Asian dealers are hoping for a 10% rise in dollar bond issuance in 2024 as interest rates stabilize and companies step up borrowing to fund capital spending plans after this marks the weakest year for debt markets in eight years.
The first few days of 2024 have seen a flurry of US dollar deals from some of Asia’s biggest companies, with SK Hynix and steelmaker Posco seeking to raise a combined $2 billion, according to sources with direct knowledge of the deals data.
The Republic of Indonesia soon tapped the dollar financing markets to secure $2.05 billion in a three-tranche deal, according to a term sheet seen by Reuters.
Last year, $272 billion of dollar bonds were issued in Asia-Pacific, including Japan, the lowest level since 2015, according to Dealogic data.
The decline came as companies pulled out of deals as higher U.S. interest rates lowered borrowing costs in certain local currencies and domestic banking markets.
For investment banks in Asia, the decline in bonds meant another hit to their fee income as income from equity capital markets and corporate buyout advice slowed in line with poor activity levels.
Key to the improvement in the outlook for dollar bond issuance is the view that the Federal Reserve will start cutting the cash rate in 2024 as indicators suggest inflation is starting to come under control.
Elaine He, head of debt syndicate for Asia Pacific at Morgan Stanley, highlighted the significant issue of onshore versus offshore rates in Asia. He marked that onshore borrowing is cheaper than onshore borrowing.
“With the Fed potentially cutting rates in 2024, a narrowing of the spread between onshore and offshore borrowing costs could encourage an increase in US dollar offshore borrowing.“
Dollar bond trades in Asia hit record highs in 2021 amid the COVID-19 pandemic as central banks cut interest rates and most of the world’s major governments ordered emergency fiscal stimulus, but have fallen over the past two years as rates have been gradually raised.
Bank of America Asia-Pacific debt capital markets (DCM) syndicate head Joseph Pepping said he expects Asia-Pacific dollar issuance to rise about 10% in 2024 with more certainty about the rate outlook.
“Everybody’s comfortable when we’re at the top of the rate cycle, central banks have been pretty clear that they’re going to stay longer,” he said.
“Companies that have been waiting for the market for the last two years will start to come back.”
Terry Schmassmann, co-head of Asian debt capital markets at UBS, said regional Asian companies, particularly those in the renewable energy and electric vehicle supply chain sectors, will need to tap the markets to secure financing for their expansion plans.
With the uncertain rate environment in developed markets, many companies have halted their foreign investment strategies.
As the concept of higher-for-longer rates gains ground, we’re witnessing increased capital needs. This suggests a busier year for offshore issuance.
In China, however, issuance of high-yield dollar bonds remains muted as the country’s real estate sector, once an active participant in the dollar market, remains in trouble. Dollar bond issuance in China was worth $42.5 billion in 2023, compared with a market peak of $210.5 billion in 2019, Dealogic data showed.
“It depends on how much financing companies need, whether they can find cheaper alternatives on the mainland. Given the size of China’s economy, a surge in high-yield deals is expected to emerge in 2024,” He said.
Bonds issued in all currencies in the Asia-Pacific region in 2023 were worth $1.72 trillion, the lowest amount since 2015, according to Dealogic data.
(1 USD = 7.8085 Hong Kong dollars)