There's a Bottleneck in Asia's High Grade Bond Market

  • Chinese state company debt sales to swell issuance pipeline
  • Investment-grade spreads to widen on supply increase: Guotai

Asia’s top-rated bond issuers are facing an uptick in borrowing costs as some of the region’s biggest companies race to the market to refinance debt.

Investment-grade borrowers issued 80 percent of the record $78 billion in dollar bonds sold in Asia excluding Japan last quarter as companies sought to lock in funding before the Federal Reserve boosted benchmark rates. With the Fed poised to tighten further and France’s presidential election looming, that issuance rush is expected to continue -- but at a price.

“Many issuers are looking to squeeze in deals” ahead of potential market catalysts -- from the French vote to U.S. earnings season -- that could sideline both companies and investors, said Mark Reade, a fixed income analyst at Mizuho Securities Asia Ltd. in Hong Kong. “Against that backdrop, the path of least resistance for Asian dollar credit spreads, at least in the short-term, is wider.”

Four Chinese state-owned investment-grade companies -- including State Grid Corp., operator of most of the country’s electricity distribution network -- are roadshowing deals this week, and a slew of China’s banks are eyeing the dollar bond market. Issuance by Asia ex-Japan investment-grade companies is likely to come in at $50 billion this quarter, according Standard Chartered Bank, up from $46 billion in the same period last year.

The average deal size for Chinese investment-grade issuers has increased by about 32 percent from the first three months of the year, to $1.48 billion in April, data compiled by Bloomberg show.

Widening Spreads

Most of the dollar-bond issuance this quarter is expected to be used to refinance debt, said Li Chao, head of the Asia bond syndicate at Standard Chartered, with $20 billion of dollar debt due for redemption in the second quarter, the most in data compiled by Bloomberg back to 2005.

“We do expect a pick-up in the new-issue premium going forward, as more supply hits the market,” said Guo Rui, a fixed-income portfolio manager in Hong Kong at Guotai Junan Asset Management. “New issues were priced generally tight in the first quarter, as issuers were looking to borrow cheap before the March rate hike, while banks and insurers were flush with liquidity.”

Borrowing costs are gaining on those for high-yield issuers, with investment-grade dollar debt yields trading near the smallest discount to those for junk notes in four years. Still, at 184 basis points, high-grade spreads remain below their five-year average of more than 200 basis points.

In a survey of bankers and analysts, 10 of 22 respondents said they expected the Asia ex-Japan investment-grade bond spread to widen five basis points in April, while nine of 21 predicted the high-yield spread to narrow five to 10 basis points.

Junk bond issuance is expected to drop off amid speculation Chinese regulators are trying to limit debt raising by lower-rated firms. Shenzhen Development and Reform Commission, the southern Chinese city’s branch of the top economic planning body, restricted offshore bond issuance to investment-grade companies last month.

‘More Demanding’

Meanwhile, the pipeline for investment grade is backing up. China Merchants Bank Co. and a bunch of regional lenders plan to sell bank capital bonds offshore after China Zheshang Bank Co. paved the way, pricing $2.18 billion of preference shares on March 22. Power company China Huaneng Group is also mulling dollar issuance.

But they’re going to have to pay for it. China Petroleum & Chemical Corp., the world’s biggest oil refiner, saw spreads on its $3.4 billion, four-part bond issue widen by as much as 12 basis points Wednesday after pricing on April 6. Similarly, the spread on China Huarong Asset Management Co.’s notes sold in January widened by four basis points after the news a week ago that it was planning more issuance, data compiled by Bloomberg show.

“I expect investors to become more demanding and selective on investment-grade notes,” said Li at Standard Chartered. “A new-issue premium will be required going forward, especially for those decent-sized transactions.”

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