IFR Asia Outlook for Asian Credit Roundtable 2025: Transcript
IFR Asia: Monica, what, if anything, has surprised you about the 2025 market?
Monica Hsiao, Triada Capital: With Trump in office and all the speculation over tariffs, I expected a lot more general volatility. But if you look at VIX and risk assets, they were holding up until March, in part because the market had held out hope that Trump would negotiate first before implementing tariffs. Since then there has been a rotation out of US equities that has created big drawdowns that, in turn, finally pulled credit spreads wider. In general though, credit markets are still more benign than equity markets and emerging market currency markets have not been as risk-off as they could have been. In Asia I suppose we can explain the muted volatility, other than in Indonesia, to the anchoring by the relatively stable Chinese yuan.
Gary Lau, Moody’s: I would echo Monica’s point on tariffs. I think the scope is wider than we expected, so it will certainly have an impact across different countries and sectors. Another surprise is that last year everybody expected multiple rounds of US rate cuts, but this will not be the case with interest rates expected to remain elevated in 2025. Also, we expect a lot more capital will be put into cloud computing, AI or AI-related investments, which will spill over into funding markets, including the dollar bond market.
Eugene Ng, HSBC: I think what surprises me is the robustness of the market at the start of the year. The depth and the liquidity are evident, not only in US dollars, but across different Asian local currencies as well.
As Gary mentioned, the expectation of rates coming down faster has ebbed away, which will impact not only corporates, but also government issuers in the US dollar market. Issuers will have to think very carefully about their tenor combinations and whether they can accept current rate levels.
Julian Lee, AAHK: Usually we issue right after New Year and this time it happened to be before the inauguration as we expected a lot of US dollar volatility. We also issued in Hong Kong dollars but I think the surprising thing is the interest rates differential between HKD and USD, which is easily anywhere between 50bp and 70bp.
The HK dollar liquidity pool has tightened after the recent upsurge in the Hong Kong equity markets, which started after the “DeepSeek” moment. As a result, we’re seeing some tightening, at least for some tenors.
IFR Asia: Eugene, from where you’re sitting in DCM, what are your expectations for new issues this year?
Eugene Ng, HSBC: Last year, we saw substantial growth in volume, largely due to the exceptionally low issuance in 2023. This year, we remain optimistic, as the trajectory of rates has become much clearer. Yes, the pace of rate cuts may have slowed, but if you look at CPI and PPI, the direction is quite clear.
Secondly, spreads are at very tight levels, especially for high grade issuers, making this an opportune time to look at the market. The Hutchison Ports deal is a key example, which priced at 73bp over five-year Treasuries and exceeded their expectations.
Thirdly, I think we are seeing a gradual recovery in the Chinese economy. A lot of investors are becoming keen on certain Chinese issuers, which is why Greentown was able to tap the market. While China high yield has faced challenges, certain Chinese real estate names with strong government support are expected to re-emerge in the market.
It will also be interesting to see what the governments choose to issue and in what combination. As Julian mentioned, the Asian local currency market especially in Hong Kong dollar and CNH has seen remarkable growth in recent years. There are more currency options for government entities to consider. I expect the issuance will increase.
Monica Hsiao, Triada Capital: We have definitely seen some turnaround in equity and credit sentiment in China, granted from a lower base, which was instigated by DeepSeek and China tech in general. The other positive factors include news about Shenzhen Metro’s support of Vanke that brought back hope that the remaining last issuers standing will survive as performing credits. That said, in my opinion, it’s not 100% clear that all the bonds will get bailed out at par, more that the can is likely kicked down the road until the next solution can be figured out. Given where pricing has come to, from an investor standpoint, a lot of the good news has been priced in and now it is a wait and see whether the property market onshore can improve with the loosened measures in the meantime.
