Asia-Pacific banks are likely to stay cautious about raising debt after aggregate issuance in June fell to the lowest monthly level since the start of 2021 amid tight financial conditions.
Banks in the region raised a total of $3.49 billion in debt in June, down from $6.06 billion in the previous month and $19.79 billion in June 2021, according to data compiled by S&P Global Market Intelligence. In addition, banks raised about $860 million by selling equity instruments during the month, taking the aggregate capital raised to $4.35 billion.
Issuers of nonconvertible bonds in June included Asian Infrastructure Investment Bank, Industrial & Commercial Bank of China Ltd.'s Singapore branch, South Korea's KB Kookmin Bank and Japan's Mitsubishi UFJ Financial Group Inc. In addition, Singapore's Oversea-Chinese Banking Corp. Ltd. raised $750 million via an issuance of convertible bonds due 2032.
Debt issuance will likely remain subdued as banks are having a hard time keeping up with front-loading and higher interest rates, analyst said.
"The only reason why we may see more issuance would be a further regulatory tightening increasing capital requirements, but that is unlikely to happen soon," said Alicia Garcia Herrero, chief economist for Asia-Pacific at Natixis Corporate & Investment Banking.
Financing conditions around the globe remain tight as rising interest rates, market volatility and other headwinds continue to hit investor sentiment. S&P Global Ratings on July 28 said it expects global bond issuance to contract about 16% in 2022, after first-half issuance fell 10.9% year over year to $4.2 trillion. While emerging and frontier market corporate issuance slowed across regions in the second quarter, issuance remained strong in Asia-Pacific, led by China, Ratings said.
In the current financing environment, banks will only issue new bonds to repay their redeeming debt instruments or to fill gaps in their working cash positions, said Ales Koutny, global bonds portfolio manager at Janus Henderson Investors.
"Banks' use of capital and profitability depends on their cost of funding and the steepness of yield curves," Koutny said. "As both of these metrics deteriorated significantly — cost of funding increased and flatter curves reduce profitable opportunities for excess cash — banks will only issue new bonds to repay redeeming ones or to make up shortfalls in the working cash positions."
Overall, Koutny expects markets to remain moribund, though small short-term pickup in issuance may happen as many corporates, which have been postponing their required issuance due to an unfriendly market, will need to issue by the end of 2022.
Local currency vs. greenback
While more Asia-Pacific banks are likely to turn to issuing local-currency bonds as a strong U.S. dollar pushes up borrowing costs for issuers, it is not a remedy, analysts said. In June, six banks issued $1.64 billion worth of bonds in currencies other than the U.S. dollar, compared to $1.85 billion worth of U.S. dollar-denominated bonds issued by Asian Infrastructure Investment Bank and Industrial & Commercial Bank of China.
"Local-currency debt is not the panacea either as, in many cases, it is purchased by nonresidents who may decide to sell off any time, bringing down both bond prices as well as the value of the domestic currency if their presence is large enough," Herrero said.
Janus Henderson's Koutny expects more local-currency bond issuance due to volatility experienced by other currencies against the greenback.
"For most emerging markets corporates, [U.S. dollar] issuance is cheaper and has generally higher levels of demand," Koutny said. "While this is beneficial, it is quickly eroded by an erratic U.S. dollar. As such, we believe local issuance will continue to increase marginally due to excess volatility experience by local currencies versus the [U.S. dollar]."
Asia-Pacific banks that issued bonds in currencies other than the U.S. dollar in June included KB Kookmin Bank, Mitsubishi UFJ Financial, PT Bank Negara Indonesia (Persero) Tbk and Union Bank of the Philippines, Market Intelligence data shows.
