Dealmakers bank on stable rates to revive Asian dollar bond issuance in 2024

By Scott Murdoch

SYDNEY (Reuters) – Asia’s dealmakers are hoping for a 10% increase in dollar bond issuance in 2024 as interest rates stabilise and companies beef up borrowing to fund capital spending plans, following the weakest year for debt markets in eight years.

The first few days of 2024 have brought a rush of U.S. dollar deals from some of Asia’s largest companies, with SK Hynix and steelmaker Posco aiming to raise a combined $2 billion, according to sources with direct knowledge of the transactions.

The Republic of Indonesia tapped dollar funding markets early to secure $2.05 billion in a three-tranche transaction, according to a term sheet seen by Reuters.

Last year, there were $272 billion in dollar bonds issued across Asia Pacific, including Japan, the lowest level since 2015, according to Dealogic data.

The decline came as companies pulled back deals as higher interest rates in the U.S. made borrowing in some local currencies and domestic bank markets cheaper.

For investment banks in Asia, the bond decline marked another hit to their fee incomes as revenue from equity capital market and corporate buyout advisory slowed in line with poor activity levels.

Key to the outlook for dollar bond issuance to improve is the view that the Federal Reserve will start cutting the cash rate in 2024 as indicators point towards inflation starting to come under control.

“A very important theme in Asia is onshore rates versus offshore rates so in many parts of Asia, it’s much cheaper to borrow onshore,” said Elaine He, Head of Debt Syndicate for Asia Pacific, Morgan Stanley.

“With the Fed potentially cutting rates in 2024, a reduction in the disparity between onshore and offshore borrowing costs could encourage an increase in offshore U.S. dollar borrowing activities.”

Dollar bond deals in Asia hit record highs in 2021 during the COVID-19 pandemic as central banks slashed interest rates and most major world governments ordered emergency fiscal stimulus, but dropped over the past two years as rates were ramped up.

Bank of America’s head of Asia Pacific debt capital markets (DCM) syndicate Joseph Pepping said he expected Asia Pacific dollar issuance would increase by about 10% in 2024 with more certainty on the rate outlook.

“Everyone is comfortable now that we are at the top of the rate cycle, central banks have been fairly clear they will stay higher for longer,” he said.

“Corporates that have been waiting out the market for the past two years will start to come back in.”

UBS’s co-head of Asia debt capital markets, Terry Schmassmann, said Asian regional companies, especially those in the renewable energy and electric vehicle supply chain sectors, would need to tap markets to secure funding for their expansion plans.

“Given the uncertain rates environment in developed markets, a lot of companies have put on hold their overseas capex strategies,” he said.

“Now this higher-for-longer mantra is starting to settle in, we are seeing some of those capex needs coming through. I would expect it to be a busier year for offshore issuance.”

However, in China, high yield dollar bond issuance remains muted as the country’s property sector, once an active dollar market participant, remains troubled. Dollar bond issuance in China was worth $42.5 billion in 2023, compared to the market’s peak of $210.5 billion in 2019, Dealogic data showed.

“It depends on how much funding companies need, whether they can find cheaper alternatives onshore. Given the size of the Chinese economy, there’s anticipation of an increase in high-yield deals emerging in 2024,” Morgan Stanley’s He said.

Bonds issued in all currencies across the Asia Pacific region in 2023 were worth $1.72 trillion, the lowest amount since 2015, according to the Dealogic data.

($1 = 7.8085 Hong Kong dollars)

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