Asia to test bond record again in 2015

[HONG KONG] Asia could set another record for international bond issues in 2015 if Chinese companies continue to borrow offshore at the same voracious pace they did this year, while bankers expect a heavy redemption schedule and larger pipelines from India and Indonesia to lift activity.

Barclays is forecasting volumes in Asia, excluding Japan and Australia, to rise 10 per cent in 2015, while another senior banker said G3 currency bond sales could hit US$225 billion from Asia, excluding Australia and Japan. Meanwhile, Standard Chartered sees next year's volumes coming in similar to this year.

Asian G3 supply reached US$208 billion for this year up to December 19, beating its previous high of US$146 billion, according to Thomson Reuters data, and achieving a third consecutive annual record.

The jump in Asian bond volumes is largely attributable to jumbo deals from Chinese banks and corporations, such as Alibaba, Bank of China, ICBC, CNOOC and Sinopec, which helped drive the country's offshore bond issuance to nearly double to over US$70 billion this year from 2013. These deals could well determine next year's volumes, say bankers.

"It all really depends on China and, especially, whether we will see those mega-benchmarks again," said Henrik Raber, global head of capital markets at StanChart. "When you have one borrower doing US$6.5 billion in one deal, it has a noticeable impact on a market that has historically been US$100 billion-$125 billion in size."

Bank of China and ICBC might not raise as much in 2015 as the combined US$12.2 billion in offshore Additional Tier 1 capital they sold this year, but more issuers, such as China Construction Bank and China Minsheng Bank, could take next year's Chinese AT1 volumes to as much as US$20 billion, said a senior banker.

Although falling oil prices forced secondary spreads for CNOOC and Sinopec to widen around 15bp-20bp in the past month, this should not prevent them from issuing jumbo bonds as US Treasury yields have fallen to levels seen in May 2013, at around 2.1 per cent for the 10-year, said a senior debt syndicate banker.

These deals could help expand China's share in the overseas bond market to about half of all Asia G3 volumes next year, according to bankers. Another factor that could raise Chinese supply was bets that the country's euro-denominated issues would double next year, said Jon Pratt, head of debt capital markets Asia Pacific at Barclays.

Asian euro-denominated bonds have been on the rise, recording 9.8 billion euros (US$12 billion) this year from 7.0 billion euros in 2013, said Pratt. "We're expecting a big pick-up in euro issuance from Chinese companies," he said.

"A large number of Chinese companies have exposure to the eurozone and are increasingly acquiring assets in Europe." India focus Issuance from India is also forecast to increase from this year's US$19 billion to US$30 billion, said another banker, as high-yield companies looked to raise money offshore, as well issuers in the infrastructure, power, telecommunications and raw materials sector.

StanChart's Mr Raber is also hopeful Indian banks could raise AT1s offshore as early as the second quarter, while corporate benchmark deals could lead the way in January.

"Investors like the financial sector because they think the credit story is going to strengthen as the economy grows," said Mr Raber. "Banks, being core to economic growth, will be natural beneficiaries."

Indonesia's pipeline will also increase now that the presidential elections are over, say bankers, and Sri Lankan corporations may also look to step up issuance after a series of successful sovereign deals.

"We'll see a pick-up in growth and the need to raise capex financing and general investment financing rather than just refinancing, which they can already do in the domestic markets," said Mr Pratt, referring to India and Indonesia.

"The flattening of the yield curve will get them to consider international bond markets as they find attractive opportunities to term out their debt and replace bank facilities with bonds."

Yet, some bankers are cautious going into 2015 as falling oil prices continue to rattle global financial markets and some emerging-market assets sell off. The Russian ruble tumbled last week, while the Indonesian rupiah also hit its lowest level since the Asian financial crisis.

"I think this may be the year where we are flat to slightly down because of the heightened volatility," said Herman van den Wall Bake, head of Asian fixed-income capital markets. "If oil continues to find new lows, I think that's going to create a lot of stress. That stress will generate volatility and that volatility will probably make investors sit on their hands. I think it's going to be more of a buyer's market."

Expectations of a strengthening US currency could also make dollar interest payments more expensive, and improved access to liquidity onshore could persuade more Chinese and South-East Asian issuers to seek funding locally, said bankers.

Bankers say they are more concerned about these issues than the impact of rising US interest rates. "There's a lot of activity in EM and, if we are in the same place as we are now in January, it's going to be a little bit of a cautious start to the year," said Mr Raber. "We've also seen some meaningful outflows both in high yield and in EM funds."

Sovereign issuers, such as the Republic of Indonesia, Sri Lanka and the Republic of the Philippines, are expected to kick off Asian issuance next month, as well as half a dozen established Chinese property names. Reliance Industries and Citic Group may also look to issue next month, as may Export-Import Bank of Korea and Woori Bank.

However, they may find that the cost of funding has increased. "As Europe and LatAm get very cheap, that's going to push out the pricing for Asia," said Deutsche's Mr Bake. "Borrowers will have to get used to the idea of paying new-issue premiums that are larger than this year." Mr Bake added that investors would be able to find bargains for high-yield bonds that had been trading lower in secondary markets at levels that could be difficult for some high-yield issuers to beat.

Despite the volatile backdrop, bankers believe that Asian credit profiles remain stronger versus their global EM peers, which should drive investor appetite. Investors are also able to keep benefiting from a spread arbitrage versus developed market credits.

"EM, namely Eastern Europe and, to a lesser degree, Latin America, is witnessing a deterioration in credit metrics, but Asia hasn't really seen that and the credit story is still intact," said Mr Bake.

REUTERS