasers: major commercial banks, which are flush with cash and short of good lending opportunities because few corporate customers are borrowing. There's also more of an appetite for fixed-income investments from private-banking customers, who, despite the recent runup in local stock markets, remain doubtful of the long-term returns on Asian equities.

The picture in Asia is not uniformly bright. Both Japan and Taiwan have suffered credit-ratings downgrades in the past six months because of continuing concerns about the health of their banks. "The credit quality in Asia is still mixed," warns Paul Coughlin, managing director of corporate and government ratings at Standard & Poor's in Hong Kong. That may be, but it's clear that for most Asian bond issuers, their days as the pariahs of international finance are over.

By Frederik Balfour in Hong Kong

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