When the Republic of Indonesia sold dollar bonds to fund a
widening budget deficit last June, it found investors keen to
snap up 30-year bonds at a yield of just over 8%, and 10-year
debt at less than 7.5%.
Already the markets had pushed Indonesias funding costs
wider, following the collapse of Bear Stearns last March. But
when the Republic returned in February this year, 10-year bonds
cost 11.75%, and any hopes of selling long-dated, 30-year paper
quickly went out of the window.
Indonesia went ahead and sold $2 billion of 10-year bonds,
agreeing to hand over almost $90 million more in interest
payments each year compared to the 10-year notes it sold last
summer. It succeeded in funding its budget deficit, but an
extra interest charge of close to $900 million over the
duration of the bonds is no small burden for a country
grappling with worsening economic conditions, falling exports
and a high subsidy bill.
Indonesia has been Asias biggest sovereign borrower each
year since 2006, and that reliance on international debt leaves
it more exposed to the financial turmoil than many of its
regional peers. It has seen its cost of funding ease slightly
since March, as demonstrated by a new issue of $650 million of
five-year Islamic bonds, priced to yield 8.8% on April 16. But
its experience mirrors a situation faced by governments and
corporate treasuries across Asia, who are struggling to raise
cost-effective capital despite a boom in new debt sales in the
US and Europe.
Asia is catching up, but its a surprise that we
havent seen more supply here, given that the markets have
been open since the start of the year, says Stephen
Williams, head of global capital markets for Asia Pacific at
HSBC in Hong Kong. Some companies were aggressive in
pre-funding early last year, but in some cases Asian borrowers
were slow to realize the severity of the crisis. By the time
they did, the markets were already shut.
The international debt markets slammed shut for Asian issuers
with the collapse of Lehman Brothers in September, as global
fund managers fled from emerging market risk and the hedge fund
industry went into meltdown. No Asian borrower private
sector or public was able to access the global bond
markets until January, and it took until late March for the
first private-sector Asian company to sell dollar bonds.
At the time of writing, Asian borrowers outside of Japan and
Australia had sold bonds worth just $19 billion since the start
of the year compared to $790 billion in Europe and $708
billion in North America.
Conditions have eased since the height of the credit crisis in
the fourth quarter of 2008, but it remains impossible for many
lower-rated Asian borrowers to sell bonds without government
support, and those that still have the ability to access the
international debt markets are finding it an expensive
Investor base narrows
The international investors who have stayed committed to Asian
credit have picked up some bargains over the last few months.
Bonds sold by the Republic of the Philippines in January had
soared to more than 111% of face value by late April, while
debt issued by Korea Development Bank and Export-Import Bank of
Korea in January quickly jumped to 104%.
Rising prices show that investors are returning to the Asian
market, but the range of buyers has narrowed dramatically from
just six months ago. The US hedge funds that bought into
high-yield Asian debt in the heady days of 2006 and 2007 have
all but disappeared, in many cases after heavy losses, while
the structured investment vehicles and conduits that were
regular buyers of investment-grade and public-sector Asian
paper live on only in the history books.
German public-sector lender Depfa, which had invested hundreds
of millions of dollars a year on South Korean bonds, shut its
Hong Kong office in March, while European lender Dexia
another big buyer of Korean bonds has scaled back its
Asian investments dramatically.
Few banks run proprietary trading desks on a scale approaching
that of 12 months ago, while many of the bank investors have
been forced to wind down their Asian investments altogether
after taking government bail-outs. RBS is in talks to sell its
Asian business just a year after acquiring ABN Amro, while
UBSs principal trading arm was one of the first
casualties of the subprime crisis. Lehman Brothers
in-house trading desk was a big buyer of high-yield Asian
credit until its collapse, while JP Morgan and Barclays Capital
formerly big investors in Asian debt have scaled
back their positions. Dresdner Kleinwort, which had been a big
investor in subordinated bonds sold by Asian banks, and
UniCredits HVB, another big buyer of Asian debt in recent
years, have also pulled back.
Asian investors are taking much bigger allocations in new
issues, and it is the insurance companies and long-term
emerging funds that are the most active again a big
shift from early 2008.
The old-fashioned real money has come back with a
vengeance, says Herman van den Wall Bake, head of
international debt syndicate for Asia at Deutsche Bank in
Singapore. The investor composition was already changing
last year, but Lehmans collapse was the tipping point.