In past years, there’s always been an underlying sense of caution from investors whenever there is a huge rebound. It’s a matter of whether the earnings results show real improvement to justify the multiples or the metrics. We do have government meetings coming up and we need to see if the private sector’s expectation for government support is realised. We’re seeing movement in the right direction but we need to see how sustainable the animal spirits will be. But we can understand that there is a natural adjustment to the pendulum because sentiment previously on China was extremely bearish. Therefore, to some extent it was time for some rebalancing of positioning.
To that point, about market technicals, it is important to note that we started the year with quite tight spreads and okay all-in yields but credit became more about a rates play. It took until March for the market to de-risk and reprice credit spreads somewhat. Looking ahead, we may see more volatility given the combination of tariff wars, geopolitical headlines, and slowing growth, but we hope to use volatility to find higher premium bonds. Overall, I think 2025 will be a good year to find decent all-in yields for carry. But we will need to be patient to take some short-term mark-to-market volatility.
One of the things we track is around fund flows between credit and equity and vice versa, as well as cross-regional flows. This really will be a matter of where we think the relative performance of asset classes is. But, overall, I would say credit is still an area to increase allocation to in a year like this when the direction of equities and growth is unclear and tends more to the downside.
The other factor is that because of the reduced expectation in rate cuts, there may be a bear flattening in rates such that eventually funds return to building higher duration positions after the fear of steepening subsides. Overall, emerging market credit in hard currency funds has not seen as much fund outflow as emerging market equity and broader markets. Relatively, in Asia we are still tight compared to US spreads, but we offer some pick-up on a risk-adjusted basis and there is a technical rarity of the higher duration investment-grade bonds, for example, because supply has been muted year to date.
By the end of the year, I do think that we’re going to end up this year with more bond issuance than last year. But not so great that we affect the supply and demand dynamics, because people do still need diversification and we still expect a lot of net redemption from maturities and calls.
Gary Lau, Moody’s: From a credit perspective, we expect the Chinese government’s debt swap programme to stabilise the local government financing vehicles (LGFV) sector and the property market to bottom out after multiple rounds of government supportive measures, which will facilitate a better sentiment.
On the high-yield side, Greentown’s bond issuance was quite successful. We also saw H&H (Health & Happiness) and other names successfully tap the market. Whether a constant high-yield market will reopen remains to be seen, but there is certainly positive momentum. With a number of potential fallen angels in our rated universe, the refinancing needs of the high-yield portfolio would also rise if they were downgraded to speculative grade.
At Moody’s we revised the corporate outlook for China from negative to stable – although one could argue that the economy is slowing and there is also challenge from intensifying trade tension.
Our expectation is that with government supportive policy, we are unlikely to see further deteriorations in the credit profile of the rated corporate portfolio. Earnings and Ebitda will probably stay flat, depending on the sector, but most companies outside the property sector have a stable outlook, excluding those companies affected by a sovereign negative outlook. Corporates in the rest of the Asia Pacific region also have a stable outlook, backed by steady economic growth in the region, which provides a supportive environment for issuing bonds from a credit angle.
Monica Hsiao, Triada Capital: Year-to-date supply is 10% higher year on year as of February. This year, we expect around US$39bn of gross reductions. This isn’t counting any potential liability management exercises, tenders and so forth. We will have healthy supply, but in terms of the mood for Asia – particularly for Greater China – Vanke and New World are the two names that seem like the bellwether of determining sentiment in the China-Hong Kong region that somewhat spills over to South-East Asia high yield too.
Credit spreads for India high yield have remained relatively tight and this will likely stay this way even as Indian growth slows and as we wait to see what the Reserve Bank of India does. But we must keep in mind that, looking at bookbuilding, the Asia credit market really is supported by domestic local demand. We’re not looking at many bonds needing to do 144A anymore and that shows the relative strength of demand locally, whether by institutional or retail investors.
IFR Asia: That’s certainly a theme that I’ve been hearing as well. The strength of the local markets, the strength of demand just in Reg S and where we’ve really been able to go with that. Maybe, Julian, you can tell us a little bit about the thought process that went into your transaction?
