Aberdeen Sounds Alarm as Asia Bond Growth Soars: Credit Markets
The amount of dollar-denominated bonds issued by companies in Asia is growing almost 10 times faster than the global corporate debt market, raising concern that investors are lowering their standards as they seek to take advantage of the region’s relatively high yields.
The face value of securities in the Bank of America Merrill Lynch Asian Dollar Corporate Index has almost tripled to $260.6 billion since June 2009, while the firm’s Global Corporate & High Yield Index has risen about 30 percent to $8.93 trillion. Total borrowing by 15,032 publicly traded non-financial companies in Asia excluding Japan has jumped to $3.6 trillion from $1.53 trillion in 2007, according to data compiled by Bloomberg.
As central banks from the U.S. and U.K., and the euro region to Japan keep benchmark interest rates near zero, an increasing number of investors are targeting Asia for high yields and an economy forecast to grow more than three times faster than America this year. High demand is allowing borrowers in the region to pay an average 3.83 percent to sell notes in dollars, compared with 3.18 percent for corporate issuers worldwide. The 65 basis-point gap has shrunk from 221 in October 2011.
“There’s this desperation to chase yield, to chase the market, to chase the tail of quantitative easing to try to generate returns,” said Anthony Michael, the Singapore-based head of fixed-income for the Asia-Pacific region at Aberdeen Asset Management Ltd. “That works for a while but sooner or later, people end up lending to companies that should never have come to the public market.”
The rally may reverse within the next six to 12 months, said Michael, whose firm managed $322.4 billion as of March 31, according to its website. Asia Pacific fixed-income assets total $19.1 billion, Michael said.
Standard & Poor’s said in its latest report that 68, or 12.5 percent, of the 544 global issuers it has on “negative creditwatch” are from the Asia-Pacific region. That compares with 33 in Latin America and 29 in Eastern Europe, the Middle East and Africa.
Borrowing costs for lower-rated companies in Asia are declining as those for higher-graded counterparts stagnate. Bonds rated BB, the top tier of speculative-grade, yield an average 5.24 percent, down 21 basis points from Dec. 31. The average for investment-grade securities has increased 1 basis point over the same period.
Companies in Asia outside Japan have sold $17.3 billion of junk-rated dollar bonds this year, more than double the $6.85 billion issued a year earlier, Bloomberg data show. Similarly rated sales worldwide in the U.S. currency total $171.1 billion, up from $135.3 billion in the same period of 2012, a record year for offerings of the debt.
Elsewhere in credit markets, the cost of protecting corporate bonds from default in the U.S. declined. The Markit CDX North American Investment Grade Index, which investors use to hedge against losses or to speculate on creditworthiness, decreased 1.5 basis points to a mid-price of 70.1 basis points as of 12:09 p.m. in New York, according to prices compiled by Bloomberg.
The index typically falls as investor confidence improves and rises as it deteriorates. Credit-default swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.
The U.S. two-year interest-rate swap spread, a measure of debt market stress, increased 0.29 basis point to 14.54 basis points as of 12:10 p.m. in New York. The gauge widens when investors seek the perceived safety of government securities and narrows when they favor assets such as company debentures.
Bonds of Rio de Janeiro-based Petroleo Brasileiro SA are the most actively traded dollar-denominated corporate securities by dealers today, accounting for 5.2 percent of the volume of dealer trades of $1 million or more as of 12:10 p.m. in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. Petrobras, as Brazil’s state-run oil producer is known, sold $11 billion of bonds abroad on May 13, the most ever for an emerging-market issuer.
Global central bankers are easing monetary policy by lowering borrowing costs and buying bonds. South Korea’s rate cut on May 9 was the 511th reduction worldwide since June 2007, according to Bank of America Corp. figures, calculated before Vietnam and Sri Lanka said a day later they were also lowering policy rates.
The moves are prompting investors to search further afield for returns. Dollar funding costs for companies in Asia slid to a record low 3.77 percent last week after yields on junk bonds globally fell below 6 percent for the first time, according to Bank of America Merrill Lynch indexes.
Asia is favored by credit-market investors because gross domestic product in the region will rise 6.6 percent this year, compared with projected gains of 2 percent for the U.S., 1.6 percent for Canada, 0.8 percent for the U.K. and a 0.5 percent decline for the euro zone, separate Bloomberg surveys show.
Much of the proceeds generated from Asia’s bond sales are being used to refinance debt, helping companies to extend maturities. Some 30 percent of the $84 billion of dollar bonds sold this year are slated for such a purpose, versus 13 percent the same period of 2012, data compiled by Bloomberg show.
“A lot of these bonds aren’t being issued for business development reasons, they’re being issued to roll over debt,” said Paul Smith, the CFA Institute’s Asia-Pacific managing director. “That should put some sort of warning light on.”
Cnooc Ltd. (883), China’s biggest offshore energy explorer and rated AA- by S&P, plans to refinance loans used to acquire Canada’s Nexen Inc. with $4 billion of notes it sold this month in the largest offering from the region in almost a decade.
Chinese corporate borrowing will probably exceed that of U.S. companies within the next two years, S&P said in a May 14 report. Companies in the world’s second-biggest economy face “significant” financial risk and the probability of an economic correction may be building, according to the firm.
“High levels of investment, primarily in manufacturing, real estate and infrastructure, have supported the country’s strong economic growth rate, particularly over the past five years, and credit is fueling this investment,” S&P said.
The risk of a slowdown in China is the highest among 32 economies surveyed by S&P because the nation’s investments are less productive, according to the report.
China’s Sinochem Group, whose debt is graded BBB- by Fitch Ratings, paid a coupon of 5 percent to sell $600 million of dollar bonds with no fixed maturity last month. That’s 130 basis points less than what it paid on 30-year securities sold by a unit less than two-and-a-half years ago, Bloomberg data show.
PT Pertamina Persero, Indonesia’s state-owned oil company and rated BB+ by S&P, sold $1.63 billion of 30-year bonds at a coupon of 5.625 percent this month. That’s 37.5 basis points less than it paid for same tenor securities in April 2012.
“The low yielding environment has presented corporates and sovereigns with an unprecedented opportunity to lock in long-term funding at attractive rates,” said Suanjin Tan, a Singapore-based Asian fixed-income portfolio manager at BlackRock Inc., which had $3.8 trillion of assets as of Dec. 31. “Given the expectations for a global search for yield to persist, I see Asian high-yield as a sweet spot.”
Such low yields prompted Warren Buffett, Berkshire Hathaway Inc.’s billionaire chairman, to say this month he’s not buying corporate debt and pities those savers who depend on bond interest for income. Bill Gross, who manages the world’s biggest bond fund at Newport Beach, California-based Pacific Investment Management Co., said this month the 30-year bull market in fixed-income assets is over.
With more leverage in the financial system, “sooner or later we’re going to have a pretty nasty sell off,” Aberdeen’s Michael said.