Fixed income investors in Asia are showing increased caution due to risks around US rates and weakness in Chinese bonds, causing some issuers from the region to hold back their deals.
Hong Kong businessman Richard Li’s PCGI Holdings finished investor calls on August 10 and a proposed US dollar bond offering could have hit the market as early as Wednesday, but a banker on the deal said investors needed more time to better understand the company – even though it has been issuing offshore bonds since 2019.
The banker also said there was a pricing gap between some investors and the issuer.
Both Hong Kong-listed property company Great Eagle Holdings and Indonesian distressed-debt manager Perusahaan Pengelola Aset have also completed investor calls on August 4 but are yet to tap the market for their proposed debut dollar bonds.
“Great Eagle could have done a deal [last week], but it’s about the pricing,” said a banker on that transaction. “Investors are starting to push back because of region-specific jitters around names like Evergrande and Huarong, so they are asking for more buffer in pricing.”
Property developer China Evergrande Group has faced negative headlines about delayed payments to contractors, while trying to sell assets to raise cash. Meanwhile, state-owned China Huarong Asset Management is expected to release its delayed annual results by the end of this month, and some investors fear it could announce a debt restructuring.
Investors in Asia are heavily exposed to both companies, making them reluctant to take a risk on new issues unless they are well compensated.
The proposed new bonds of Great Eagle and PCGI Holdings are also unrated, which naturally results in a smaller pool of investors compared to the rated universe, although unrated Hong Kong issuers such as Henderson Land Development and Wheelock have five-year notes trading in the low 2% area.
Indonesia’s PPA, on the other hand, is a tricky name that has sub-investment grade ratings of BB/BB+ (S&P/Fitch) and operates in a business cleaning up bad loans from state-owned enterprises as the country grapples with one of Asia’s worst Covid-19 outbreaks. Still, the sticking point for the state-owned asset manager’s debut deal was also pricing.
“I was a bit surprised to hear how the pricing was much wider than what the issuer might have wanted to see,” said a banker away from the deal.
Issuers want to take advantage of the current low US Treasury yields and tightest-ever spread levels, reflected in the heavy corporate bond issuance in the US last week, but Asian investors are turning cautious.
“Investors are on a risk-off mode at the moment between credit issues and rates, so it’s a bad time to be printing a new issue if you ask me,” said an investor based in Asia. “If you look at the Asian credit composite index, the return is negative year-to-date because of rising rates and the Evergrande sell-off, and a lot of fund managers’ performances are even worse than the index.”
The 10-year US Treasury yield had dipped to 1.172% on August 3, but climbed to 1.367% on Thursday, according to Refinitiv data. The benchmark had been hovering below 1% at the end of last year.
The banker away from the PPA deal said investors are also waiting for more clarity on the Fed’s tapering plan at its Jackson Hole meeting on August 26–28.
“They would not want to jump the gun ahead of something like that,” he said.
US investor demand
All three potential issues will be offered in Reg S-only format, which means they are more heavily affected by Asian headlines around Evergrande, Huarong and China’s regulatory crackdown compared with 144A/Reg S transactions that can be sold to US investors.
A new US$414m amortising five-year non-call two 144A/Reg S green bond from Azure Power Energy that priced on August 11, for example, was covered over four times with US investors taking a third of the offering.
“It’s a pure ESG play from a renewable energy company, and US investors are unaffected by all the Asian issues,” said a banker away from the deal.
The green bonds, with expected ratings of Ba2/BB+ (Moody’s/Fitch) and a weighted average life of 4.33 years, priced at par to yield 3.575%, inside initial price guidance of 4% area.
Final orders exceeded US$1.7bn from 102 accounts. Asia took 37%, the US 33% and Europe 30%. Fund managers and asset managers bought 88%, insurers and sovereign wealth funds 5% and private banks and others 7%.
Barclays, HSBC, Standard Chartered, Credit Suisse and MUFG were joint global coordinators for the Azure deal as well as joint bookrunners with Jefferies, Roth Capital Partners, Societe Generale and ICICI Bank.
HSBC, Credit Suisse, DBS and SMBC Nikko are joint global coordinators, joint lead managers and joint bookrunners for the PCGI Holdings deal.
Citigroup, HSBC, JP Morgan, UBS, ANZ, Bank of America, Bank of China (Hong Kong), CMB International, DBS and Mizuho are joint global coordinators and joint bookrunners for the proposed Great Eagle bonds. BNP Paribas, China Construction Bank (Asia), ICBC (Asia), OCBC Bank, SMBC Nikko, Standard Chartered and United Overseas Bank are joint lead managers.
PPA held investor calls via BNP Paribas, DBS and Standard Chartered.
Source: Reuters (Reporting by Jihye Hwang, Editing by Daniel Stanton.)