Geopolitics, a shift to sustainable finance and an uneven recovery from the pandemic are reshaping Asia’s credit-market landscape, uncovering opportunities for investors around the world.
Before the onset of the COVID-19 pandemic, the Asian credit market had been growing substantially in the decade since the global financial crisis. Annual issuance of cross-border bonds skyrocketed1 to USD575 billion in 2020 from USD107bn in 2006, according to the International Capital Market Association.
The potential for more growth is ripe for all to see, with international deals making up around 20 per cent of bond issuances from the region2, compared with around 40 per cent across the world. While this is partly due to a preference for Asian issuers to finance onshore, structural changes brought about by the pandemic, the relatively high yields on offer and the opening up of China’s markets are attracting a fresh wave of international investors.
At the same time, a new set of corporate issuers are coming to market, attracted by low interest rates. All this adds up to a new phase, as the asset class starts to move beyond COVID-19, characterised by a focus on environmental, social and governance (ESG) factors.
“After the pandemic shook investor confidence in some areas of Asia’s credit landscape, sentiment is now buoyant and demand continues to grow,” says Duncan Robinson, Managing Director, Global Head, Credit Flow Trading at Standard Chartered. “We’re entering a new chapter now, but there are echoes of a previous era – low rates and altered supply chains, which are still to run their course through the market.”
The outbreak of COVID-19 pushed the world into a health crisis and an economic crisis at the same time: shredding assumptions about growth, bringing nations across the world to a standstill and shuttering companies. In response, policymakers and monetary authorities cut interest rates, guaranteed loans and put in place a swathe of support measures3 which distorted markets, including Asia credit.
And even as the region leads the economic recovery, growth is likely to remain uneven, as China powers ahead and other Asian economies struggle. Alongside the patchy rehabilitation from the pandemic, investors are still grappling with uncertainties related to geopolitical tensions and the impact of sanctions on some companies.
The pandemic has also accelerated some trends that were already in train, both in the region and around the world. While the way we manage our lives and businesses were increasingly migrating online, this shift was exacerbated as COVID-19 swept around the globe.
Shriram Transport, which provides finance for the commercial vehicle industry in India, used the first lockdown to build out its digital infrastructure and platforms, reaching much of its customer base – which is largely made up of individuals – by mobile phone. The company has now started using blockchain technology4 to issue its fixed deposit certificates.
The company has also issued social bonds5, raising USD500 million last year in India’s first international public social bond issuance. In a sign of the strength of demand for assets linked with social benefits among international investors, the final order book was in excess of USD2.2bn – more than four times oversubscribed.
This year, the company came to market again for USD725m in secured notes, aided by Standard Chartered, again as part of its social bond6 issuance. The proceeds will help employment generation7 through micro, small and medium enterprise financing and microfinance. Positive social impact will be generated by improving financial access for the underbanked, who can find it difficult to access conventional financial services.
Across the region there has been an increase in sovereign and corporate supply, partly to plug gaps created by the pandemic. Total bond issuance is up regionally, while the issuance of bonds tied to ESG in the Asia-Pacific region has more than doubled to reach a record USD69bn this year.
There’s been a significant increase in supply from the Philippines – both in terms of sovereign8 and corporate credit – as the nation staves off the economic impact of the pandemic, which pushed up demand for financing.
COVID-19 has also brought a new wave of issuers to market, as companies that once had strong cash positions on their balance sheet find their revenues drying up. Airports are a key example here, with cash flows decimated by the pandemic’s impact on the tourism industry.
Without their regular sources of funding, a number of airport authorities across Asia have come to market more regularly since the pandemic struck. The Airport Authority Hong Kong9 sold bonds to US-based investors for the first time, raising USD1.5bn to fund capital expenditure on a third runway. It raised USD900m in 10-year notes and USD600m in 30-year bonds.
Changi Airport – one of the world’s busiest hubs – raised capital10 via its first medium-term note offering, while Delhi International Airport11 issued a USD450m green bond.
China and the Southbound bond connect
Investors are continuing to make capital available for public and corporate projects throughout the region and this is expected to continue, as China’s recently launched Southbound Bond Connect12 scheme enables more investors to seek offshore assets.
More than 2,000 global institutional investors are approved to use the northbound Bond Connect13 to access China’s bond market and the Southbound Bond Connect will allow China-based investors to buy offshore debt.
This will widen the scope of assets in the region considerably. China’s onshore bond market14 is the second largest in the world, after the US, while ICMA estimates the offshore corporate bond market to be approximately USD752bn, or around 30 per cent of the total APAC international corporate bond market.
Issuance by Chinese companies is skewed towards real-estate financing, and there have been some high-profile defaults that threatened to undermine sentiment15.
The increasing number of defaults means that Chinese investors may look at other parts of the region and diversify to countries like the Philippines, India and Indonesia.
With the Southbound bond connect having opened, many expect that demand will remain robust across the region. And even while more money is expected to emanate from China, few foresee a flood, since the most sophisticated and engaged issuers from China have already found ways to access capital.
Concerns about geopolitical tensions also appear to have done little damage so far, with with many companies from China– including Alibaba and Tencent – tapping the market in high-value and well-received deals.
“Last year was a record for issuance volume and it appears that the Sino-US tensions are not deterring investors,” added Mr Robinson. “Investors are keeping the evolving situations in mind, but they are still seeing value in credit all across the region.”
This article is based on themes discussed during a panel at Standard Chartered’s recent Global Credit Conference: Opportunities from Disruption. View the recording.