Julian Lee, AAHK: When I joined the authority, we had a mandate to expand the airport. A significant amount of the funding has gone into developing the third runway system, which requires US$18bn of capital expenditure. During Covid, when the rates were low and the HK dollar and US dollar were trading pretty much at parity, it didn’t really matter which currency you tap.
When rates started to rise after Covid, we saw a divergence in terms of rates between the Hong Kong and US dollar. So, in the last financial year, we did some small-scale experiments. We issued a small size public offering in HK dollars, which was used to strategically support and establish a pricing benchmark for the retail bonds offering. Then, when we started to make some investments in the mainland, we also took advantage of the low rates in CNH as well. Those were not big transactions, but it was our experiment to see how the local markets would react with our issuance.
Both went quite well and when we needed to issue a US$7bn offering, then the choice of currency and lowering the funding cost became extremely important.
We are Hong Kong issuers, and naturally Hong Kong dollars is our functional currency. So it ended up being quite useful because it abated at least a significant size of our reliance on the US dollar. We debated heavily with our syndicate on how it should be executed because it was unprecedented, but the outcome was good. Incidentally, I think we also helped create a pathway for other statutory bodies, SSAs or even governments to think about the local currencies a bit more.
IFR Asia: For the US dollar portion, did you have much of a debate over whether to use 144A format?
Julian Lee, AAHK: When we started this journey a few years back, we decided that going the 144A route is worthwhile. We understand the additional disclosure requirements but given the potential size that we are looking at, 144A makes sense because it does not take a lot more work but taps a bigger investor pool. Given that our issuing size potentially can be quite significant and the fact that I like to limit market risk in terms of limiting the exclusion timeframe – for us, 144A is a worthwhile exercise.
IFR Asia: Eugene, we’ve seen other issuers take this multi-currency approach such as Alibaba. What are the considerations for these issuers and why is this approach making sense right now?
Eugene Ng, HSBC: As Julian mentioned, US dollar rates have increased rapidly over the past 24 months. I think it came to a point where a lot of the issuers wondered whether it made sense. Ultimately a lot of regional issuers will consider other currencies. For example, a lot of Hong Kong issuers would naturally use Hong Kong dollars. When cross-currency swap levels become too costly, it’s natural to turn to local currency as an alternative.
I think that pretty much happened at the end of 2023, starting first with the dollar. The Singapore dollar credit market had a big boom, not only with the corporates, but a lot of different banks tapped the Additional Tier 1 market.
Last year, the Hong Kong government had a significant year of bond issuance. A highly liquid and deep local currency market is beneficial for different market participants. Once a yield curve is built, it extends to the swap curve, which benefits counterparties. One of our key missions has been to support the development of the local bond market. Naturally, when the HK dollar is cheaper, a lot of Hong Kong issuers want to maximise this opportunity. It does take certain issuers, like Airport Authority Hong Kong to really explore how deep the market is.
Airport Authority Hong Kong has kind of set the scene for a lot of different issuers, who now look at this market and say, “This is the tenure and this is the liquidity I can tap. If HK$18bn is needed, I could look at it. But if I need more, US dollars would make sense.”
With the growing Asian local currency market, issuers have more options to consider. For Alibaba, CNH makes sense because of the low interest rate and the high liquidity. But there are other merits to issuing offshore, especially at the long end of the curve where the offshore CNH market is more vibrant.
IFR Asia: Do you think these local currency markets have deepened and expanded greatly in the past couple years?
Eugene Ng, HSBC: In Singapore, there’s been more than a 100% growth in issuance from 2023 to 2024. This year, I think the expectation is the same with a lot of banks focusing on the Singapore dollar market.
For Hong Kong dollar and CNH, we expect more deals because of the liquidity and the vibrancy at the long end of the curve. This in turn will generate interest from investors expanding that portfolio such as insurers, pension funds and a lot of the Middle Eastern accounts as well. While we can’t compare to the US dollar, there has been significant growth of issuers with modest requirements to focus solely on a Hong Kong dollar or CNH perspective.
