Local Corporate Bonds’ Universe Discovery
Local corporate bonds, 90 percent concentrated in Asia at Chinese policy banks in particular, have almost matched the growth in the external asset class in recent years to reach almost $5 trillion in size, according to JP Morgan which may be preparing a dedicated index . The amount is around one-third of all EM bonds outstanding, and is just $2 billion behind local sovereigns which are now the largest allocation and trading components. Half of issuance is in financials, with the remainder in infrastructure and utilities. Since 2010 $1 trillion in annual supply has been added before redemptions, but less than one-tenth the total or $350 billion is available through Euroclear and pricing capability is also thin. Ratings agencies only offer coverage of 250 firms out of the 4500-range universe, and JP Morgan’s tracking criteria will require minimum $50 million and 1-year terms.
China accounts for two-thirds of the field led by the Development Bank’s $900 billion, and Europe and Latin America both have placed over $200 billion. Half are in short-term 1-3 year maturities which may impede yield curve development, but countries like Chile and Korea with sophisticated insurance and pension sectors promote longer duration. Banks represent 60 percent of the market and access the debt both for funding and regulatory purposes, while oil and gas activity plunged 40 percent last year due to commodity and Russian crises, as the latter companies were 80 percent of Europe’s total. The Middle East and Africa each have floated $80 billion, and India has the third ranking overall at $250 billion. Brazil is biggest in Latin America with $120 billion followed by Mexico’s $80 billion, which is just ahead of South Africa. Asia has half the Euroclearable sum led by offshore center Singapore, while only Chinese companies have individual taps above $100 billion. Banks are both the prime names and buyers, although foreign investors with a local presence can now participate on the interbank and exchange-listed markets. The Export-Import Bank with $250 billion in circulation recently received additional government injections and may try to target buyers abroad to support its infrastructure project pipeline now expanded with launch of the AIIB, according to reports.
Banks and companies in Malaysia, Indonesia and Turkey also are active through the no-interest Islamic sukuk format, as the global corporate and sovereign stock hit $120 billion in 2014. In Q1 placement was near $20 billion, over 40 percent Malaysian followed by the UAE at almost 20 percent. The result was $10 billion below recent periods with oil and exchange rate shifts, but the Bahrain and Bangladesh central banks piloted new instruments. Sovereigns were half the category and supra-nationals like the Islamic Development Bank were prominent. State hydrocarbon producer Petronas had a large $1.25 billion deal and cross-border acceptance spread with the UK Export agency offering a $900 million facility for Emirates Airlines. Sharia-compliant institutions hold close to $2 trillion in assets by S&P calculations, and debuts are forthcoming in the Philippines, Thailand, Kenya and elsewhere. Barclays includes Malaysian sukuks in benchmark indices, and the premium over standard pricing has halved to 50 basis points as once unconventional cultural norms go universal.
