Record Bond Sales Showing Lessons of 1997 Learned: Asean Credit

Southeast Asian companies are on track for an eighth straight year of record bond sales as local investors provide protection from a repeat of 1997, when the region’s currencies collapsed and global banks fled.

Bond sales will rise as much as 20 percent from last year’s $101 billion of local and dollar-denominated notes, according to CIMB Group Holdings Bhd., the top underwriter of domestic debt in the 10-member Association of Southeast Asian Nations, or Asean. DBS Group Holdings Ltd. and Maybank Kim Eng Holdings Ltd. see a repeat of last year’s 48 percent gain. PTT Global Chemical Pcl of Thailand’s and PT Bank Rakyat Indonesia, the nation’s third-biggest lender, are lining up to sell debt.

“Asia can finance Asia now,” Clifford Lee, head of fixed income at DBS, the second-largest underwriter, said in a Feb. 21 interview from Singapore. “This trend has been picking up for a couple of years, but it became more obvious since last year.”

The combination of higher yields, faster economic growth, and an expanding pool of wealthy investors is proving irresistible to the world’s biggest fund managers. New bond issues increased five-fold since 2000 as Asean governments transformed markets since the crisis 15 years ago, when tumbling currencies froze credit, forcing Thailand, Indonesia and South Korea to borrow more than $110 billion from the International Monetary Fund.

Relative Value

Corporate dollar bonds yield at least one percentage point more than Treasuries and local-currency sovereign debt yields are on average three points higher, according to data compiled by Bloomberg. Indonesia’s 10-year rupiah government bonds have fallen to 3.49 percentage points more than similar-maturity U.S. Treasuries from last year’s high of 5.05 points on June 1, data compiled by Bloomberg show.

The International Monetary Fund says the region’s five biggest economies will expand nine times faster than Germany in 2013, growing 5.5 percent, compared with 0.6 percent for Europe’s biggest economy and 2 percent for the U.S.

There were 3.37 million millionaires in the Asia-Pacific region in 2011, more than in North America for the first time, according to a June report by Capgemini SA and RBC Wealth Management.

Nomura Holdings Inc. and JPMorgan Chase & Co. have set up new debt capital markets units to focus on Southeast Asia in the past five months. The Philippine peso and Thai baht are among the top five holdings in the Asia-Pacific Sovereign Open plan at Kokusai Asset Management Co., the manager of Japan’s largest mutual fund. The Sovereign Open fund returned 8.7 percent this year, beating 96 percent of its peers, data compiled by Bloomberg show.

Fund Flows

“Bonds in Southeast Asia, where economic growth and currency outlooks are both solid, have been chosen by investors, luring a good amount of inflows into the region,” Takahide Irimura, head of emerging-market research in Tokyo at Kokusai, which manages the equivalent of $37 billion, said in a Feb. 26 interview.

Southeast Asia needs $1 trillion of investment in infrastructure such as railways and ports this decade and will increasingly seek financing in the region, according to the Asian Development Bank. Singapore’s Keppel Corp., the world’s largest oil rig maker, is considering a Chinese yuan bond.

Expanding economies are reducing bond risk in the region. The cost of insuring Philippine sovereign debt using five-year credit-default swaps fell 59 basis points in the past year to 99, while Thailand’s dropped 64 basis points to 88, according to data provider CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the privately negotiated market. For Malaysia, the rate declined 42 basis points to 76 and Indonesia’s slid 32 basis points to 138.

Sales Guide

Sales may increase in part because Asean, together with China, Japan and Korea, want to allow corporate bond issuers to use standardized regionwide documents to cut transaction costs next year, Seung Jae Lee, an adviser to the ADB, said in a Feb. 21 interview.

In 2012, the regional group published a 1,500-page guide to markets including Indonesia, Malaysia, the Philippines, Thailand, Singapore, Laos and Vietnam. The Credit Guarantee & Investment Facility, set up by Asean along with the three North Asian economies last May, will assure repayment on its first corporate offering in the coming months, Chief Executive Office Kiyoshi Nishimura, said in a Feb. 21 interview from Manila.

Local Currency

The total value of outstanding government and corporate bonds in the region rose to $1.1 trillion last year from $218 billion in 2000, according to the ADB. Local investors hold 88 percent of domestic government notes in the Philippines, 85 percent in Thailand and 73 percent in Malaysia, its data show. The proportion held by investors from other Asian countries rose to 9.4 percent in 2011 from 4.2 percent in 2001, the figures show.

“One thing that Asia learned from the 1997-1998 financial crisis is that reliance on foreign-currency funding is toxic,” Lee Kok Kwan, deputy chief executive officer at CIMB, said in a Feb. 25 interview from Kuala Lumpur. “There is actually very little need for reliance on foreign-currency funding when the savings rate in this part of the world is so high.”

Gross national savings were 49 percent of gross domestic product in Singapore and 39 percent in Malaysia in 2011, according to a World Bank report. That compares with 11 percent in the U.S. and 23 percent in Germany. Most Asean nations run current-account surpluses, lifting regional foreign-exchange reserves to more than $770 billion, official data show.

Borrowing Costs

Southeast Asian corporate bond sales have amounted to $12.1 billion so far this year, compared with $16.4 billion a year earlier. Growth won’t match 2012’s pace as rising borrowing costs deter companies, according to CIMB.

“We expect some growth but the market is coming out of a very strong year, so growth won’t be anywhere close to last year’s number,” said CIMB’s Lee.

The rate on Indonesia’s 10-year bonds may reach 5.70 percent by year-end as inflation gathers pace, according to the median estimate in a Bloomberg survey. It climbed nine basis points this week to 5.37 percent. The yield on Malaysia’s similar-maturity debt will gain 23 basis points to 3.7 percent, according to a separate survey.

Those yields are also attracting global investors, prompting analysts to forecast currency gains. Malaysia’s ringgit and the Philippine peso will each advance 3.1 percent by the end of the year, and the Singapore dollar 2.2 percent, according to Bloomberg surveys. That puts them among the top 10 in emerging markets worldwide.

“As Asia is poised to lead global growth, we expect more regional investors to emerge and demand from them will increase over time,” Tengku Zafrul Tengku Abdul Aziz, chief executive at Maybank Kim Eng Holdings Ltd., said in a Feb. 27 e-mail from Kuala Lumpur. “Only a serious global risk-off event can cause a serious outflow of funds from this region and we don’t expect that to happen.”

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