Photographer: Brent Lewin/Bloomberg

Pimco Warns of Asia Debt Risk After Record Dollar Bond Sales

  • Note issuance up 66% in quarter from year ago to $152 billion
  • Pimco says it doesn’t expect leverage to slow down in region

Pacific Investment Management Co. is wary of the risks of rising debt levels after sales of dollar bonds by borrowers in the Asia-Pacific region ballooned to a record.

Issuance surged 66 percent last quarter from the year earlier to $152 billion, according to data compiled by Bloomberg. Borrowers have rushed to lock in lower financing costs as the average yield premium on the securities has fallen 72 basis points this year to 206, near the lowest since 2007, according to Bank of America Merrill Lynch indexes. Zhuzhou City Construction Development Group Co., a local-government financing vehicle in China, starts investor meetings in Singapore, Hong Kong and London from Tuesday, a person familiar said.

Investors have plowed money into riskier assets despite warning signs, in a hunt for yield as central banks in the U.S., Europe and Japan keep interest rates near zero. Median net debt at listed Asia-Pacific firms has jumped to 3.1 times earnings before interest, taxes, depreciation and amortization, from 1.9 five years ago, data compiled by Bloomberg show. It’s becoming harder for companies to service obligations as the region’s economic growth cools this year to what analysts forecast will be the weakest since 2009.

“Credit is increasing in Asia but growth isn’t rising” at the same speed, said Roland Mieth, a Singapore-based emerging markets portfolio manager at Pimco. “We don’t expect leverage or increasing debt to slow down in Asia."

China’s policy makers have been keeping monetary policy relatively supportive. Yet central Deputy Governor Yi Gang said last month that the nation’s short-term goal has to be curbing leverage. CLSA Ltd. estimates total debt may reach 321 percent of gross domestic product in 2020 from 261 percent in the first half.

BNP Paribas SA in September warned that investors aren’t paying sufficient attention to default risks in the Asia dollar bond market as they hunt for yields, highlighting issuance linked to Chinese regional authorities.

“LGFVs could see exacerbated fundamentals if they continue to issue a lot of bonds very cheaply overseas and that will have an impact on the risk of default,” said Charles Chang, the head of Asia credit strategy and sector specialists at the firm in Hong Kong. “This may take a bit of time to play out but that risk is building as we speak.”

High Leverage

Chang also highlighted Chinese developers with high leverage levels as a long term risk to the health of the market. Haitong International Securities Group Ltd. said that many real estate companies will need to issue bonds to redeem notes that mature in 2017.

Aberdeen Asset Management Asia Ltd. is avoiding Chinese dollar bonds as it says a lot of the demand comes from mainland investors who are willing to accept low yields because the issuers are household names to them.

“China is a big underweight for us,” said Donald Amstad, a director at the firm. “Chinese U.S. dollar corporate bonds are generally very low yielding assets.”

BEA Union Investment Management Ltd. said valuations on some of the sales have been stretched. It flagged risks such as the U.S. elections and the weakness of European banks, which could trigger a sell-off.

“It’s true that some of the deals don’t really compensate investors for taking the risk,” said Pheona Tsang, the Hong Kong-based head of fixed income at BEA Union Investment.

— With assistance by Lianting Tu

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