What to make of the start to the year in the Asian bond market? A pessimist would say that the $19bn of bonds sold so far this year is more than a third down on the same period in 2018, according to Dealogic data. But a realist cannot fail to be impressed.
The market is quickly gathering pace. Some $2bn more bonds were sold in the week of January 14 compared to the previous week. Issuers have also been able to slash new issue premiums, some getting away without paying any premium at all. It looks like there is little to stop them as the sell-side prepares for a final push before Chinese New Year in early February.
But there are several problems that could cause headaches for bankers and investors in the months and years to come, including the short duration of many deals. More than two-thirds of the bonds sold so far this have tenors under three years, many of them including call or put options as well. This merely delays problems, allowing issuers a short-term respite but a longer-term conundrum — how to ensure refinancing risk is not an annual headache.
The bigger problem is the lack of diversity among the issuer base. Chinese sub-investment grade property credits made up almost half of the number of deals sold in Asia ex-Japan as of Monday evening. The lack of supply from quality Chinese names means offshore corporate bond volumes from the country have dropped by more than half compared to this time last year.
Central China Real Estate and China Evergrande Group, should they price their planned dollar bonds on Tuesday, will take the number of property deals coming out of China to almost 20 within a short time frame of three weeks. China Aoyuan Group, Guangzhou R&F Properties and Zhenro Properties have all come to the market twice already since the start of the year.
Thanks to an increased risk appetite from investors, most Chinese property deals this year have been welcomed in the primary market — Road King Infrastructure even saw a 10-times covered book despite a 50bp price tightening — and have traded well on the brake. But the non-stop supply from the sector has seen the order book coverage for new issues steadily drop, to an average of 3.25 times covered last week, compared to the four times between January 1 and 11, data compiled by GlobalCapital Asia shows.
The market already appears to be feeling the burden of supply. New bonds from the likes of China Aoyuan, Country Garden Holdings, Redco Properties Group, Yuzhou Properties and Zhenro started to drop towards the end of last week, according to ANZ research. By comparison, away from China, investors were still chasing bonds from State Bank of India and Bharat Petroleum Corp (BPCL), which tightened by 10bp-20bp in the secondary market. In primary, BPCL’s $500m deal also had a six times subscribed book.
There could also be some surprises that might catch the market off guard, putting a dent in secondary prices and overall sentiment. China’s Kangde Xin Composite Material Group, having unexpectedly failed to make principal and interest payments on two onshore bonds, has become the first dollar defaulter of the year, after a cross-default was triggered. The nose dive in the share prices of Hong Kong-listed developers and outstanding dollar bond issuers Jiayuan International and Sunshine 100 last week has also surprised the market and caused confusion.
In 2018, investors were notoriously skittish. Market windows were opened and closed in a matter of hours. The buyside appears to have started this year with more appetite to invest, following the typical trend of January buying. But a strong start to 2019 should not fool anyone. It will not take much to push this market over the edge.