Asia’s Sovereign Debt-Tied Note Sales Surge to Five-Month HighJun Yang
Sales of structured notes tied to Asian government debt are poised to jump to the highest in at least five months, as tumbling yields elsewhere drive investors to the region’s higher rates.
Offerings linked to Asian nations from the Philippines to South Korea rose to $204.87 million through the first three weeks in January, the largest amount for any full month since August, Bloomberg data show. HSBC Holdings Plc this month sold a record $90.3 million of notes tied to Sri Lankan government bonds, as JPMorgan Chase & Co. and Standard Chartered Plc issued a total of $41 million of securities tied to Indonesia.
Asian countries have seven of the 20 highest-yielding emerging market sovereign bonds tracked by Bloomberg. Sri Lanka’s central bank raised rates twice last year, even as counterparts in developed economies drove down yields on government and corporate debt by printing cash.
“If you are sitting now on a pool of capital, and you look out at the world, the amount of value that you could’ve obtained through traditional buying is limited,” John Goff, head of fixed-income structuring for Asia excluding Japan at Nomura International Hong Kong Ltd., said by phone. “Naturally, people then look back towards Asian sovereigns they feel a lot more comfortable with, and try to form a view about where is good value for the risk that’s being taken.”
Issuers of credit-linked notes use the securities to hedge against possible credit events and pay the buyers for accepting the risks as long as the underlying assets don’t default. Sales of such instruments jumped to $2 billion as of Jan. 21 from $467.5 million in December, with 10 percent of those sold this year connected to Asian economies, according to Bloomberg data. The nations accounted for 5 percent last year when Russian debt was the most-used underlying asset.
HSBC’s $90.3 million of five-year notes pay an 8.5 percent annual coupon in U.S. dollars, according to Bloomberg data. The actual yield on the securities, which directly replicates that on the underlying debt, is 10.7 percent as they were sold at a discount to their par value, according to William Shek, the bank’s co-head of interest-rate products for Asia Pacific.
Investors are “willing to take a little more risk and put their money back into emerging markets where you can still find yield, compared to other markets,” Shek said in a telephone interview. “There’s very little in the market that can offer you anything higher than 10 percent nowadays.”
U.S. investors were the biggest group of buyers of the notes, outnumbering their European and Asian peers, he said.
HSBC sold $9.5 million more notes linked to Sri Lanka in a separate placement on Jan. 11. Citigroup Inc. was the second largest issuer of notes linked to the country, offering a combined $24.4 million in four offerings, while JPMorgan sold $2.06 million of securities.
Fitch Ratings in July 2011 raised its rating on Sri Lanka’s long-term debt to the third-highest level for junk bonds with a stable outlook, the first upgrade following the end of a three-decade civil war in 2009.
The South Asian island’s central bank raised borrowing costs in February and April in the biggest overhaul of economic policy since the conclusion of the conflict before unexpectedly lowering rates in December and keeping them unchanged this month. The yield on the country’s five-year government bonds was at 10.9 percent on Jan. 17 after rising 180 basis points in 2012.
Among other Asian countries, Standard Chartered sold $12.38 million of notes linked to the Philippines in two offerings, while UBS AG issued $25 million of notes tied to South Korea.
“Investors are looking for yield enhancement and access to new markets,” Sarah Wang, head of credit structuring for Asia Pacific at Barclays Bank Plc, wrote in an e-mailed response to questions. “Sovereign underlyings offer an attractive risk-return profile and have better liquidity compared to corporate names.”