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Snapshot - Valuation of 1Q2017 APAC USD new issues

A snapshot of valuations as of March 31 for all USD deals/tranches issued by APAC issuers in 1Q2017 reflect a strong preference for higher yielding issues. Chinese HY, Indonesian, Indian and Financials HY Subordinated USD bonds issued in 1Q2017 were arguably amongst the better performers for the quarter. Of course, there will be certain bonds within the other groups that would also have performed well but those were the four distinct groups that we thought saw strong performance collectively at the end of 1Q2017 based on the data studied below.

Quick notes on the data:

  • Due to relatively low amount of data across the various sub-groups, the median measure of change in spreads/yield would be a better reflection of general moves within the sub-groups
  • We treat taps of existing bonds as distinct tranches
  • "Sub." refers to subordinated issues, the rest are senior issues
  • All valuations are bid and indicative, as of March 31st 2017


Corporates

  • Chinese HY corporate USD bonds amongst the best performers in the sector with senior and subordinated bonds showing a median change in yield of -52.65bp and -67.45bp respectively
  • Chinese corporate IG's contrasting median and average change in spread figures were due to the strong performance of the following bonds, which pulled down the average for the sector significantly:
    • TEWOOG 4.625% 2020s saw spreads -24.0bp from reoffer/issue
    • TEWOOG 5.500% 2022s tightened -37.0bp
    • BJCAPT 3.875% 2020s tightened -59.5bp
    • HRAM 3.375% 2020s tightened -35.0bp
    • All other Chinese corporate IG bonds issued in 1Q2017 saw spreads widening from issue as of March 31
  • Indian corporates did well across IG and HY; IG bond spreads tightened by a median of -32bp while the HY bonds saw yields falling by about -11.4bp
  • Indonesia HY corporates bond issues turned in a solid performance with yields falling a median of -9.60bp
    • Average fall in yield of -37.76bp was due to clear outperformers in DOIDIJ 7.750% 2022s and PBRXIJ 7.625% 2022s, which saw yields falling 107.8bp and 108.4bp respectively as of March 31
  • Hong Kong Corporate HY issues were arguably the worst performers in the Corporates space with median and average yield change of +17bp and 6.12bp respectively, primarily due to the underperformance of these bonds:
    • NOBLSP 8.750% 09Mar2022 saw yields rising +38bp
    • HONAIR 7.125% PerpNC3.5 (and its tap) had yields rising +35bp




Financials

  • All HY/Subordinated issuance from Financials sector performed well; clear outperformers were:
    • ASAMLI 7.250% PerpNC5 saw yields falling -158.2bp since reoffer/issue
    • FWDINS 6.250% PerpNC5 yields fell -126.8bp
  • Australia, Japan and New Zealand IG Snr issues performed well as of 1Q2017 with their median spreads coming in -8.00bp, -2.00bp and -7.00bp respectively
  • Malaysia and India IG issuances saw spreads remain flat
  • Contrasting median and average spread figures for Chinese IG Snr tranches were due to certain clear outperformers that pushed average figures lower
    • CCAMCL 3.000% 2020s saw spreads tightening -20bp from reoffer/issue
    • CCAMCL 3.650% 2020s tightened -19bp
    • BCHINA 3.000% 2022s tightened -17bp
    • TAIKAN 3.500% 2022s tightened -33bp




SSAs

  • APAC USD bond issuances from the SSAs saw mixed performance at the end of 1Q2017
  • Supras, Korean, Japanese and Chinese SSA bonds put up a decent performance in general seeing their spreads tightening between 0.50-7.85bp
  • Chinese SOE/LGFV USD bond issues across both IG and HY underperformed at the end of the quarter
  • Indonesia was arguably the best performer within the SSA space with the sovereign's dual-trance sukuks and Indonesia Eximbank's issue reflected yields falling a median of -8.80bp
    • BEIAIJ 3.875% 2024s saw yields falling 10.7bp since reoffer/issue
    • INDOIS 3.400% 2022s yields fell -8.8bp
    • INDOIS 4.150% 2027s yields fell -4.6bp
  • The sole issue from Mongolia was the clear outperformer in this space with MONGOL 8.750% 2024s seeing its yields falling -54.3bp since issue




Analysis

It is unsurprising to see new issues from Indonesia and India performing well by the end of 1Q2017. Both economies have performed well YTD underpinned by its strong domestic consumption aiding growth while the recovery in the global economy stoked an export rebound. The Jakarta Composite Index and the SENSEX index had set all-time highs recently at 5,680.239 on April 6 and 29,620.50 on March 31 respectively.

  • Compared to most of their regional peers, their large and increasingly wealthier domestic markets will help reduce their dependence on exports for growth going forward; this can be observed in India currently (Indonesia to a lesser extent)
    • USD/INR has consistently fallen in 2017 YTD and was subjected to significantly less jawboning observed in most USD/Asian currency pairs amidst a broad downward trend YTD due to a pull-back in the broad USD as Trump policy uncertainties mounted
    • USD/IDR had largely remained contained within a 13,300-13,400 range for most of 1Q2017; but since April 10, the pair has broken below 13,300
  • We do expect recent positive sentiment on both economies to bolster capital and investment inflows into both markets for the rest of the year
  • Some of the near-term risks on both economies that should be considered include:
    • Volatility in global oil/commodity prices could weigh on growth particularly for Indonesia
    • Recent EU resolution requiring single-certification on sustainably -produced Europe-bound palm oil is expected to have an adverse impact on the palm oil industries in Indonesia (and Malaysia), being the world's largest (and second-largest) palm oil producer and exporter
    • Jakarta runoff elections on April 19 poses a political risk with polls showing a close race between the incumbent governor Basuki Tjahaja Purnama and Anies Rasyid Baswedan where a loss for Purnama could throw a spanner in the works and slow President Jokowi's efforts to implement policies and reforms aiding Indonesia's growth
    • Concerns over the growing bad loans problem for both Indian and Indonesian banks persist
      • Indonesia's deposit insurance agency (LPS) expects non-performing loans problem at Indonesia's banks to worsen and keep Indonesia's growth below 6.0% in the next two years
      • Non-performing loans continue to rise with State Bank of India reporting a 50% increase in bad loans in a year while those of its five associate banks increased by about 170%; local rating agency ICRA estimates gross non-reforming assets to constitute 9.7-10.0% of total assets at the end of 1Q2017


Chinese USD bonds have seen good demand and strong performance particularly for the new Corporate high yield issues although as with all things, caveat emptor should not be taken lightly

  • We view recent steps taken by the PBOC to tighten credit conditions as a signal it is concerned of the domestic credit risk problem
  • The search-for-yield could inadvertently result in the underpricing of credit risks particularly from the lower-rated/unrated credits


Looking Ahead:

1Q2017 saw total notable USD issuance of USD122.18bn. In terms of APAC USD bond issuances for 2Q2017, June is typically a slow month while French elections coming up in late April/early May could cause some volatility which may lead to issuers preferring to wait on the sidelines. However with China having a total USD1.4tr debt maturing in 2017, most of which will require refinancing over the coming months, we may see more issuances coming from the mainland. Certain issuers (i.e. the better performing sub-groups in this study such as Indian, Indonesian corporates for example) may take advantage of the good demand and performance of their peer group and opportunistically tap the USD market in the next quarter.


(haikal.razak@informagm.com)


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