West looks East for value

Thu Apr 17, 2014 3:38am EDT

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* Western participation in Asian deals rises

* Analysts see little upside for European and US credit

* Total return to date has already beaten full-year targets

By Christopher Langner

SINGAPORE, April 17 (IFR) - The high returns in the European and US credit markets of late are driving investors back to Asia in search of better yields and relative value.

The renewed demand is supporting an issuance spurt, which promises to turn April into one of the busiest months of the year. As of April 17, the month's tally was at US$15.9bn, lower only than January's US$20.7bn.

Portfolio managers and analysts are attributing the burst in activity to the high returns year to date of credits in Europe and the US. The situation has left investors with few options but to search again for yields and upside in emerging markets, especially in Asia, widely seen as one of the more resilient regions within the asset class.

Traders have reported increased interest in Asia from Western asset managers. Deals this month have also shown a stronger participation of Western accounts.

About 60% of a US$200m bond from Indonesian textiles company Sri Rejeki on Tuesday sold to US and Europe. Asian accounts, meanwhile, had dominated the last large offering from an Indonesian credit, the US$225m five-year from real-estate company Alam Synergy. Investors from the region bought 72% of the bonds.

"US investors have mostly shunned Chinese property names and I doubt they will change their minds on that, but the recent deals we've seen are away from this sector and are, therefore, attracting a strong response from this investor base," said Zhi Wei Feng, a high yield credit analyst at Standard Chartered Bank.

The Western participation increased for high-grade transactions, too. Last week, when State Bank of India sold a two-tranche bond, 76% of the US$1bn five-year piece went to Europe and the US, while 73% of the 10-year went to the same regions.

In April last year, the last time SBI had been to the US dollar market, Asian accounts took 56% of the US$1bn five-year bond.

Unexpectedly good year-to-date returns in Europe and the US have paradoxically prompted investors in those regions to increase their Asian exposure, where they now see more upside potential.

According to Societe Generale credit analyst Juan Valencia, the total return for investment grade credit in Europe this year to April 15 stands at 2.96%, while in the US it is at 3.85%. High yield in Europe has returned 3.83% and in the US, 2.92%.

The total return has already beaten most of the forecasts made at the beginning of the year.

Deutsche Bank, for instance, had predicted that US high-grade bonds would return negative 0.6% and junk paper a total of 3.9%, though that had the caveat of a prediction of a 100bp rise in the yield of 10-year US Treasuries.

Much of the return seen in IG this year was due to an unexpected drop in Treasury yields.

"A lot of the gains have been driven by yield compression (on the benchmark)," said Pradeep Mohinani, credit analyst at Nomura in Hong Kong.

The 10-year US Treasury started the year with a 3% yield and is now around 2.65%. The JP Morgan Asia Credit Index Investment Grade Index has returned 3.7% year to date and the Asian Corporate High-Yield Index from the same family 2.4%.

BETTER ASIA RETURNS

However, because of spread widening last year, in relative terms, Asian bonds are offering better yields and potential returns than paper from similarly rated companies in the West.

A gauge of the size of the pick-up is in the 41bp available from the embedded option adjusted spread on Citigroup's US Broad Investment Grade Bond Index.

The Bank of America Merrill Lynch Asian Dollar Investment Grade Index offers a 167bp option-adjusted spread for the same modified duration and an average rating only two notches lower.

A similar logic applies to the high-yield world.

"You simply cannot find 9% yields on Single B paper in the US," said a high-yield portfolio manager in Singapore.

That, he says, explains why companies like Bangladeshi telecoms Banglalink or Indonesian textiles Sri Rejeki Isman are finding demand.

Banglalink, with a B1 rating from Moody's, had circulated price talk of 9% for a US$300m five-year bond on Wednesday, while Sri Rejeki Isman, rated B1/BB- (Moody's/S&P), priced a US$200m five-year last Tuesday at the same 9% level.

"When they [Western accounts] see this kind of yield, they get excited," said a credit analyst in Singapore. (Reporting by Christopher Langner, additional reporting by Neha D'silva, editing by Timothy Sifert, Abby Schultz)

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