Game plans differ across the investor universe, but one theme uniting these buyers is increased caution over credit quality and maturity. This has turned the tables on bankers and issuers, who will no longer be able to tighten yield guidance on new bond transactions and still count on oversubscription rates of 10 times or more, something that was commonplace until a few weeks ago.
“This is not a sellers’ market any more,” said one Hong Kong-based institutional investor. “We’re not going to give up any liquidity premium to the market for the wrong reason. Liquidity is a bigger issue, especially in Asia. Right now bid-offer spreads are so wide that you are pretty much going to give up all your returns [if you try to sell any issue purchased this year].”
Investors will also gravitate towards shorter maturities, since the recent volatility has particularly affected the yields of longer-dated US Treasuries. The 10 year Treasury yield has soared 38bp to 2.41%, while the three year Treasury yield has widened 21bp in the month since Bernanke first hinted on May 22 that the Fed could look to start reducing its bond-buying this year.
“People are going to be a bit more circumspect now on maturities,” said Todd Schubert, head of fixed income research at the Bank of Singapore. “I think deals like the very long 30 year Pertamina [issued in May by the Indonesian energy company] will have trouble getting done. I think most people now will be most comfortable with domestic-based types of names in Indonesia issuing in the 2018-2020 type of maturity.”
Unappealing perps
Schubert added that frequent bond issuers such as Indonesia's Lippo Karawaci should find enough demand to do five to seven year deals, but he was pessimistic about the prospects for a first time issuer with a low single B rating enjoying the same success, especially if they were to price a 10 year bond. He is also staying away from perpetuals that are fixed for life and have little incentive to call.
Another investor that declined to be named agreed with Schubert, saying that perpetual bonds needed to have an improving credit profile and provide an incentive to call the bonds after five or 10 years. He said that the perpetual bond of Thai oil and gas explorer PTTEP, which had a 25bp step-up at year 10 if not called and a 100bp step-up at year 25, was a structure that he would be comfortable with.
Schubert is also keen to invest in systemically important banks such as Bangkok Bank and Siam Commercial Bank in Thailand, as well as some of the Korean policy banks.
But another fund manager noted that liquid Korean banks have been more volatile in secondary trading, which he said would prompt him to ask for more premium if they were to come to market. This is something that Korean banks, some of Asia’s most notorious hagglers when it comes to bond pricing, have sometimes been unwilling to do in bull markets.
Ironically, it is a lack of liquidity that would make aspiring sovereign bond debutants such as Bangladesh and Vietnam, which have shown interest in issuing dollar bonds this year, attractive to bond investors at the right price.
“They haven’t issued much — unlike Indonesia and the Philippines, which are easy to sell off," said Schubert. "If Bangladesh came there would only be one bond and it would remain tight in the hands of investors."
Goldman Sachs, HSBC, Standard Chartered and UBS are bookrunners for PTTEP, while Deutsche Bank, HSBC and Standard Chartered are running Vietnam deal. Bangladesh has not yet appointed banks.