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Investment grade, high yield tenors diverge in Asian credit
[SINGAPORE] Asia's investment-grade borrowers are selling longer-dated bonds while their high-yield peers issue shorter maturities, as rising rates pull issuers and investors in opposite directions.
An IFR analysis of rated US dollar bonds shows the average maturity for investment-grade issues so far this year has risen to around 6.9 years, compared with 5.4 years in the first quarter of 2017. In contrast, Asian high-yield maturities shrank to 3.6 years, from 4.4 years in Q1 2017.
The data reflects final maturities, excluding perpetuals, as at March 22.
The change is indicative of investors' increasingly conservative approach to duration.
"People are getting allergic to tenor," said a Singapore-based banker. "Issuers might need to temper their expectations."
Resistance from investors is being seen this year in higher new-issue premiums from Asian bond issuers - unimaginable this time last year, when many issuers succeeded in pricing inside their existing curves. Premiums of 10-25 basis points (bp) are now common for IG issuers in Asia.
Meanwhile, the better-rated issuers see the era of cheap money drawing to an end and are trying to sell long-tenor bonds before rates rise any further.
"From a valuation perspective, the five-to-10-year spread differential for Asian IG does look too flat, and we can expect regional corporations are still eager to print long-tenor paper to lock in cheaper funding," said Jimond Wong, managing director for Asia fixed income at Manulife Asset Management.
"This supply bias may continue to pressure the long end of the credit curve. Besides, as spreads are now lingering at multi-year tights and room for further compression is arguably less than before, investors may be less inclined to sit on longer tenor unless adequately compensated with wider spreads."
The US Federal Reserve is expected to raise rates two more times this year, after Wednesday's 25bp increase, with three hikes in prospect next year. That has made investors wary of longer tenors, which are more sensitive to rate movements.
"In the past, selling a 10-year IG bond was easier than selling a five-year, because of the higher yield," said a syndicate head. "Now, the sentiment is completely opposite."
SoftBank Group Corp and Lenovo Group both announced they were considering raising funds from 10-year bonds, before choosing not to last week, with Lenovo printing only a five-year bond under Reg S.
"You're really going to need to do a 144A offering to do a 10-year now, or you'll be leaving a lot of value on the table,"said the Singapore-based banker. "The US investor base always takes on more duration than Asia."
In high yield, a proposed US$500 million-plus 15-year deal from Indonesia's Star Energy Geothermal has yet to launch, after starting roadshows on Feb 28.
Since last year, many Chinese high-yield issuers have seized on a loophole in regulation to issue offshore bonds at tenors of less than a year, which do not require prior approval, but even those with offshore quotas are now learning they can only find demand at an acceptable price if they issued at short tenors.
Double B rated Shandong Iron & Steel priced a two-year bond last week, rather than a three-year as originally intended, after Chinese asset managers gave feedback that they would prefer to limit duration risk. Before that, Single B rated Xinyuan Real Estate had to pay 9.875 per cent to complete a 1.5-year issue on March 12, having issued a three-year at 9.125 per cent just four months earlier.
In the past, many high-yield issuers favoured short tenors to keep coupons low, but they are now starting to see the value of locking in longer-term funding - just as the market has turned against longer tenors and raised the cost of funding for junk-rated credits.
"Last year, we were trying to get high-yield issuers to push out to seven years and they wanted to go shorter," said the syndicate head. "Now, it's reversed." The rate environment is creating buying opportunities in secondary credit.
"We feel that, while US rates can continue to move higher, the pace will moderate," said Wan Howe Chung, head of Asian fixed income at Amundi.
"This means there are potential opportunities in IG, which have sold off purely due to duration."
Mr Wan said the flatness of the rates curve meant that Amundi would wait until long-dated bonds cheapened further before shifting focus to that part of the credit curve.
"We like short-end HY bonds for stable carry, though we are beginning to see very stable short-end IG names cheapening up, but we expect more selling to come," he said.