Swaps open Asian local currency bond markets
* Withdrawals from local markets shift basis swaps
* Move makes issuance more compelling for foreigners
* Offshore renminbi and Samurai markets pick-up as dollar halts
By Christopher Langner
June 7 (IFR) - As investors pull money out of some Asian markets in response to recent volatility, the resulting shift in swap rates is making bond issues in some local currencies more compelling.
Spiking yields and an uncertain rates outlook have brought to a halt the record flow of dollar bonds from Asia, with Chinese utility Huaneng Group the only issuer in Asia ex-Japan to complete a new deal in the past three weeks.
In contrast, the offshore renminbi and yen markets are welcoming more foreign issuers after a slow start to the year. JP Morgan Chase last week completed the year's first Samurai bond from a US issuer, while National Australia Bank made its debut in the Dim Sum debt market.
The pick-up in cross-border deals follows a swing in swap markets as traders adjust their expectations for US rates. In the past three weeks, the cross-currency basis swap from renminbi to dollars has moved some 20bp. Swaps tend to move according to flows of hard currency in or out of a country.
The two-year, for instance, was being offered at -161bp last Thursday, according to Thomson Reuters data, one of its least negative levels year to date. The yen/dollar basis swaps are also near recent highs, as is the derivative for the Australian dollar.
"At these levels, you might see some issuers trying to take advantage of the arbitrage," said one syndicate banker. Indeed, the move has already brought back issuers to both the Dim Sum and Samurai markets, with the Kangaroo seen as the next destination.
The International Bank for Reconstruction and Development, rated Aaa/AAA/AAA, hinted at this emerging arbitrage opportunity two weeks ago, when it priced the largest offshore renminbi bond to date in 144A/RegS format: a Rmb1.7bn (US$274m) one-year transaction.
The bond, sold via HSBC with a yield of 2%, also marks the largest Dim Sum from a supranational and from any issuer in the Americas. More important, however, was the fact that the recent move in the basis swap translated to sub-Libor funding for the IBRD once the bond was swapped back into US dollars.
Renminbi investors were also happy, as the supply of investment-grade paper had been very light so far this year. It was such a positive experience for both sides that the IBRD returned last week and reopened the bond for another Rmb300m, bringing the total amount outstanding on the new issue to Rmb2bn.
More activity is expected from foreign high-grade issuers in the Dim Sum market and the multilateral was duly followed by Aa2/AA-/AA- rated National Australia Bank, which priced a fixed-rate two-year offshore renminbi bond at 2.4%.
On a swapped basis, NAB paid approximately 30bp over Libor for the two-year bonds. That is about 4bp inside the Australian major's cost of funding in dollars.
The same dynamics have given the Samurai market a welcome boost after a disappointing start to the year. One banker described the Samurai pipeline as the busiest in recent memory as more issuers look to take advantage of arbitrage opportunities.
JP Morgan Chase was the latest to jump on the opportunity, printing a ¥105.6bn (US$1.06bn) three-tranche transaction that saw the 10-year piece come 11bp through the lender's US dollar funding costs on a swapped basis.
That deal followed similar achievements from Rabobank (Aa2/AA-/AA), Korea Development Bank (Aa3/AA-/AA-) and Nordea (Aa3/AA-/AA-).
"You can say we expect a very busy June," said one banker in Japan. That is more than bankers looking after dollar bond issuance can say.
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