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MAY 9, 2005
Asia's Bond Boom Is Showing Its Age As demand softens, Asian issuers are worrying how far rates will rise A year after a successful bond float, the Indonesian government went back to the debt market in March confident of getting similar terms. After all, credit agencies boosted the country's ratings late last year, and short-term external debt has fallen over the past five years from 200% of foreign exchange reserves to just 35%. But a new deal was postponed -- twice -- because Indonesian officials couldn't get the interest rate they expected. Once the $1 billion issue was completed in April, Jakarta reluctantly agreed to pay 7.3%, up from 6.8% a year ago. Other Asian sovereign borrowers, including the heavily indebted Philippines, took note. "Suddenly, Asian issuers woke to realize that the environment had changed," says Tay Soo How, head of fixed income portfolios at Citigroup Asset Management (C ) in Singapore. Now investors and issuers are scrambling to figure out how much more softness to expect. There are two camps. One thinks rates will go up, so it's better that issuers go to market fast before offerings get prohibitively expensive and before global investors shy away from emerging-market debt. The other is betting that the Asian bond boom, though showing its age, still has a stretch to go. It's quite a dichotomy, and it underscores how hard it is to read Asian conditions these days. Even so, new debt issuance in Asia hit $63 billion in the first quarter, up 2% from the same period a year ago, according to Dealogic. That's significant, given that worldwide bond issuance has tapered off in the past six months amid worries that U.S. rates will gain at least 75 basis points before yearend. Those concerns have done little to undermine Asia's ballooning bond market, which has more than doubled in the past five years. Better transparency, less-leveraged balance sheets, and general prosperity all have created a deep pool of Asian bond issuers, especially in the corporate sector. Tighter fiscal discipline has improved the environment for sovereign bonds. JUMPY INVESTORS Increasingly, asian companies are turning to a rapidly maturing debt market for access to capital, which offers them greater flexibility at a lower cost than standard bank loans. "Even though rates are going up, Asian borrowers are still hungry for capital," says Herman van den Wall Bake, head of Asia Debt Syndicate for ABN Amro in Singapore. And some investors remain hungry for high-yield, long-term paper. "The short end of the yield curve is going up. But if you look at the 10- to 30-year curve, it's actually down in recent months, with the U.S. yield curve flattening," says Bake. Indeed, asset managers from around the world have been flocking to Asia, drawn by higher yields. Take the 7-year bond which Sino-Forest Corp. issued late last year at a rate of 9.125%, or 518 basis points over a 7-year U.S. Treasury note. Analysts say strong fundamentals make that investment shine next to the paltry 250-basis-point spread paid out by similarly rated U.S. corporates. So where's the problem? For starters, volatility has increased in recent weeks -- as evidenced by Indonesia's pricing troubles. Average Asian corporate bond yields surged from record lows of 7% in early February to nearly 8.50% in late March, after investors ran to the exits amid fears that the U.S. Federal Reserve would hike rates more aggressively. That could augur a period of choppy markets where debt issuance becomes problematic, if not impossible, especially for higher-risk companies and governments. Some investors -- and borrowers -- are growing jumpier at the thought that the good times may end. And some Asian issuers seem eager to lock in today's rates before spreads widen and increase borrowing costs. The end of the boom, or just a pause? There's plenty of money to be made -- or lost -- on the answer.  By Assif Shameen in Singapore
BW MALL
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