Julian Lee, AAHK: Two-and-a-half years ago, we asked the banks whether a public offering in Hong Kong dollars was feasible. At the time, the banks answered was that it was challenging because the Hong Kong dollar market was dominated by private placements.
Comparatively, Singapore, even by then, had already developed an ecosystem mostly driven by the city’s public and government-linked corporations. Meanwhile in Hong Kong, that just never existed. So, together with other issuers, such as the Hong Kong Mortgage Corporation, the Urban Renewal Authority and ourselves, slowly, a Hong Kong ecosystem started to develop, where investors started to get comfortable with the public market.
I believe that the liquidity is there, because Hong Kong, by nature, should have a larger liquidity pool than our friendly competitor, Singapore. It’s just whether issuers want to attempt to develop that market, instead of relying on private placements, which was the easier way to go previously.
We also recently saw the Asian Infrastructure Investment Bank (AIIB) do its first public HK dollar bond, proving that sovereigns, supranationals and agencies are also starting to think about it. It’s a very good development.
IFR Asia: Monica, from the investor point of view, how is the uncertainty of the world affecting how you guys are looking at credit?
Monica Hsiao, Triada Capital: As mentioned earlier, we didn’t necessarily expect that much complacency on credit spreads in the beginning of the year. But I think that we’re starting to have a bit of a tremor right now for good reasons. Ahead, we expect volatility to continue given we are living in Trump’s world at the moment, but at the same time, I think that issuers are broadly in shape to service debt, earnings growth softening should affect equity more than credit, and money has to park somewhere for carry until there is more clarity on the equity side.
Within Asia, certain news is probably not priced in and not noted enough, such as the anti-dumping measures from Korea and Vietnam vis-à-vis China on steel-related imports, which were in addition to restrictions already imposed by other Asian countries on China. On the other hand, sometimes there is also an overreaction on the bonds side. Because of the lack of certainty there is a knee-jerk reaction to sell first and ask later based on broad headlines that later get reversed. On our shorter dated bonds we are comfortable not to overtrade as a result.
There have also been some rumours about another epidemic. So, on top of tariff cascades, we can never rule out black swan events, but we do not see risks of credit crunches or liquidity crisis, which is why we still believe this is the year of yield for carry.
Geopolitically, whether it’s the German elections or upcoming changes in the French government, or negotiations between Ukraine-Russia or Israel-Gaza, we have to see these events through a lens of interconnectedness. The world is very integrated today and the impact on general beta and credit spreads will be correlated to some extent. For us, it’s very much a focus on the shape of the curve – whether it’s the underlying rates yield curve or the actual credit spread curve – these are all areas that will have an impact on how we actively reallocate across bonds in the portfolio.
We had always expected the second half of the year to feed through more on the slowdown of the economy, but this may actually happen earlier. While I think the underlying US economy is strong, we are seeing a softening of US data and questions about US exceptionalism. For example, in March we saw outflows from US tech and outperformance of the Hang Seng index and China tech equities. We also saw a reversal of dollar strength because many were one-way on that USD trade. All of these reversals may be short-lived because of the lack of visibility ahead, therefore directional trades will be much harder-to-call. We believe in keeping a more diversified book by geography and industry as well as duration.
The macro backdrop is very important this year. Hence, we are monitoring the rates curve moves and foreign exchange markets. In past years when we suffered emerging market routs, it spills over into credit markets through currencies first and kind of triggers a domino effect in risk appetite.
Also, when we talk about rate cuts, we remind everyone that this is really just about front-end. The curve and the relative flattening or steepening impacts how and whether issuers issue. In the same vein, fund flows will impact how we position ourselves.
This is the challenge and the fun of credit markets, because we do not only have one stock price, it is complex with issuers having a whole curve and we have nuanced terms in each bond. This is a year when we have to do a lot more work because the world economy’s broader direction is harder to read.
