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November 13, 2012 2:22 pm
This summer, Samsung Electronics did something rare for an Asian company: it convinced US bond investors to look at it as a high-grade global company rather than a bet on emerging markets.
This might not sound like a huge leap, but only a couple of financial borrowers from Asia have done this before – and it made a big difference in the interest the consumer electronics group is paying on its first ever US dollar bond.
Western investors have traditionally looked at non-Japanese Asian borrowers from the top down as an emerging markets play first, then through the prism of the strength of the local sovereign, and finally to the company itself.
This now appears to be changing. Samsung turned the process round and ultimately priced its five-year $1bn deal at a lower yield than that of the South Korean government at the time, according to bankers on the trade.
Now Baidu, China’s equivalent of Google, is conducting a roadshow to sell its first US bond deal, which will also be the first deal from China to be fully registered with the Securities and Exchange Commission, meaning in theory that even retail investors could buy the bonds.
“Samsung was the catalyst for a Baidu or anyone else with the right rating and financial reporting to start to not price as an EM company but as a high grade company,” says a banker familiar with both deals.
These and other signs suggest the Asian bond markets are growing up. Issuance has hit record levels. There have been more 30-year deals and more debut borrowers, some even without credit ratings, than ever before.
Yields, which move inversely to prices, have hit record lows. The iTraxx Asia ex-Japan investment grade index, which measures the cost of protecting corporate bonds against default, fell to about 112.5 basis points in September, though it has widened out slightly to about 124bp now.
“As sovereign yields in Asia have declined, investors have started to take on more credit risk,” says Stephen Williams, head of debt capital markets in Asia Pacific at HSBC. “We are also seeing people moving down the yield curve to 10, 15 and 30-year deals.”
CNOOC, the Chinese oil company, enjoyed strong demand when it sold $1.5bn 10-year and $500m 30-year bonds together this summer, according to bankers involved. It became the first Asian company ever to price its 30-year debt at the same spread, or premium, over government bonds as its 10-year. Not long after, Sinopec followed and priced a 30-year bond with a lower spread than its 10-year. Both highlighted the strength of demand from insurers and pension schemes to find returns that can fund their long liabilities.
“I think it is a sign of growing maturity in Asia that we’re seeing so much more variety of issuance,” says Jon Pratt, head of debt capital markets in Asia at Barclays.
The question is whether Asian borrowers are simply benefiting from a reluctance among investors to put their money in Europe. This has been a peak year in Asian issuance, especially in the so-called G3 currencies of US dollars, euros and yen. Until the start of this week, financial groups and corporates alone had issued almost $100bn of bonds, almost twice the $55bn issued over all of last year. Local currency financial and corporate bond issuance is about 40 per cent ahead of last year.
But bankers and investors believe that most of the money, particularly the institutional money, that has switched to Asian credit is there for the long term.
Pyramis, the institutional arm of Fidelity, has switched to using GDP-weighted benchmarks to help set its allocations between different countries. “We are using this because it aligns the investment weight given to countries more closely with their abilities to pay,” says Curt Hollingsworth, fixed income portfolio manager at Pyramis.
Ooi Boon Peng, chief investment officer for fixed income at EastSpring Investments, adds that central banks around the world are putting greater long-term allocations towards Asian fixed income.
Furthermore, while European financial group issuance may be at its lowest since 2003, corporate bonds are having one of their best years as companies take advantage of the low interest rates to stock up on cash. In total, the European market has still seen almost $900bn worth of deals this year, highlighting the difference in scale.
“The increase in Asian issuance, even if it’s a $50bn leap [as with the G3 currencies], which seems enormous here, is in a global context not a big number,” says a senior debt banker in Hong Kong.
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