Steady progress

IFR Asia - South East Asia 2015
9 min read

With recent efforts to bring lower-rated South-East Asian borrowers to the global debt capital markets yielding mixed results, the outlook for investors’ high-yield appetites remains uncertain.

Two and a half months into 2015, there is underlying nervousness about how South-East Asia’s credit markets will fare this year. A debt restructuring from Chinese developer Kaisa Group has soured the tone and, already this year, several new issues have been pulled. However, despite these wobbles, DCM bankers are upbeat about this year’s prospects for the regional debt markets.

“It’s going to be a very interesting year for South-East Asian credit markets. Supply has been relatively constrained, but we expect a decent tally for the year overall,” said Alexi Chan, HSBC’s head of debt capital markets, Asia-Pacific. “Jurisdictions I expect to be busy include Indonesia and Malaysia, with greater stability in commodity prices providing a helpful backdrop.”

As a credit proposition, South-East Asia ticks the “challenging” box, featuring, as it does, a range of less-developed countries. Singapore, with its implied Triple A credit rating, bestrides the top of South-East Asia’s credit curve, with Malaysia, Indonesia, Thailand and the Philippines in the middle and Cambodia, Laos, Myanmar and Vietnam at the bottom.

That range of countries, however, offers unique diversification opportunities. Against the backdrop of the “Sinofication” of Asia’s offshore bond markets, where China has come to dominate issuance, South-East Asia offers an opportunity for investors to spread their geographical risks and participate in a dynamic economic growth story – especially at the lower reaches of the regional credit curve.

While issuance from the middle of that curve has become a staple product for asset managers both in the region, as well as in the US and Europe, increasingly, interest is being shown in paper from the frontier markets at the bottom of the curve, where pent-up demand is building because almost nothing has been brought to market.

Despite the idiosyncratic appeal of the South-East Asian credit proposition, question marks hang over the region about the performance of emerging-market debt in the face of an eventual normalisation of US interest rates. Undoubtedly, a “hard landing” for the EM asset class globally would rule out the lower reaches of South-East Asia’s credit curve from coming to market, as well as anything other than the highest-quality names.

Malaysia in focus

South-East Asia’s offshore debt markets have no doubt progressed in leaps and bounds since the Asian financial crisis forced a rethink of currency mismatches the late 1990s.

In recent years, issuers in the region have benefited from increased allocations of funds into debt as investors have come to see the region as a relatively safe credit bet, bringing robust inflows and lower beta on South-East Asian investments relative to many other emerging markets.

According to data from Thomson Reuters, since 2008 some US$629bn of G3 deals from South-East Asia have been printed. Malaysia has dominated the issuance tally since the financial crisis, with US$170bn of deals. Next come Singapore, with US$137bn, and the Philippines, with US$132bn.

Indeed, numerous banks have singled out Malaysia as likely to be a rich source of supply in the offshore G3 markets this year, in both conventional and sukuk formats.

The next big test of demand for Malaysian credit will be a jumbo offering from Malaysia’s Petronas, which was marketing a multi-billion dollar global bond and sukuk package in early March. With last year’s slump in energy prices putting Malaysia’s export revenues and, as such, its sovereign credit under pressure, the jumbo deal is emerging as a signal trade for 2015.

Export-Import Bank of Malaysia is rumoured to be considering a big sukuk issue before June, while Telecom Malaysia has also been mentioned.

Interestingly, debt-laden investment vehicle 1MDB is about to be broken up, something that will stymie rumours that the company was hoping to raise additional funds in the offshore markets. The company actively considered the Samurai bond market in 2013, potentially with the backing of JBIC guarantee, but the nothing came out of it.

“There is a big risk that the execution of the hefty Malaysia pipeline will not be well timetabled. It will be a work of art to sequence the deals properly, in conventional and sukuk formats against, what is unlikely to be, a stable global credit backdrop,” said a regional DCM head.

The Philippines is also likely to be busy, given its heady GDP growth and rosy ratings picture.

“The Philippines has been on an upwards ratings trajectory and remains high on the buy list,” said HSBC’s Chan. “The long-dated sovereign trade, which opened the year, was very well received and has performed strongly in secondary. It confirmed that the robust technical backdrop remained very much in place.”

House guests

A key driver of technical demand for South-East Asian credit has been the growth of regional private banks, which have seen a structural alteration in their assets under management, with a larger proportion allocated to debt over equity and into high yield over high grade. This has particularly benefited high-yield issuance from Indonesia.

In addition, US and European institutional funds have been opening Asian offices, driving interest in Asian debt from investors in those jurisdictions. Funds, once referred to as “tourists” in the Asian debt markets and liable to be rapidly withdrawn at the first sign of trouble, are now increasingly regarded as “house guests”, backed with stable long-term allocations to individual countries and asset classes.

Still, despite this strong technical backdrop, early signs suggest this year is likely to be challenging for lower-grade credits emanating from South-East Asia. In mid-February, MAXpower, a Single B rated Indonesia-based gas producer, was forced to withdraw a planned US$250m five-year non-call three issuance, despite the hefty 11.75% yield on offer. A tweaking of covenants and escrow accounts failed to enable the offering to cross the line.

Meanwhile, at the same time, Philippines real-estate operator Century Properties pulled its planned unrated five-year bond offering, which was touted to yield in the mid 9% area. The question bankers asked was if these were one-off stumbles from challenging credits, or an axiomatic shift in sentiment towards low-grade issuance from the region.

Indeed, the two pulled deals surprised the market because, on the day they were withdrawn, Indonesian telecom infrastructure developer Tower Bersama brought a US$350m Reg S, which attracted a US$1.7bn order book, was tightened 50bp to 5.25% from initial guidance and came flat to slightly inside the issuer’s implied curve.

In the case of MAXpower, the company’s projected 5.5 times gearing and the likelihood that it would have needed further financing or an IPO to service the debt dissuaded investors from stepping up.

Kaisa fallout

Nevertheless, the two shelved deals leave no doubt that the Asia high-yield segment has begun 2015 with the least-auspicious tone for many years. That raises the prospect of more false starts during 2015 as investors become increasingly choosy about the credits they decide to support.

China, though many miles away from the jurisdictions featured in this report, shoulders much of the blame for that. In January, a cliffhanger involving China real estate developer Kaisa and the possibility it would miss a US$26m coupon on a dollar bond had created a mood of panic among high-yield investors.

A delayed coupon payment and white-knight investment in early February brought a more sanguine tone to proceedings. However, now, investors are being forced to extend maturities and accept drastically lower coupons before Sunac China will confirm its rescue investment.

“An interesting element of the pulled Century Properties deal is that, in my opinion, it was tarnished by the China property market, despite being a Philippines real-estate credit. China debt has the potential to ‘cannabilise’ South-East Asian paper even if the credit link is not obvious at all,” said one regional DCM head.

“What we are seeing nowadays is a return to proper credit discipline, where people don’t just book any deal for fear of being left out of the crowd.”

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Steady progress