Easy Cash Fuels Asia Dollar Bond Swaps With More Deals Seen

  • Market is conducive for doing note exchanges: Morgan Stanley
  • Corporate creditworthiness can improve with bond swaps: BNP IP

More Asian companies are expected to call bonds or swap notes to get better dollar funding costs after junk-rated China Evergrande Group and Kaisa Group Holdings Ltd. together exchanged about $5 billion in debt this month.

Morgan Stanley and Credit Suisse Group AG foresee more so-called liability management exercises this year as rates remain low and issuers tap investor demand for yield. Companies rushed to sell bonds to refinance debt in the first half ahead of higher expected U.S. rates, spurring a record $157.1 billion of issuance by Asian borrowers outside Japan.

"We’ve seen continued inflows into the dedicated global emerging-markets funds and investors are sitting on long-term liquidity with lots of cash,” said Derek Armstrong, head of debt capital markets, Asia Pacific, at Credit Suisse. "We are going to see continued opportunistic liability management from companies, whether it is to execute early calls or to undertake exchange offers into longer-dated deals, to lock in funding costs.”

Fund managers including BNP Paribas Investment Partners are open to buying notes in exchange offerings even if they offer lower yields because the deals can improve issuer creditworthiness. Still, a relaxation in covenants in some issues by borrowers such as Kaisa is raising concerns that investor safeguards are being watered down.

Rate hikes by the Federal Reserve and the central bank’s plans to unwind its balance sheet are potential risks to the market. Sales in the first half are double last year’s figure for the same period, with lower spreads attracting issuers from India and Indonesia too.

“A quicker-than-expected process to reduce the Treasury and mortgage-backed securities holdings could really put some pressure on the market,” said Ernst Grabowski, head of Asia Pacific high yield at Morgan Stanley’s fixed-income capital markets team based in Hong Kong. “We may see some volatility in the Asian fixed-income market as a result.”

Fed St. Louis President James Bullard said in London Thursday plans to shrink the central bank’s balance sheet are unlikely to cause volatility in markets.

Thailand’s PTT Exploration & Production Pcl, which has an investment-grade BBB+ rating from S&P Global Ratings, is currently offering to swap bonds. Byran Carter, head of emerging-market fixed income at BNP Paribas Investment Partners in London, expects more Asian companies to do similar deals. He is cautious about Chinese high-yield deals given regulatory risks and changes in risk appetite.

Companies will probably boost bond sales for growth and expansion in the second half as many high-yield borrowers have already refinanced debt, according to Morgan Stanley’s Grabowski. Corporates may still undertake “sizable” liability management exercises this year or next if they think the rising interest-rate environment will affect their issuance later on, he said.

— With assistance by Annie Lee

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