Significantly fewer U.S. dollar bonds have been issued in Asia since March, as investors demand higher yields or shun emerging markets amid a global economic slowdown caused by the coronavirus outbreak.
While issuance started recovering in April, credit spreads for new corporate dollar bonds in the region are likely to remain high for now, which could continue sidelining high-yield issuers, analysts say.
In March, only 49 dollar bond deals were struck in Asia excluding Australia and New Zealand, according to data from Morningstar Direct. Although the count rose to 90 in the first half of April, it was still much lower than 404 in January and 277 in February.
"COVID-19 disruptions and associated global recession worries have raised credit default fears and prompted a tightening in [U.S. dollar] liquidity, posing a double whammy for [U.S. dollar] credit issuance," said Wei-Liang Chang, a credit and foreign exchange macro strategist at DBS Bank.
Dollar bonds have been one of the major funding sources for Asian companies and governments, as they take advantage of relatively lower interest rates offshore to boost their capital or refinance their overseas debt.
Anna Ho, an analyst at UBS, said that investors are also concerned about prospects in the secondary markets amid plunging prices of most asset classes toward the end of March.
"A few high-grade credits have accessed the market successfully, so deals can still get done but overall volumes have been low," said Jason Elder, a corporate and securities partner at Mayer Brown.
BOC Aviation Ltd. sold US$1 billion of five-year notes at a yield 300 basis points higher than U.S. Treasurys in the week of April 20. The premium was three times the 100-basis-point spread the aircraft leasing firm paid for a similar-tenor debt in January.
The company actually managed to bring down its coupon to 3.25% for the latest offering, from 3.50% it paid in April 2019. "Spreads have widened but our cost of funds has actually come down year on year, despite the carnage in the capital markets," said Timothy Ross, the head of investor relations at BOC Aviation.
High-yield bonds in spotlight
Zooming into the sub-sectors of the dollar bond market in Asia, DBS' Chang said that while investment grade bonds have seen "softer growth" in the first quarter, the high-yield bonds have contracted on a year-over-year basis owing to a "huge jump" in spreads and weak demand.
UBS' Ho agreed that Asian high-yield bonds will face challenges in terms of refinancing in 2020. Within the high-yield universe, she said property companies represent 45%-50%, Indonesian and Indian high-yield bonds are 10%-15% each, and the remaining are Chinese state-owned enterprises or local government financing vehicles.
"Chinese property bonds, which are a major component of total Asian high-yield bonds, actually have a lot more financial flexibility to handle the situation," Ho said. She said there are several ways to obtain financing, such as asset sales, bank loans and the onshore bond market, which helps the sector weather the lull in the region's dollar bond market.
For Indonesian and Indian high-yield bonds, Ho said the bonds typically mature in three to five years, adding wiggle room to the issuers as they do not need immediate bond refinancing.
Despite the economic slowdown, Neeraj Seth, head of Asian credit at BlackRock, said the market might remain challenging for issuers placed in the lower-credit-quality spectrum and in sectors directly affected by the virus. However, Seth is optimistic that higher-quality investment-grade and high-yield issuers will enter the market in the next few months.
China, Japan most active issuers in Asia
So far in 2020, China and Japan are the most active dollar bond issuers in the region, with the former still known to dominate the dollar bond market in Asia.
"The decline in [U.S. dollar] bond issuance does not spell an imminent crash for Chinese firms," said DBS' Chang. "They can always opt to finance in the onshore [yuan] market where spreads remain quite contained, or rely on bank loans. Remember, external [U.S. dollar] debt remains a small portion of total Chinese corporate debt, which is still largely dominated by bank loans."
BlackRock's Seth agreed that the size of U.S. dollar credit for Chinese issuers is "relatively modest" compared to the total credit to corporates. Local Chinese banks provide funding of around 150% of GDP and onshore yuan markets are about 50% of GDP, he said.
Credit spreads may not come down soon
Analysts said that the Fed's initiatives such as open-ended quantitative easing and the US$850 billion credit market support have eased pressure on U.S. dollar liquidity, although dollar bond spreads are likely to remain high.
"If you look at the late-March data, the credit spreads in Asian investment-grade and high-yield bonds are actually at [a] historical peak, even higher than the downturn in the European debt crisis 2011 and the oil price crisis 2016, and even at par with the global financial crisis," said UBS' Ho. "In credit spread terms, we are already seeing the worst."
Despite the gloomy short-term prospects of dollar bonds in Asia, there are significantly fewer bonds that will mature in the second half of 2020 compared to the first half, which could provide some breathing room for issuers who are struggling to fulfill their debt obligations before the end of the year.
Analysts noted that there are a number of ways to avert a bond default, such as maturity extensions or swapping for new bonds with haircuts.
"We do expect the default rates to pick up in the Asian [high-yield space] but expect the asset class to outperform the rest of [emerging market] or U.S. [high-yield] markets in terms of default rates by end of 2020," said BlackRock's Seth.