Julian Lee, AAHK: I think the other thing that could potentially change the formula is the renminbi onshore market or Panda market. The market still faces some barriers and challenges such as different disclosure requirements and swaps, but with the world not necessarily completely relying on the US dollar, its potential will grow.
Regulatory barriers within the Panda market will ease over time for certain issuers so that will potentially be a viable source to diversify your funding source away from pure US dollar.
We have already seen a number of European issuers tapping into that. The European banks and some German automotive issuers are frequent issuers so it’s something to watch out for.
IFR Asia: Eugene, from your conversation with issuers, what concerns are popping up?
Eugene Ng, HSBC: Rates are definitely the hottest topic. In many pitches and meetings, we spend 10 to 15 minutes talking about rates – not only in Hong Kong, but also with Chinese issuers including corporates and state-owned enterprises. Some issuers benefit from stronger liquidity on their balance sheets and have the flexibility to wait. However, after almost two-and-a-half years of elevated rates, there’s only so much more one can wait.
One key challenge for me is to translate the tight spreads currently available in the market into opportunities. It’s actually one of the best times. You have seen issuers who understand the fundamentals of the spread and the rates to tap the market.
Timing is another critical factor. Some issuers historically tapped the market in the third or fourth quarter but many have been bringing forward their timetables. This is because in the last two years, the first half has proven to be a better time. Looking at the calendar, there are also more holidays in the second half.
For clients in China, the rate differential between onshore and offshore continues to be a key topic amidst signs of Chinese economic recovery. With economic objectives more clearly outlined, we can look for reduced volatility in China’s markets going forward.
That said, with Treasury yields exceeding over 4%, long issuance tied to the 10-year Treasury is around 4.5%. Adding the spread, issuers could face costs nearing 6%. This is understandably a key concern among the CFO community of China issuers.
Gary Lau, Moody’s: No doubt, as Eugene said, there are high-quality names that have very liquid balance sheets with multiple channels of funding access. We see cases, particularly state-owned enterprises that just paid down their maturing offshore debts by cash on hand or with funds raised from domestic market because of the high dollar funding cost relative to domestic funding.
But, at the same time, if you look at some other high-grade names and even LGFVs, they issue dollar bonds for a variety of reasons, not only to maintain the offshore issuance quota, but also a diversified investor base and keep their presence in the offshore dollar market for future fundraising. There are also some genuine offshore funding needs, including capital management, offshore investment and longer tenures. They see all these merits in tapping the offshore dollar market and accept the reality that the rate will remain elevated for a period of time compared with domestic funding. That’s why we still expect issuers to come to the offshore market.
Looking across the rated universe for all corporates in the region, ultimately domestic debt still accounts for the majority of their total debt outstanding. So one thing we look at whether a corporate will issue dollar bonds is their offshore refinancing need in the next 12 months.
Monica Hsiao, Triada Capital: The issue is that last year we were more conditioned to think that elevated Treasury yields were correlated with a sanguine risk sentiment. This was due to the assumption of inflationary pressures from productive growth. This year, in comparison, we have bouts of doubts about whether we are about to enter a stagflation cycle.
In Asia, besides watching USD rates, we have to consider how we look at the relative US dollar moves against the CNH/CNY, because how the People’s Bank of China fixes the currency sends signals about whether the currency is being used as a trade weapon too. Recently, the Chinese government has demonstrated that they have been happy to keep the renminbi relatively stable. This has been a good anchor for rest of Asia sentiment too.
We are reminded that nothing should be looked at in isolation. Everything is relative and there are so many pieces of the puzzle and variables right now. Such as the tariff reaction, which everyone has discussed ad nauseam, and yet no one has been able to map out the end results.
At the same time, we’re going to have overreactions to certain single data points. For example, Nvidia’s results are seen as almost as important as the Federal Open Market Committee (FOMC).
That’s why I see 2025 as a year to spend more time thinking about top-down asset allocation. It’s a year to consider all these macro factors as well as some of the micro stories. But I still think credit is a very attractive asset class to be, given the volatility of markets, because I believe new issues will price with more premium ahead.
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