Asia Asset Bubble Monitor: Credit booming, but perps show limits

Friday, 19 November 2010 02:28 -     - {{hitsCtrl.values.hits}}

HONG KONG (Reuters) - Asia’s booming credit markets are not yet bubbling over, with investors drawing a line at exotic perpetual bonds, though some equity valuations in red-hot Southeast Asian bourses appear stretched.

Asia ex-Japan, with its favourable economic fundamentals and stable balance sheets, has been a magnet for foreign capital, one whose attraction has been made all the more powerful by expectations that money will stay cheap in advanced economies for a long time.

A growing number of emerging economies in Asia and elsewhere in the world have been imposing or considering capital controls to keep the influx of speculative money from feeding potentially destabilising bubbles and complicating policymaking even further.

Visiting bankers from the West have been struck by the boldness of Asia’s nouveau riche, who last month bought three bottles of 141-year-old Chateau Lafite Rothschild wine at Sotheby’s in Hong Kong for $232,692 each, nearly triple the highest estimate.

It’s no surprise then that some analysts say if any asset bubbles form in Asia; it would be among the most anticipated in modern history. Indeed, the phrase “asset bubble” has appeared in more than 3,000 articles so far in 2010, more than any other year in the past decade, Factiva showed.

Below are highlights of the bubble risks traders and investors face in Asia. For now the risks appear relatively low.


Bubble risks: Low. Borrowers want to lock in long-term funding, but investors are asking for higher premiums.

* “Risk on” trading in the wake of the Federal Reserve’s second round of quantitive easing has given way to profit taking in secondary markets as U.S. Treasury yields spike. * The issuance calendar is still full but upward pressure on yields and unfriendliness toward structures that push boundaries, such as perpetual bonds, may eventually cool primary markets. * Perpetuals, which have no maturity and had not been issued by an Asian corporate in 13 years, issued by Cheung Kong Infrastructure, Hutchison Whampoa and Noble Group fared poorly in secondary trading after Noble’s bond attempted to push through with what was viewed as an aggressive structure.

* Noble’s 3-point drop in secondary trading was a reality check for bankers and a curb on bubble behaviour. Likewise, OCBC Bank’s Lower Tier 2 bond with a 12-year non-call seven maturity — the first of its kind from an Asian bank — widened as much as 20 basis points two days after it was issued.

* Asia ex-Japan G3 currency bond issuance hit a record US$78 billion so far this year, with nearly six more weeks to go in 2010, Thomson Reuters data showed.

* Rare borrowers are still coming out of the woodwork to lock in long tenors at tight prices. They include Sri Lanka’s $1 billion 10-year bond and a $1 billion 10-year global bond from India’s biggest bank ICICI Bank. Both borrowers were able to achieve tighter pricing on the latest bonds than that paid on their last borrowings, which were shorter in duration.

* Investors still are welcoming higher duration in both high-yield and high-grade names, for now. Watch how far down they go on the credit scale.

* Capital curbs have already cooled foreign inflows in some of Southeast Asia’s hot bond markets.

While Indonesia has been hit by duration-cutting trades after posting equity-like returns for the second consecutive year, Thai bond yields have rocketed after Bangkok reimposed a 15 percent withholding tax for offshore purchases of local bonds on 13 October. In Philippines, a dollar shortage engineered by the C entral Bank dimmed the relative allure of Philippine assets and weakened the peso sharply — one of the top performing Asian currencies so far this year.


Bubble risks: Low to medium, on Southeast Asia valuations, IPO frenzy

* Asia’s hottest stock markets this year in the Southeast may be due for a correction. Without one, they run the risk of forming a bubble.

* MSCI indexes for Indonesia, the Philippines and Thailand are trading at price-to-12-month forward earnings ratios that are 22 percent above the five-year average, Thomson Reuters I/B/E/S data show.

* Valuations may contract, with the 30-day mean change in 12-month earnings estimates for the Philippines and Indonesia down 0.1 percent, according to Starmine data.

* A gaggle of prominent shareholders liquidated nearly $2 billion worth of equities in Hong Kong, South Korea, Indonesia and Malaysia last week, signalling a possible top of the market because of high valuations.

* Contrast that with Coal India’s <COAL.BO> IPO on 4 November, which encapsulated the frenetic year for IPOs. The $3.5 billion offering drew $52 billion in orders, and shares surged 40 percent on the first day of trade.

* “When everyone at large starts talking optimism, that is the time to get cautious. Retail participation has increased a lot. There are plenty of ‘tips’ floating around. All these are danger signs.” said Arun Kejriwal, director of research firm KRIS in Mumbai.


Bubble risks: Low since leveraged deal volume is way below 2007.

* Asian borrowers are being aggressive but lenders are not giving in so easily yet, reducing the risks of overleverage.

* A lacklustre response last month to Bharti Airtel’s $7.5 billion offshore loan in syndication to finance the purchase of assets from Zain Group shows banks are being sensible about pricing and risk.

* Average pricing for offshore loans in Asia in 2010 has dropped considerably from 2009 though still has not reached lows from the 2003-2007 boom years, Thomson Reuters LPC data show.

For a chart of average Asian syndicated loan pricing, click []

* Leveraged buyout financing in Asia Pacific ex Japan is as of the third quarter $2.03 billion. Last year LBO volume was $2.52 billion, still way below the last bull market high of $21.32 billion in 2007.

* Kohlberg Kravis Roberts’ $1.7 billion LBO of Australian fund manager Perpetual may be the weather vane for leveraged finance. Expect LBO financing to heat up if the deal is successful.