Not a single dollar bond has been issued so far this week in Asia ex-Japan. This is a stark contrast to the previous week, when dollar issuers in the region raised a total of $2.2bn from seven deals, according to Dealogic. And in the first half of June 2014 they churned out 16 deals, bagging $9.6bn.
Bankers laid the blame squarely at the soaring volatility in global markets, as uncertainty had grown ahead of the Federal Reserve two day meeting on June 16-17 and, more worryingly, a Eurogroup finance minister meeting that was scheduled for June 18, as GlobalCapital Asia went to press. Hopes were low that any narrowing of the gulf between the Greek government and its creditors would be possible.
The scale of the fallout in European markets was made all too plain by a deal from KfW this week that barely limped over the finish line. Bankers in Asia were shaken to see a credit as strong as the German state development bank struggle to print only €2bn, with barely any oversubscription. Some felt that the lender had not offered enough of a concession to soothe the feverish market, and had failed to get its typical size of at least €3bn away as a result.
“Even such a strong SSA credit from Germany turned out to be a disaster, which means the market is really volatile and investor sentiment is very weak,” said one Singapore-based syndicate official.
What’s possible?
Bankers in Asia are turning their attention to what deals are at all possible if the choppy conditions continue. One Hong Kong-based DCM head said that single-B or weak double-B issuers, and especially debuts, would stand no chance. But investment grade credits, even first-timers, could probably still get deals done by paying up perhaps an additional 20bp.
As a result, he said higher rated IG credits and issuers with MTN programmes would dominate the pipeline for the time being.
Others broadly agreed. “According to my calculations, even financial names with strong IG credits should be willing to pay around 25bp-30bp of premium to tap the market right now,” said a Singapore-based syndicate official. But he added that he had persuaded a couple of dollar IG clients to wait until early July.
No matter how long volatility lasts, market observers say they expect tier two and additional tier one trades from Industrial and Commercial Bank of China and Bank of Communications, respectively, to hit the dollar bond market at the end of June.
“The issuance window is narrowing down because they don’t want to go into July, when liquidity tightens because of summer,” said the senior banker. But he added that pricing was another big reason to be confident, as Chinese banks were usually happy to pay up to get a deal done.
“I don’t think they mind much paying a premium to woo investors when bringing riskier notes to a volatile market,” the banker said.
FOMC caution
It is not unusual to see subdued activity in the bond market ahead of an FOMC meeting, although the additional uncertainty created by the Greek crisis added an extra dose of wariness. That caution appeared to extend to the Federal Reserve, which offered no firm message on the prospect of a September rate rise. The dollar fell in response, although other areas stayed calmer.
“The FOMC decision gave little shock value to the market, as you can see in the fact that there’s no major sell-off in US Treasury bonds," said a Hong Kong-based senior credit analyst. "We just expect one or two rate hikes sometime between September 2015 and March 2016 — it’s as simple as that."
He said that Greece was the more worrisome issue as not many people even in Europe seemed to truly understand what was going on.
“Although Asia remains relatively safe compared to other EM countries and has enough liquidity, I don’t think the concerns over Greece would dissipate after the June 18 meeting, which means volatility is here to stay for a while,” the analyst said.
One effect of the June tension could be a busier July for Asia bond bankers, however. “Activity will pick up more than usual in July as the June pipeline hasn’t cleared up,” said a Hong Kong-based senior debt syndicate official. “Therefore I think the usual summer lull will hit a little bit later in August, and the market will get noisy again in September ahead of another FOMC meeting.”
CNH no alternative
In contrast to the quiet dollar bond market, there has been some consistent deal flow in the offshore renminbi (CNH) bond market. ICBCIL Finance made its debut on June 11 with a Rmb1.5bn ($241.6m) three year. It was followed by New Zealand dairy company Fonterra Cooperative Group’s third dim sum on June 15, with proceeds to be used to support its business in China.
The next day, US construction equipment manufacturer Caterpillar raised Rmb1bn as it has Rmb2.1bn coming up for redemption at the end of June. And most recently, Shenzhen-listed Financial Street bagged Rmb1.5bn with its maiden outing to the market.
But market participants said this activity did not make the CNH market a viable alternative to dollars for most names.
“CNH does appear resilient and stable compared to dollars, but the latter offers size," said the Hong Kong-based head of DCM. "A benchmark in CNH is Rmb1bn-Rmb2bn, but dollar issuers are looking for the equivalent of Rmb3bn-Rmb5bn."
Tenors are also a problem. Dollar borrowers usually want five years or more, but those in CNH are typically issuing three years or less. Not just that, but current cross-currency swap levels make it an unattractive option for those who need to swap.