Asia premium intact, but signs of change
July 13 |
July 13 (Reuters) - The subject of the "Asia premium" in the US dollar credit markets returned to the spotlight last week, as borrowers from Japan and South Korea paid only minimal new issue concessions to their secondary curves but still offered hefty discounts to comparable US credits.
The yield premium for Asia's borrowers has been a feature of issuance since the region's offshore debt markets took off in the mid-1990s.
The discount - measured using the Asian investment-grade curve versus US triple-B credits - reached 650bp at the height of the Asian financial crisis, and has inverted only during the US recession early in the last decade, when Asian IG traded through US triple-Bs by some 150bp.
The two curves traded in lockstep during the financial crisis credit spread blowout, but over the past two years the Asia premium has returned.
"There are structural arguments which support the view that there must always be an Asia premium. One is that there is an illiquidity premium on Asian credit versus US credit given the sheer size and liquidity of the US credit market," said Viktor Hjort, head of credit strategy at Morgan Stanley in Hong Kong.
"There are further considerations such as the fact that Asia lacks a transparent and advanced bankruptcy process; that it still largely relies on offshore capital markets funding which is inherently cyclical. In addition, while US corporate balance sheets have been improving over the past few years, those from Asia have been deteriorating," he added.
While an Asian premium certainly exists, it should, in theory at least, begin to erode on the sheer weight of money currently flowing in to the sector. Last week saw US$12bn printed out of the region, with total books north of US$42bn.
The substantial demand reflects a backdrop of resilient growth and sound banking systems in the region, a striking contrast to the situation elsewhere with the eurozone crisis seemingly far from resolved and the US economic recovery only sluggish.
Participation in the deals was boosted by a high level of central bank involvement, prompting speculation that pools of liquidity invested in US or European financial names might already be getting switched into Asian investment grade paper.
Middle Eastern central banks were rumoured last week to be selling euros and writing much bigger tickets for the deals from Asia, according to a regional syndicate head - an intriguing indication that there might be a full-scale shift out of official euro holdings.
"If you're the central bank of Norway holding US or European bank paper and facing a downward ratings dynamic, it's a no-brainer to look at issuance from an Industrial Bank of Korea or a Mizuho, which gives you a generous yield pickup to own an OECD name without going down the credit curve," said a syndicate head in Singapore.
"And with the eurozone crisis nowhere near over it is an obvious strategy to clear out your euros and park them in dollar paper from Asia where there is a decent pick-up to be had," he added.
FURTHER TO GO, BUT CHANGES NEEDED
Interestingly, the Asia premium has already begun to tighten. Asia IG spreads contracted by 6bp in the week to July 6 versus only a 3bp tightening in US and European IG, while Asia high-yield contracted 23bp versus a 2bp and 3bp tightening in the US and Europe. Last week the Asia IG index contracted another 10bp versus a 1.5bp widening for the US IG and a 1bp widening for the European Main.
"You can certainly argue that the Asia credit premium is too wide and has room to tighten further in the medium to long term. A quality double-A China oil major for example you pick up at 150bp on a Z basis, whereas a single A rated US oil name such as Conoco will yield you 90bp over and a double A like Chevron 35bp over. A triple-A such as Temasek in Asia trades at a pick up of 110bp on a Z basis, a triple A like Exxon at 35bp," said Owen Gallimore, head of credit strategy at ANZ in Singapore.
However, before Asian credits start to trade at the same level as their Western counterparts, a few key changes may be needed.
"In the US you do have vastly superior transparency, with 10-K updates on company accounts for issuers which have long issuance track records and generally operate in more mature sectors," said Gallimore.
"By contrast in Asia, many of the issuers have an issuance track record of a couple of years, operate in less mature industries, and do not provide regular cashflow disclosure. That helps explain why the Asia premium will not be fully erased."
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