WELCOME TO SEPTEMBER. This, traditionally, has been the month when the summer lull comes to a halt and the flow of Asian bond offerings resumes with a vengeance. We saw none of that last week, however, and DCM bankers are growing palpably nervous about what lies in store for the remainder of the year.
One guru who has proven prescient in calling markets over the past decade or so I have known him has turned notably cautious – if not quite doom-and-gloom. He reckons that we are on for a US$150bn year in offshore G3 issuance from Asia.
We now stand at around the US$130bn mark, versus the US$137bn we were at this time last year. So that means issuance of around US$20bn-odd versus the US$63bn we saw between September and December last year. That wouldn’t exactly be a disgrace but it means the run of record-breaking totals we have enjoyed in G3 every year since the financial crisis will have been broken.
China remains the main risk, but has morphed from one of the tail variety into a great big blot on the G3 landscape. Primary Asia high-yield, according to our guru, has lousy technicals and is effectively shut for issuance.
In his opinion, lots of real money is looking at the distressed regions of secondary Asian high-yield for conspicuous bargains, in the hope of picking up dirt-cheap paper and sitting on the steering committee of a debt workout in the hope of achieving IRRs in the region of 30%–40% if the restructuring goes according to their plan.
In other words they’re not interested in putting in the credit work on a new high-yield bond even if it’s generously priced, when a much more juicy return is to be had via the beaten up secondary market, even if you have to wait rather longer and get your hands dirty in the toing and froing of a debt workout.
I reckon we will get a hike this month or next
BRIGHT SPOTS WILL be found, he thinks, in high-grade from Singapore, Hong Kong and India and from the China SOEs and banks. The latter Chinese asset classes would seem to me to be rather challenging in the light of China’s recent stock market travails and it will take a brave house to step in and bring a market-opening deal.
I assume that anything, whether its a single-tranche Double A rated China oil major or a loss-absorbing bank capital issue will be pitched to investors far back of secondary comps and that the iterations from initial guidance to final pricing will be far less ambitious than we have grown used to in Asia’s heady primary markets.
Fifteen rather than 25bp will probably become the standard modus operandi in deal execution for now, assuming the background noise remains relatively subdued and that there is no toxic pulled deal to force a longer period of primary market closure.
For the China industrial and property complexes, the main concern is that a further depreciation of the renminbi of the order of magnitude of say a further 7% – bringing the total depreciation to over 10% since the shock move by the Chinese authorities to devalue the renminbi by 3% last month – will herald softening credit quality. For Chinese companies with a hefty offshore debt burden, enterprise values would shrink and a round of defaults would then beckon.
Another respected regional DCM head takes a rather more cheerful view of the way in which the final four months of the offshore primary G3 year are likely to pan out. While not predicting a final year tally, he reckons the market will resume printing and that even China property counters and decently priced high-yield will re-emerge.
On the China property front he’s not alone in taking a bullish stance. Moody’s noted in a recent research piece that China property issuance contracted by US$2.2bn in the first half of this year to US$5.5bn versus the same period last year.
This, in the ratings agency’s view was based on a lower than average rate of redemptions in the sector, falling levels of land acquisition and access to relatively cheap sources of funding onshore. But they are bullish. Moody’s recently re-rated the China property sector to stable from neutral and reckon that declining inventories, gradually rising sales and ample access to funding will turn things around.
WE WILL KNOW in time just how the rest of 2015 turns out for Asian primary G3. The most important factor is the US Federal Reserve, which might be about to raise interest rates for the first time in nearly a decade.
At last month’s Jackson Hole summit, Fed vice chairman Stanley Fischer refused to rule out a September rate increase and I’m with him on that. The US economy is firing and near full employment prevails. Global equity market volatility would return on any Fed tightening.
But how much of a shock would such a rate rise be? After all, before the collapse of China equities and the renminbi devaluation, forward rates markets were more than 60% sure of a September hike.
I reckon we will get a hike this month or next. There will be volatility, of course, but not of the white-knuckle variety. And then the issuance window will reopen – at least enough to justify the existence of Asia’s debt market bankers for a good while longer.
