Beware reasons to be cheerful about Asian credit


In the scheme of things, the victory of French presidential candidate Emanuel Macron in the first round of voting over the weekend, and the projected victory after the run-off next week, ought to provide one reason to be cheerful.

If the polls are right and Macron clinches the French presidency, then it seems likely that the euro will not collapse nor will the European Union; that was the package offered by Marine le Pen, but her capturing the Elysee Palace seems a very long shot indeed.

Readers of this column will know that I am bearish on Asian credit on the basis of geopolitical risk, and specifically the story that is playing out in North Korea. But the markets seem impervious to that glaring risk, at least for now, and what is interesting is the willingness of investors to embrace the lower reaches of the Asian credit curve.

We saw it a few weeks ago when the first Triple C issue to price since 2013 crossed the line in the form of a US dollar five non-call three from Indonesia’s Indika Energy, which uncovered such frothy demand that the issue was upsized.

A fair chunk of demand for the deal came from Asia, something which underscores the rapid maturing of the region’s investor base in terms of the depth of liquidity and a willingness to dig deep when it comes to credit risk analysis. Around 65% of the 144a/Reg S deal went to Asian real money.

The question I ask myself is whether the deal will prove to be the harbinger of a full-scale high-yield bonanza, involving more such Triple C deals, or whether we are simply witnessing the manifestation of opportunism based on a recovery in commodity prices.

It seems everyone is suddenly super-bullish on the outlook for a range of commodities, including coal, which has staged a recovery of sufficient magnitude that many coal producers and ancillary companies in Asia have effectively escaped from the threat of bankruptcy in less than a year.

Much like the projected outcome of the French presidential election, it seems the mindset at the moment is firmly of the “glass is half-full” calibration, and the market seems to want to manifest bullishness across a range of asset classes, from commodities to high-yield debt.

I’m less than convinced. As I wrote in this column last week, the threat to Asian credit – from what appears to be the most dangerous geopolitical situation to have threatened Asia in more than a generation – is so real that the prevailing price action in Asian credit seems almost surreal.

As ever we can but wait. But even if the standoff between North Korea and the US proves to be a drawn-out piece of sabre rattling that comes to nothing (I somehow doubt that possibility), I’m less than convinced that risk-on is really back in a meaningful way in Asian credit.

The story seems to be about the hunt for yield – something that never really went away. But if the US rate cycle really has turned, then I imagine the beneficiaries of that will be in the high-grade rather than the high-yield silo.

That won’t stop opportunistic high-yield issuance on the back of the supposed trend reversal of commodity prices. And that’s how it’s to be viewed: a high-yield boom in Asia strikes me as wishful thinking.


25 Apr 2017


Capital Markets

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