November has seen an exponential amount of issuance. So far this month, Asia ex-Japan issuers sold $32.7bn of public G3 bonds, compared to the $14.9bn during the same period last year, according to Dealogic.
There is a clear reason for the supply jump, especially from the Mainland, given that Chinese borrowers accounted for more than 80% of the issuance this November.
Earlier in the year, many bond hopefuls found their funding plans stalled because of a lack of approval from the National Development and Reform Commission (NDRC). But after the Party Congress wrapped up, the regulator has opened the tap once again. It gave the green light to 70-100 new transactions in the past month or so, some of which have quotas that expire in the New Year.
Needless to say, issuers were happy with the turn of events, especially those that had been forced to sell more expensive bonds with a tenor of less than a year to circumvent the NDRC.
Tewoo Group, for example, struggled to get the green light to go offshore to refinance its then outstanding three year notes from 2014. It was forced to issue a $500m 3.7% 359 day bond in October to address the maturity, but included a regulatory call option in that bond, enabling it to call back the 2018s at 101 once the NDRC allows it to print a longer-dated transaction. Tewoo priced a new $500m three year at 3.15% last Friday.
But the flurry of new approvals added immense pressure to the market, and in mid-November, three issuers — Indonesian palm oil producer Sawit Sumbermas Sarana, Chinese wind and solar power company Concord New Energy Group and state-owned Inner Mongolia Baotou Steel Union Co — were forced to pull their deals in the same week.
Department store operator Lifestyle International Holdings also decided not to proceed with a planned transaction. Most firms that that did go through with their trades had to lower their expectations on size, or were unable to revise price guidance, or saw underwhelming secondary market performance.
This was thanks to risk aversion among fixed income investors, who having had a great year in terms of returns, are hesitant to put their portfolios at risk near the year-end. Knowing they will have plenty to choose from in December, accounts are happy to sit back and relax until they see a name that tickles their fancy.
But the bonds oversupply, while a challenge, also provided the Asian bond market with opportunities to grow — and this is important.
The challenging environment has required issuers, and the banks advising them on their funding, to be savvier and more realistic about their expectations. They need to be willing to compromise on either size or price — or else be ready to sacrifice secondary performance.
The new dynamics also called for transparency and better communication, beneficial to the long-term development of Asia DCM. Recent deals from Binhai Investment Company, Times Property Holdings and Yankuang, for instance, were announced with capped sizes from the start. In some cases, issuers' pricing preferences were also indicated to the market. As one banker on those deals put it — the key to success in the current market conditions was to over-communicate, not under-communicate.
This applied to not just China. Union Bank of the Philippines, for example, which had been absent from the dollar bond market for 13 years, decided to tap unmet demand for another $100m just a few days after pricing the original $400m 3.369% 2022s. It decided not to push the limit with a much bigger size than what it had indicated to the market the first time around.
With the primary issuance explosion expected to continue, more efforts are required to make each individual story a hit with the buy-side, and to give everyone a reality check. Issuers and banks have so far risen to the challenge. Here’s hoping they stick to their guns for the next few weeks.