The Asian G3 bond market saw a surge in issuances in the third quarter of 2020, sustaining the robust activity in the first half of the year on the back of large transactions underpinned by investment-grade credits.
Figures supplied by Refinitiv show Asian G3 bond issuances, outside of Japan and Australasia, amounted to US$114.08 billion in the third quarter of 2020, representing an increase of 37.6% from US$82.93 billion in the same period a year ago. This was the highest third quarter volume in Asian G3 bond issuance since 2010, as the market continued to brush aside the impact of Covid-19.
For the nine months of 2020, the amount reached US$302.91 billion, a 10.4% increase from US$274.40 billion in the corresponding period of 2019. In September alone, the total issuance reached US$50.73 billion, the highest September tally since 2010 and up 38.4% from US$36.64 billion in the same period last year.
“This year has been categorized partially by elephant-sized transactions,” says Conan Tam, head of Asia-Pacific debt capital markets at Bank of America. “Issuers are also taking advantage of the market, raising more than they usually would. We likewise see some repeat issuances, with investment grade issuers accessing the market twice this year – a theme similar to what you see in the US.”
The issuances in the third quarter are driven by investment-grade names. Says Tam: “The investment grade fund flows are still positive globally for good reasons. The underlying rates are benign and spreads have not come back down to levels seen in January – they are still slightly elevated. It has been a constructive rate environment for investors.”
Singapore’s global investment company Temasek Holdings printed one of the most interesting deals during the third quarter when it priced on September 29 a three-tranche bond offering totaling US$2.75 billion, which included its longest issuance tenor so far of 50 years that further extended its debt maturity profile.
In doing so, Temasek followed in the footsteps of Thailand’s state-owned oil and gas company PTT, which priced in July a 50-year bond amounting to US$700 million. In April, the Republic of Indonesia became the first Asian sovereign to sell a 50-year bond as part of the issuance totaling US$4.3 billion. The 50-year tranche raised US$1 billion.
Longer-dated bonds from investment-grade corporates are gaining traction in Asia as institutional investors, such as pension funds, seek assets to match their long-term liabilities. Chinese multinational conglomerate Tencent Holdings printed a US$6 billion offering in May, which included a 30-year tranche amounting to US$2 billion and a 40-year tranche amounting to US$750 million.
Malaysia’s national oil and gas company PETRONAS also raised long-term capital when it priced a similar deal size of US$6 billion in April that likewise included 30-year and 40-year tranches of US$2.75 billion and US$1 billion, respectively.
A debut deal that attracted a lot of attention was for Contemporary Amperex Technology Limited (CATL), a leading global supplier of energy storage batteries and lithium battery materials. The company on September 10 priced a five-year bond amounting to US$1 billion and a 10-year bond amounting to US$500 million, which generated a combined order book of over US$13.5 billion, enabling CATL to tighten its pricing by 50bp to 55bp.
“We saw in this deal global funds that we do not usually see play in Reg S Chinese deals before,” says Tam, whose bank acted as a joint global coordinator, bookrunner and lead manager for the transaction.
Innovative offering structure also emerged during the period when China National Chemical Corporation priced on September 14 a US$3 billion equivalent five-tranche issuance with a combination of a multi-tenor US dollar senior, US dollar subordinated perpetual and a euro senior bond. This was the first time for a Chinese company to issue simultaneously such a variety of product offerings across different currency, tenor and type of instruments.
China Huarong Asset Management followed suit when it printed on September 24 a three-tranche transaction totaling US$1.2 billion that included a three-year and a five-year fixed rate bond, plus a subordinated non-call five-year perpetual bond.
Overall, China accounted for the largest issuance volume in the first nine months of 2020 with US$134.76 billion for a 44.5% market share. This was down from US$139.19 billion, or 50.7% market share, in the same period in 2019. The decline was offset by the higher volume recorded in Hong Kong, the Philippines, Indonesia, Singapore and Malaysia.
High-yield issuance in the third quarter of 2020 also rose, up 14% to over US$17.55 billion, according to Refinitiv, compared to US$15.40 billion in the corresponding period of 2019. This brought the January-September volume to US$52.17 billion, which was below the US$67.91 billion recorded in the same period a year ago.
“We may see further tapering off in high yield issuance from the property sector, which is constructive in the medium term,” Tam points out. “We’ve seen a big drop off in private banking demand for high yield. We’ve hit a level where investors are less interested for these types of deals.”
China Evergrande Group, one of the country’s largest property developers, rattled the market in the last week of September amid concerns over its ability to meet its debt repayments. The crisis was eventually averted when the company’s strategic investors, in an announcement on September 29, agreed not to redeem their investment for cash.
China continues to dominate the high-yield space with total issuance of US$31.74 billion during the first nine months of 2020 for a market share of 60.8%, followed by Hong Kong with US$10.21 billion (19.6%), India US$3.31 billion (6.4%) and Indonesia US$3.06 billion (5.9%).
Going forward, high-yield issuance from the Chinese property sector, faces a challenge with the implementation of the so-called “three red lines” policy, which restricts property developers' borrowings according to three ratios: asset-to-liability, net gearing, and cash-to-short-term debt.