Asia-Pacific nonfinancial firms' corporate debt issuance is likely to stay muted after aggregate volumes dropped year over year in the quarter ended March 31.
The aggregate value of debt the region's nonfinancial firms issued fell 17.7% to $40.01 billion in the first quarter from $48.52 billion in the year-ago period, according to data compiled by S&P Global Market Intelligence. The first-quarter number is, however, an improvement over the fourth quarter of 2023, when $30.02 billion was raised.
The year-on-year drop comes as persistently high interest rates deter issuers from tapping capital markets. There is some potential for recovery in corporate debt issuance, but it is unlikely to be substantial, said Thomas Kollar, corporate and securities partner at international law firm Mayer Brown.
"The interest rate setting has made it challenging for many corporate issuers to access the [US dollar] bond market, especially with more favorable onshore rates and liquidity in many jurisdictions leading some issuers to finance or re-finance with local currency bank loans," Kollar said.
Volumes plunge
A plunge in corporate debt issuance — both in terms of value and number of transactions — in mainland China dragged aggregate volumes in the region during the first quarter. Mainland Chinese issuers raised $9.02 billion in 54 deals versus $26.75 billion from 193 deals a year ago.
The decline in debt issuance volumes in the region was likely due to a confluence of several factors coming together, including tightening monetary policies, said Ben Charoenwong, assistant professor of finance at NUS Business School in Singapore. In addition to higher rates, Charoenwong cited concerns over the sustainability of the region's economic growth and ongoing political, geopolitical and trade tensions between the US and China as the likely reasons for the decline in activity.
"Ongoing political, geopolitical, and trade tensions between the US and China have increased uncertainty and risk aversion among investors, likely causing corporate financial policymakers to delay issuance until more clarity," Charoenwong said.
Led by the US Federal Reserve, central banks in many jurisdictions started raising interest rates in early 2022 to tamp rising inflation. Between March 2022 and July 2023, for example, the Fed increased its benchmark interest rates 525 basis points. While analysts expected rate cuts to begin earlier this year, better-than-expected economic data and hawkish commentary from the policymakers have reduced the likelihood of a rate cut soon. As a result, borrowing costs remain high for issuers.
"High [US Treasury] yields may have deterred firms from issuing corporate debt, and should [US Treasury] yields come down later this year, we should expect more issuance as the costs of issuing debt would be lower," said Johnny Chen, portfolio manager on William Blair's emerging markets debt team.
Sectoral breakdown
While most sectors saw declines in debt issuance volumes, companies in the real estate sector raised $9.96 billion in debt in the first quarter, more than double compared to a year ago, Market Intelligence data shows. A few sizable issues from mainland Chinese firms, including Zhongliang Holdings Group Co. Ltd. and China Aoyuan Group Ltd., drove the increase. Still, the number of real estate sector's debt issuance in the first quarter fell 28% year over year.
The technology sector saw the number of debt transactions grow 19%, but the aggregate value dropped 37% over the period. Kollar said investor sentiment seemed to be favorable with respect to the technology and healthcare sectors in the region.
Debt issuance by both the industrials and the energy and utilities sectors dropped by roughly 63% year over year, the data shows.
Some industrial, energy, and real estate companies can access onshore financing at relatively lower costs, reducing their need to issue corporate US dollar debt, Chen said.