The European conduits disappeared, and a lot of the Asian hedge
funds went out of business. Pension funds, insurance companies
and the traditional money managers have been the big buyers in
Buyers are concentrated on new issues, while trading Asian debt
in the secondary markets can be difficult. There are
simply fewer people involved in secondary trading now,
says Joel Kim, head of fixed income for Asia at ING Investment
Management in Hong Kong. The banks that used to act as
market makers don't have the balance sheet to do so anymore,
and bid-offer spreads are still quite wide across the market,
regardless of the credit.
Many of the Asian companies who sold dollar bonds over the past
two years are now restructuring candidates, and concerns over
rising corporate default rates mean bankers expect
sub-investment grade companies will remain shut out of the
international markets for some time to come.
Asia Aluminum, a Chinese aluminium producer which was
privatized in a management buy-out in 2007, appointed
provisional liquidators in March after foreign bondholders
blocked its attempts to restructure $1.2 billion of offshore
debt, paving the way for the biggest test of creditors
rights yet under Chinas two-year-old bankruptcy laws.
Bondholders said Asia Aluminums restructuring proposal,
which would have forced them to take a haircut of more than 75%
on the face value of the bonds, favoured domestic lenders, and
the ongoing negotiations are being closely watched as a gauge
of potential recovery rates on the many other international
bonds sold by Chinese companies under similar structures. Any
sign of prejudice will severely dent investors
confidence, making it harder and more expensive for Chinese
companies to raise international capital in the future.
The Asia Aluminum debacle raises significant questions
over the way these deals have been structured and the
protection foreign investors can expect, says Bake at
Deutsche Bank. Investors can have short memories if they
think they can make a few dollars, but were not anywhere
near a point where Asian high-yield deals can be done
Chinese companies, including those listed in Hong Kong, have
sold high-yield bonds worth $20.9 billion since 1997, according
to data firm Dealogic. Many of those issued in the boom years
of 2004 to 2007 have been downgraded in recent months as
earnings have deteriorated, including bonds from property
developers Neo-China and Greentown China, as well as China
Orienwise, a consumer finance company.
There are signs, however, that international money is returning
to Asian credit. Currencies such as the Korean won, which was
among the worst hit by the retreat from emerging market risk at
the end of 2008, have posted some gains since the start of the
year, while stock markets in Hong Kong and China rallied
strongly in March and April.
Falling credit spreads have attracted well-known and respected
names such as Koreas Posco and Hong Kong benchmark
Hutchison Whampoa to tap dollar bonds for long-term funding,
and bankers are expecting many more to follow. There has
been a lot of interest in the recent corporate transactions,
and we think other Asian companies will follow, says
Williams at HSBC. We expect there to be more supply from
blue-chip corporates in the next few months.
Posco attracted orders worth $4 billion for its $700 million,
five-year bond, launched on March 20, in a deal that was
carried away on the biggest one-day rally in US Treasuries for
years, after the Federal Reserve announced a plan to begin
quantitative easing. The rally helped Posco tighten price
guidance twice in two days of marketing, eventually pricing the
notes to yield 8.95% in the first international bond issue from
any privately-owned Asian company since early September.
Hutchison, Asias best-known corporate bond issuer, sold
$1.5 billion of new 10-year bonds on April 7, locking in
long-term funding at a cost of around 7.67% after a rally in
credit spreads brought down its cost of capital.
Demand for new bonds helped the Republic of Korea sell $3
billion of five- and 10-year debt on April 8, after Hana Bank
sold the first dollar bonds guaranteed by the Korean government
a week earlier. Both of those new issues were popular with
investors, giving an indication that appetite for Asian risk is
It is clear that not every Asian issuer is able to access
the international markets, but sovereign-linked borrowers and a
select number of good-quality corporates can get deals
done, says Kim at ING. Its just a matter of
Indonesia watched yields on its 10.375% bonds due 2014 dip
below 8% in late April as appetite for emerging market debt
continued to return, helping the government raise another $650
million in its first global sale of Islamic bonds.
But credit spreads remain many times wider than their
pre-crisis levels, and the wild price swings of the last six
months have served as a painful reminder for Asian borrowers of
their dependence on investors far away in New York or San
Francisco. In the debt markets at least, Asia is still playing