HONG KONG (Nov 25): Companies in Asia may find it more difficult to raise local-currency funds as stricter capital rules force banks to reduce their holdings of riskier bonds.
The Asian Development Bank, in its quarterly Asia Bond Monitor released today, said liquidity in the region might dry up, making it harder for both money managers and corporates to enter and exit the market easily and with minimal cost.
“There are concerns liquidity conditions are tightening because the higher capital requirements under Basel III regulations have pushed banks to reduce their holdings of bonds,” the Manila-based lender said.
“The capital that banks are required to hold against risky assets, such as low-rated local-currency corporate bonds, has risen significantly. This has had the effect of making the region’s local-currency corporate bond market much less liquid.”
Local-currency bond sales in Asia total US$171.6 billion this year compared with US$166.1 billion the same period of 2013 and $220.3 billion in 2012, according to data compiled by Bloomberg.
Subordinated note issuance has almost tripled from all of 2013 to US$89.6 billion as banks shore up their capital buffers to meet rules the Bank for International Settlements made after the global financial crisis aimed at limiting the need for governments to rescue lenders using taxpayer money.
Thailand, Korea
Sales of Basel III hybrid securities by major banks in Asia-Pacific may reach US$350 billion by 2019 Standard & Poor's said yesterday.
“Although Basel III principles are the same in all member countries, each jurisdiction has its own policy, derived from its regulator’s stance toward bail-ins and resolution regimes,” S&P said.
In Thailand, regulations were announced in September that will allow commercial banks to sell Basel III-compliant Tier 2 instruments to retail investors.
South Korea's Financial Services Commission introduced Basel III liquidity coverage rules in August, making it obligatory for domestic banks to meet the minimum ratio of 100 percent starting in January while domestic branches of foreign banks will have to meet a minimum 20 percent.
That ratio will be raised 10 percentage points each year to 60 percent by 2019.
“As a relatively new asset class, increased cross border volumes this year will help to add to liquidity, but it needs to be matched by more funds from institutional investors,” Mark Young, Fitch Ratings’ head of Asia-Pacific financial institutions group, said yesterday.
“Chinese and Indian banks are where the greatest demand for new capital is in Asia. Developing investor appetite and by implication, greater liquidity, will be an important component of the evolution of this market.”
Property risk
The weaker property market in China poses another risk to Asia’s local-currency bond market, the ADB said, as does an earlier-than-expected rate hike in the US that may raise borrowing costs.
In China, “small and less creditworthy companies might find access to funds limited,” the ADB said in the report. Real-estate companies “might also find it difficult to service their existing borrowings.”
“Only a relatively small portion of the property sector’s borrowings are sourced from abroad, but the amount is still large in nominal terms,” the ADB said, noting that offshore property bonds issued by mainland companies totalled US$67 billion in November alone.
“Regional investors who have purchased these bonds could be affected.”
Tighter rules
In September, regulators in China said they would allow qualified, listed property companies to issue medium-term notes on the interbank bond market.
While proceeds can’t be used for land purchases, they can be used for new residential projects, operating cash flows or bank loan repayments.
China has tightened regulation of its interbank bond market since opening it to qualified foreign institutional investors in 2011.
Sales are regulated by the People’s Bank of China and the National Development and Reform Commission. It’s the biggest venue for notes in China, accounting for more than 90 percent of securities outstanding.
There won’t be a meaningful recovery for homebuilders in China in 2015, Fitch said in a Nov 23 report.
The ratings company expects sales to fall by about 10 percent this year, “not enough to reduce nationwide housing supply significantly.”
“Consolidation and restructuring will continue in the next 12 months, which will force out the smaller and weaker developers,” Fitch said.