Struggles in Asia Dollar Bond Market Emerge in Smaller Deals

(Bloomberg) -- In Asia’s struggling dollar bond market, a trend toward smaller issuance sizes has big implications.

Even as the total number of offerings this year remains roughly the same as in 2017, the deal count worth $1 billion or more has almost halved. As well as the headache that it creates for companies with super-sized funding needs, smaller issues tend to be taken up by local investors who prefer to hold to maturity.

That’s bad news for Asia’s bond market, where fundraising almost doubled last year to a record $323 billion. As big borrowers printed jumbo deals, secondary trading grew in tandem, which in turn allowed for better pricing for newer bonds. The risk, if this cycle is broken, is that liquidity will dry up as foreign funds go elsewhere, says Haitong International Securities Group Ltd.

“Investors will have to continue to be selective and adjust their portfolios to reflect the lower liquidity profile of these smaller deals, until market conditions permit the return of larger transactions," said Alan Siow, London-based portfolio manager at BlueBay Asset Management.

About 12 Asian borrowers priced deals that met the $1 billion threshold in the second half, down from 35 during the first six months of this year, Bloomberg-compiled data show. In 2017, 91 issuers came to the market, led by Postal Savings Bank of China Co. which priced a whopping $7.25 billion deal.

This is down to a challenging backdrop. Asian corporate bond yields are at the highest in nearly seven years, a China-U.S. trade war is dragging on, and corporate default risks in China are rising.

Chinese demand is dropping due to deleveraging efforts onshore, causing a bias towards each successive transaction being smaller and taken up by a narrower set of investors, said BlueBay’s Siow.

“To continue to develop into a truly global asset class that attracts a global investor following, the Asian USD bond market would certainly benefit from larger transactions, including jumbo deals,” Ernst Grabowski, head of debt syndicate for Asia Pacific at Morgan Stanley.

Investors are demanding more new issue concessions now to compensate for a potentially higher mark-to-market loss on their portfolios in case of U.S. Treasury yields rise down the road, according to Chen Yi, a Hong Kong-based head of global capital markets at Haitong. That’s “especially when there are potential liquidity concerns, which could be magnified amid the ongoing trade tension."

Some issuers are paying a much higher premium these days to price deals. Average yields on dollar bonds priced by Asian junk issuers have jumped to 8.8 percent, the highest level in almost seven years, according to Bloomberg Barclays indexes. In October itself it recorded the biggest monthly jump since June 2013.

"Investors are understandably reluctant to deploy cash on days where they see exaggerated moves in leading indicators, such as U.S. equities rout and rising CDS spreads," said James Arnold, head of Asia Pacific debt capital markets syndicate at Citigroup Inc. "This is likely to be a recurring theme for at least the next few weeks and possibly into the end of 2018."

--With assistance from Allen Yan.

To contact the reporters on this story: Carrie Hong in Hong Kong at chong61@bloomberg.net;Narae Kim in Hong Kong at nkim132@bloomberg.net

To contact the editors responsible for this story: Neha D'silva at ndsilva1@bloomberg.net, Chan Tien Hin

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