ASEAN KEY DESTINATIONS
By Paul A.
By Paul A.
This Week's In View
ASIAN HIGH YIELD BOND MARKETS WILL BENEFIT FROM CASH RICH INVESTORS
A spectacular rebound in global credit markets and risk appetite jump-started Asia's high-yield debt market last year. However, the rally has made investors much more selective about what they will buy in Y 2010. Borrowers need to position themselves accordingly I believe.
The return of new bond issuance in Y 2009 followed a broad based recovery in global financial markets. As liquidity measures introduced by central banks freed up the flow of credit, investors began to move away from overweight, but low-yielding, cash holdings into heavily discounted assets.
The result was one of the most spectacular rallies seen in credit market history, culminating in the return of first sovereign, then investment grade corporate, and finally high-yield bond issuance.
However, rising valuations have also made investors much more selective in what they will buy.
Last year, the rally provided a level of support to most new bond issues, provided they were well-executed.
While savvy strategists are still positive on Asian credit in Y 2010, last year's rally may not matched. This means investors must discount the equivalent level of market support and look even more closely at the unique fundamentals of each borrower.
The good news for borrowers here is that investors remain attracted to Asia's economic potential, while emerging market investors also remain relatively under-invested.
Since April 2009, total fund flows into emerging markets sits at just under US$3B, according to EPFR Global, a provider of fund flows and asset allocation data. With strong cash positions as of early October 2009 and relatively light bond issuance toward the end of last year, we think investors have entered Y 2010 with surplus cash to invest.
Successfully raising money in today's market environment requires borrowers to clearly and effectively sell their credit story to investors.
Along with financial openness, companies have think about how they are positioned within their sectors, countries and in relation to competitors, and finding the right bank to manage this process is crucial.
I believe that the cost of debt will continue to be determined by investor appetite and, for USD bonds, and Key interest rates in the USA.
The consensus is for interest rates in the US to rise in the 2nd half of this year, something potential borrowers should consider even though it may not happen that soon.
Overall, keen strategists expect further upside to Asian credit in Y 2010 as economic conditions improve and higher bond prices see investors look toward lower-rated names to generate returns.
Issuance of bonds in US Dollars, Euros and Japanese Yen is expected to remain at last year’s record levels at US$56.7B on issuance, with M&A financing, corporate expansion and continued efforts by borrowers to improve their maturity profiles as the Key drivers.
Overall the we should expect Indonesia, and Chinese property sector to dominate the new issue high-yield market in Y 2010. International bond markets remain open to Indonesian companies looking for medium-term financing in large amounts.
Emerging market funds are rich in cash, and credit markets have reached a level of relative stability.
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