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01 December 2023

Bank issuance on the rise

By Umesh Desai

Asian global bond issuers are expected to take advantage of low funding costs for long maturities at the start of this year before interest rates rise as investors are confident about the continent's outlook. Analysts and investors say it is unlikely that last year's rally and record number of new issues will be topped this year but are confident that 2010 will still be respectable.

"Interest rates are seen heading higher and issuers are bound to take advantage of the easy conditions. I am sure there will be good supply in the first quarter," said Clifford Lau, fund manager with Pramerica Investment Management, which has $227 billion (Dh833bn) in fixed income assets under management.

In 2009, primary market debt sales reached an all-time high in Asia outside Japan as bond issues in dollars, euros and yen jumped to a record $63.25bn from 2008's $25.9bn, Thomson Reuters data shows.

Despite the wall of supply, spreads collapsed as an improvement in the economic outlook and easing credit crunch encouraged investors to buy riskier and higher-yielding assets.

The average Asian credit spread tightened to around 267 bps from 700 bps at end-2008, HSBC's Asian Dollar Bond Index shows, generating a total return of 25.4 per cent in 2009.

Closer to normal

"It was a big year because of the carry-forward of some of 2008 business and because bonds picked up some of the slack from the loan market," said Kaushik Rudra, head of credit research, Standard Chartered Bank.

"This year volumes will be lower and closer to normal years like 2007," he said. Thomson Reuters data showed volumes that year totalled $48bn.

And yet 2010 has had a strong start with at least two sovereign borrowers – Indonesia and Vietnam – mandating banks to raise a total of as much as $5bn. The Philippines and Malaysia could follow, with Manila recently approving new external debt of $2.5bn.

Analysts expect Malaysia to sell $1bn via global bonds to alleviate supply pressures in the domestic market.

The expectation of higher interest rates is also likely to see the increased popularity of floating rate notes, said Rohit Chatterji, JPMorgan's head of debt capital markets for Asia outside Japan. Yang-Myung Hong, credit analyst at Nomura International, said the early deals would find it smooth sailing but some risks, however remote, could not be ignored.

"There is still strong technical support for credits but there are risk factors such as the threat from a double dip recession and sovereign issues."

He expects total volume to fall by about a quarter in 2010, with issuance driven by refinancing.

After an initial rush, markets will become more difficult and that would mean some issuers will have to get funds from domestic markets, a source lacking the scale, tenure length and in some cases funding cost advantage of global markets.

"The consensus is that as dollar rates start to creep higher we will be looking at more difficult market conditions in the second half of this year," said Tim Jagger, Asia-Pacific head of credit strategy at Royal Bank of Scotland.

But one segment which is unlikely to be deterred by rising rates are banks and that could see higher deal flows.

"Banks are more immune to the increase in underlying base rates as they are more focused on spreads and spreads continue to tighten -- so overall its a favourable market for bank capital issuances," Jagger said.

Issuers such as Bank of Baroda and Axis Bank and a number of South Korean banks are expected to sell bonds. JPMorgan's Chatterji said the average maturity of bonds on offer will go up, reflecting investors' confidence in Asia. "Spreads are coming in but treasury yields are going up -- under the best case scenario, the total cost will remain the same but there is a likelihood all-in costs will start increasing, probably in the second quarter," he said.

But analysts are still not calling an end to the campaign of compression of spreads – the extra yield demanded by investors over the risk-free rate for holding lower quality investments. (Reuters)


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