Euro Lures Asia After Record Dollar Debt Splurge: Credit MarketsRachel Evans
Asian borrowers are setting their sights on the euro after selling the most dollar-denominated bonds on record last month, as speculation the European Central Bank will ease policy cuts funding costs to an all-time low.
South Korea, Asia’s fourth-largest economy, meets investors in Europe this week to pitch its note sale, after Bharti Airtel Ltd., India’s largest mobile-phone carrier, earlier in May offered euro-denominated securities for the third time in six months. Macquarie Bank Ltd. sold a 500 million euro ($681 million) debenture in April.
“There’s a fairly large investor base sitting in Germany, France and Holland who have a dedicated need to buy euro paper, and there’s just not enough coming from Asia,” Kaushik Rudra, the Singapore-based global head of credit research at Standard Chartered Plc, said May 20. “To the extent that some issuers have issued large transactions in the dollar space fairly recently, it makes sense to look at other currencies.”
Euro-debt offerings from Asia-Pacific borrowers more than doubled in May to 2.62 billion euros after a record $56.1 billion of dollar issuance last month stretched demand for U.S.- currency bonds, data compiled by Bloomberg show.
ECB President Mario Draghi said on May 8 the central bank is “comfortable with acting” next month, after economic growth in the region failed to accelerate in the three months through March, holding at 0.2 percent for a second straight quarter.
The monetary authority will ease policy at its June 5 meeting, according to 47 of 52 economists surveyed by Bloomberg. Average yields on corporate debt in euros sank to 1.61 percent on May 15, a record low and 281 basis points less than Asian companies pay for dollar notes, Bank of America Merrill Lynch indexes show. A basis point is 0.01 percentage point.
“People do have money and they want bonds, so almost anyone coming to the euro market will get a very good reception,” Juan Esteban Valencia, a credit strategist at Societe Generale SA in Paris, said by phone today. “Some names might not be well known and would have to do a thorough roadshow explaining their story, but for the right price they will get a good reception from investors. There is a hunger for yield, there is a hunger for anything credit-related and investors have a lot of cash to put to work still.”
Investors channeled more than $21 billion into European bond funds this year as of May 7, according to data provider EPFR. The mounting demand has helped spur a 15 percent increase in euro-denominated note sales globally in 2014 from the same period of last year, Bloomberg-compiled data show.
“European investors are looking to diversify and look for higher emerging-market yields from quality Asian names,” Juergen Maier, a fund manager in Vienna at Raiffeisen Capital Management, which oversees more than the equivalent of $1 billion in emerging-market assets, said in a phone interview.
Any further monetary stimulus from the ECB may attract more issuers from Asia, according to Mark Follett, the head of high-grade debt capital markets for Asia ex-Japan at JPMorgan Chase & Co.
“Europe is actually really attractive right now,” Follett said. “We haven’t seen many issuers go there but I wouldn’t be surprised if we see issuers do two tranche deals or straight euro transactions. Quantitative easing in Europe should support that further,” he said in a May 7 interview in Hong Kong.
The ECB is weighing asset purchases -- so-called quantitative easing -- after the region’s economic growth in the first three months of the year was half the median estimate in a survey of economists by Bloomberg. Inflation has stagnated below the central bank’s goal of just under 2 percent. The rate was 0.7 percent last month after slowing to 0.5 percent in March, the weakest pace in more than four years.
Among the economists who predicted monetary easing in June, more than half forecast a simultaneous cut in the benchmark rate and deposit rate, which would make the ECB the first major central bank to charge banks for parking excess cash with it overnight.
The euro is down about 0.8 percent against the dollar this year after gaining 4.3 percent in 2013.
“With relative funding levels attractive or comparable to U.S. dollars, you have a lot more issuers who are open to going to the euro market,” said Devesh Ashra, the Hong Kong-based head of Asia-Pacific debt syndicate at Bank of America Corp., which helped arrange Bharti’s sale. “Regional issuers that have strong track record, investment-grade rating and are a recognized brand could take advantage.”
Bharti, which made the first sale in the euro by an Indian non-financial company in December, issued 750 million euros of seven-year securities on May 12. The notes were priced to yield 3.498 percent, 56 basis points less than its debut 2018 notes.
Macquarie issued its 500 million euro notes due 2016 at a 0.779 percent coupon, according to Bloomberg-compiled data.
Dollar funding costs also remain attractive for Asian companies. Yield premiums have slid 23 basis points since Dec. 31 to 280 basis points, the least in a year, Bank of America Merrill Lynch indexes show. Treasuries -- the benchmark for most of the region’s dollar offerings -- have rallied, with yields on 10-year notes declining 50 basis points.
Asian borrowers have sold $81.6 billion of dollar bonds since Dec. 31, 5 percent more than last year when issuance surged to a record, data compiled by Bloomberg show. South Korea is considering a sale of U.S.-currency bonds, alongside a euro offering, a person familiar with the matter said May 12, asking not to be identified because the details are private. Indonesia is looking at selling dollar-denominated sukuk.
“There’s still a fair amount of cash available, as well as new mandates coming to emerging markets which will support new issuance,” Standard Chartered’s Rudra said. Euro debt allows companies to diversify their funding, and “there’s still enough appetite for good companies to do transactions in dollars.”