The virus-related dearth of issuance in Asia's primary bond market may seem like a big cause for worry for the markets, given the slowdown in issuance, but context is key. At the end of January, the market was already expected to be slow, with most of Asia packing up for the Lunar New Year holiday.
Investors also had an overwhelming amount of bonds to sort through in January, as almost $44bn in dollar paper was sold in Asia ex-Japan that month, according to Dealogic. Nearly $16bn of those notes carried a high yield rating and rampant demand kept new issue premiums low or negative.
The coronavirus has ensured the Lunar New Year break has been extended. But there is a plus side: that has allowed investors to digest a busy month. The price drop in the secondary market for high yield bonds — around three to five points in some cases — is also helping to reprice some of the Asian paper. That may be bad for investors holding these deals, but is probably good for issuance in the long term.
Chinese property developers, especially those with real estate near the epicentre of the virus in China, have been hit hardest. But Chinese high yield property bonds have long been propped up by creative bookrunners in the primary market — the secondary market widening seems appropriate.
With the volatility expected to continue, debt bankers anticipate that February will bring more investment grade credits to market, as well as names from outside of China. That means investors will see a very different mix of issuance in February than in January. That's certainly a good thing.
The volatility of the bond market seems almost muted compared to the thrashing that the equity markets have sustained. Secondary markets tumbled towards the end of January but things are starting to look up as the region’s big indices have begun to bounce back from year lows last week.
South Korea’s Kospi led gains, closing up 3.8% for the week on Wednesday. Hong Kong’s benchmark Hang Seng Index climbed 2.2% across the three days, while the SET Index in Thailand and Japan’s Nikkei 225 rose 1.5% and 1.9%, respectively. Even the Shanghai Composite was paring losses, up 2.7% following the 7.7% dive on Monday — the first trading day since the Chinese New Year holidays.
Primary ECM has not stirred, but that is typical of this time of year as markets close for the holidays and companies go into blackout to report earnings. That is not to say there has been no impact — Asian issuers preparing roadshows face various problems for meeting investors. The Hong Kong market is likely to suffer the most, since Chinese companies are the primary source of IPOs. Mainland biotechnology firm InnoCare Pharma has reportedly shelved investor meetings for its HKEX listing, which does not bode well for other issuers in the Hong Kong IPO pipeline.
Hong Kong's bankers seem to be taking the market changes in their stride, with many adapting to conducting roadshows over the phone, and working from home or taking up temporary residence in Singapore and other cities. Their resilience, and ability to keep the market moving, is a testament to how far Asia's capital markets have come since Sars shut the market in 2003.
There is no doubt that the coronavirus is a worry for market participants in the region. There is clearly much more to be concerned about than how the capital markets are performing. However, a well-functioning market does at least offer some grounds for optimism for bankers, issuers and investors. As the saying goes, this too shall pass.