Asian debt markets set to soar

03/05/2010 | Sid Verma

Asian debt volumes are set to skyrocket in the coming years as declining risk premiums in the region relative to Europe lower borrowing costs in international capital markets

Asian debt volumes are set to skyrocket in the coming years as declining risk premiums in the region relative to Europe lower borrowing costs in international capital markets.

Roy Ferguson, chief executive officer for Southeast Asia at Standard Chartered, told Emerging Markets this weekend that the risk of investing in Asia “has dropped” in the post-crisis landscape since countries like Indonesia and the Philippines are “on the verge of investment grade”.

Meanwhile, “the speed of negative downgrades in the West is increasing”, Ferguson said . Although “Asian credit ratings have not jumped up”, markets are demanding lower compensation for Asian assets, a structural consequence of the crisis.

Ferguson’s comments came as bankers were predicting that Asian credit markets are set to decouple from the eurozone debt market, which has been hit by softer risk appetite on the back of Greece’s woes.

In the coming weeks Macau casino operator Melco Crown Entertainment will issue its debut high yield deal, joining a host of Chinese property names, while Indonesian firm Bakrie Telecom on Friday issued $250 million of five-year notes to yield 11.5% over US Treasuries.

Nevertheless, Asia-Pacific ex-Japan cross-border debt volumes are expected to fall to around $138 billion this year, compared to a record binge of $171 billion in 2009 – when borrowers took advantage of the thaw in global markets to refinance.

Anita Fung, head of global banking and markets for the Asia-Pacific region at HSBC, said that high-yield issuance will dominate the supply of external debt issued by regional borrowers this year. “This is due to large liquidity seeking yield pick-up as sentiment recovers, as well as in response to a fall in borrowing costs.”

Asia’s business cycle has picked as producers reinvest, domestic consumption increases and Asian companies use their balance sheet strength to go on a regional and international acquisition spree.

Asia is also the main driver of global IPO activity, accounting for 66% of global IPO volumes, on the back of robust growth especially in China and India. This year to date Asian IPO issuance, including Chinese A shares, is approximately $37.1 billion, compared to only $700 million in the same period of last year.

Bankers believe that Asian financial market conditions are set to decouple from the G7 markets if and when developed central banks hike interest rates. Fung said regional loan to deposit rates have fallen again in recent months, with deposit growth outpacing loan growth on a regional basis, “suggesting that local liquidity remains ample, helping to anchor local rates”.

In addition, the spread between policy and lending rates is still extremely wide, as growing risk appetite will likely lead to an easing of local monetary conditions even if global and local policy rates start to rise, she said.

As a result, the supply of debt and equity deals could disappoint bankers due to the competitive cost of bank finance. “Asian banking liquidity is coming back which offers issuers alternative pool of liquidity,” said Terence Chia, Asian debt syndicate banker at Citigroup.

In other comments, Ferguson said stronger financial regulation “will reduce the presence of less-capitalized Western financial institutions in Asia” due to the higher cost of bank capital.

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