* New rules to curb corporate bank lending
* Companies likely to turn to bond markets
* Danger that investment reversal could hamper growth
By Christopher Langner
Dec 4 (IFR) - Asian bond issuance could triple over the next
five years, according to a recent report by Standard Chartered,
as deleveraging and more stringent regulatory requirements
stifle bank lending and drive borrowers to alternative sources
"We estimate that these events [Basel III and European bank
deleveraging] will lead to a tripling of the size of the AXJ
[Asia ex-Japan] corporate bond market, to more than USD10trn by
2017 from just USD3.3trn today," said the report, first issued
on November 9.
The report predicts that Basel III will cause a lending
shortfall of about USD340bn over the next five years.
"We assume that this financing shortfall will be covered by
increased issuance of corporate bonds. This increased issuance
is expected to raise the share of bond markets to circa 40% of
corporates' total funding mix by 2017, from around 25%
currently," the report said. Other borrowing needs should make
up the rest of the number.
If StanChart's analysts are right, it means that the record
USD125bn of bonds that Asian credits have issued in dollars and
euros so far this year could well be broken in 2013. The report
said that much of the growth, however, would come from local
In its quarterly Asian Bond Monitor report issued in
November, the Asia Development Bank (ADB) had already flagged
the strong growth of corporate issuance in local currencies. The
report said there was USD2.16trn outstanding in corporate bonds
in the local markets of Emerging East Asian countries, 21.7%
higher than in 2011.
That figure is in line with the 21% annual growth that
StanChart predicts. The numbers may be big, but the prediction
may not be far-fetched. G3 issuance this year has almost doubled
the USD76.2bn booked in 2011, which was itself a record year, so
when local currency bonds are added, StanChart's speculation
Yet, fixed-income investors in the region were alarmed,
given the high numbers involved. One manager expressed concern
that the massive supply would not find sufficient demand. One
analyst, however, was more optimistic: "There should be enough
money coming into the region to absorb all this supply."
So far, this year has backed the optimistic analyst's case.
According to research firm EPFR, investors allocated USD35bn in
new money to mutual funds focused on EM bonds in the year to
Add to that pension funds and other asset managers which
have been opening shop in Asia but are not featured in EPFR's
survey, and it is clear that there is plenty of money coming
into the region.
Besides the foreign money, Asia also has plenty of savings
itself. According to the World Bank, developing Asia has the
highest level of savings as a percentage of GDP, at 43.5%. One
analyst said that less than 20% of investments in Asia are
allocated to fixed income.
That is significantly higher than the 10%-12% figure seen
three years ago, but it is a long way from the 33%-35%
allocations of European and US investors, meaning there is
plenty of room to grow.
The problem, though, is if there is a sudden shift in that
flow. With corporates relying mostly on the bond markets, if
demand dwindles, funding costs could spike.
Demand is not the only concern. Companies in Asia will be
competing with banks and governments, especially in the local
markets. Government borrowing in Asia has been on the rise over
the past five years as countries boost investment to maintain
high growth rates.
According to the ADB, local currency government bonds
outstanding in Emerging East Asia grew 10.1% to USD4.08trn in
the third quarter of 2012 versus the same period in 2011. While
the percentage growth was smaller, the additional USD377bn that
sovereigns printed was almost equivalent to the USD385bn more
that corporates issued.
Then there are the banks themselves. The same Basel III
regulations that will curtail their lending to local companies
will compel them to raise capital by issuing bonds in local and
Estimates put the amount of new capital that banks in the
region will have to raise to meet Basel III's more stringent
requirements at up to USD5trn.
While much of that will come via the equity markets or
through withheld earnings, a good chunk will reach bond
investors - at juicy premiums too.
Hence, if in the next five years money stops flowing to
Asia, funding conditions could become quite challenging. Or, as
the StanChart report put it: "If the expected growth in
corporate bond markets does not materialise, economic growth in
some countries in the region is likely to be compromised."
(Reporting By Christopher Langner; Editing by Nachum Kaplan and