Nov. 21, 2016 7:38 a.m. ET
HONG KONG—Asian companies are starting to feel the “Trump effect,” as a rise in global borrowing costs forces them to reconsider their debt-raising plans.
Corporate bond issuance in Asia has already slowed since the U.S. election, with companies from China to India pulling or postponing planned deals.
The sudden stalling in debt markets could threaten a model of growth that has taken root in Asia in recent years. Firms across the region have taken advantage of low global interest rates to pile up trillions of dollars worth of debt, often denominated in greenbacks, to fuel their expansion. Asian companies have already raised $1.1 trillion in bonds so far this year, compared with $260.8 billion in 2008, according to Dealogic.
Donald Trump’s surprise U.S. presidential election victory, and an ever-growing certainty that the Federal Reserve will raise interest rates next month, have now pushed up bond yields globally, likely making future debt raising more costly. The greenback’s rise this month means it is already becoming more expensive for companies to pay back their dollar debts in local currency terms.
And while bankers and analysts say the current slowdown of Asian debt markets could prove temporary as investors digest Mr. Trump’s election, they worry sustained capital outflows could unsettle the future outlook.
“This is, at the moment, a short-term reaction,” said Mark Follett, head of debt capital markets, Asia ex-Japan, at J.P. Morgan Chase & Co. “The risk for us is it becomes a bit more fundamental.”
Higher borrowing costs for companies mean they have to spend a bigger chunk of profits on repaying debt instead of feeding projects that would stimulate growth, like building factories or infrastructure. That, in turn, could hit overall growth in Asia, home to some of the world’s most dynamic economies.
Many Asian issuers are already using bond proceeds to refinance existing debt, according to a recent report by the International Monetary Fund. It expects growth in Asia to stagnate at 5.3% for 2016 and 2017, down from 5.4% in 2015.
Asia’s corporate debt pile has become more expensive since the U.S. election. The average borrowing cost for the region’s U.S. dollar-bond issuers has risen to around 4.59% compared with 4.13% beforehand, according to J.P. Morgan Asia Credit Index. Around one-fifth of Asian bond issuance this year has been dollar-denominated, according to Dealogic.
Some borrowers are getting cold feet.
Last week, Chinese property developer Country Garden Holdings Co. pulled its offering for a 10-year U.S. dollar-denominated bond, citing “uncertain market conditions.” The Hong Kong-listed company, considered a bellwether for high-yield issuers, was marketing the bonds to yield around 5.625%, according to a term sheet seen by The Wall Street Journal. It had issued a seven-year $650 million bond in September with a 4.75% coupon.
“If they couldn’t get it done, you’d have to ask questions about other single-B’s,” said Rick Matilla, international head of market strategy at MUFG Securities Asia Ltd. in Hong Kong, referring to other borrowers that are rated at below investment grade, or “junk,” by ratings firms.
While a trickle of deals is still ongoing, bankers expect U.S. dollar-bond issuance in Asia to drop off next year.
“Roadshows are happening,” said one banker, referring to the process when borrowers meet with potential investors. But “some are going quiet after,” as issuers reconsider coming to market.
India’s state-run Canara Bank opted to postpone its marketing of around $500 million of dollar-denominated bonds following Mr. Trump’s election. Bankers on the deal told the company “that investors are not willing to come for the roadshow,” according to a Canara Bank official familiar with the bond sale plan.
“Trump was unexpected for the market,” said the official. “That was the main reason why investors are not ready to meet any issuers.” Canara Bank executives now hope to tap the market in the next week or two.
To be sure, U.S. Treasury yields—the key driver of global bond yields—are still relatively low. While the current volatility initially slowed bond issuance in emerging markets, activity could pick up after a few weeks.
“Is this going to stop suddenly mega-financings? I don’t think so,” said J.P. Morgan’s Mr. Follett. “What we need is some stability.”
Many Asian companies took steps to refinance their debt earlier this year, fearing the uncertainties around the U.S. election and the Fed’s interest-rate policy. But any borrowers that failed to act while rates were low could face higher funding costs. About a quarter of Asia’s outstanding bonds come due in 2017 and 2018.
Indonesian tire manufacturer PT Gajah Tunggal Tbk., for example, has a $500 million dollar bond on which it currently pays a coupon of 7.75%. The yield on those bonds in the secondary market is now around 14.534%.
The company said it is “in the process of reviewing our debt structure” to “bring it more in line with our actual cash-flow generation, as we plan to refinance the debt prior to its maturity in 2018.”
“Going into 2017, the risk is obviously rising,” said Terry Chan, an analyst at Standard & Poor’s. “We see most of the refinancing pressure coming beyond 2017 and 2018. We see a wall.”
—Shefali Anand contributed to this article.
Tags: Asia, Asian companies, Asian debt markets, bond yields, debt-raising, Donald Trump, global borrowing costs, India, Interest Rates, International Monetary Fund, J.P. Morgan Chase, making borrowing costlier, more expensive for companies to pay back their dollar debts, refinance debt, Trump Effect