Dollar Bond Sales Surge in Asia as Borrowers Tap New Investors

March 10 (Bloomberg) -- The lowest relative borrowing costs in more than two years and demand from international investors is driving Asian companies to sell record amounts of dollar- denominated bonds.

BOC Hong Kong (Holdings) Ltd., the Hong Kong unit of Bank of China Ltd., and Chinese developer Evergrande Real Estate Group Ltd. led Asia-Pacific borrowers selling $38.4 billion of dollar debt this year, the fastest start on record, according to data compiled by Bloomberg. Sales climbed 35 percent from $28.4 billion in the same period last year, when they slumped 22 percent in the aftermath of the seizure in credit markets.

“It’s one of the cheapest times to borrow in U.S. dollars, and at the same time, there’s a lot of cash floating around,” said Rajeev de Mello, head of Asian investment for Western Asset Management Co., which oversees $506 billion. U.S. and European pension funds “want a slice of the action,” De Mello, who is based in Singapore, said in a phone interview.

The extra yield demanded for dollar debt from investment- grade companies in Asia instead of Treasuries has fallen to 2.44 percentage points from 7.62 percentage points in December 2008, according to JPMorgan Chase & Co. Spreads fell close to a two- year low because growth in the region is helping lead the world out of the worst financial crisis since the Great Depression.

Korea Development

Korea Development Bank, the South Korean state-run lender known as KDB, boosted the size of its 4.375 percent bond sale last month to $750 million from $500 million, the most in U.S. dollars that the company has borrowed for so long at so cheap a rate, Bloomberg data show. The debt, due in 5.5 years, yielded 203 basis points more than Treasuries and the spread has narrowed to 166 basis points, Bloomberg data show.

KDB’s $1 billion of five-year 5.3 percent bonds, yielded 218 basis points, or 2.18 percentage points, more than similar- maturity Treasury yields when sold in January 2008.

BOC Hong Kong sold $1.6 billion of 5.55 percent bonds maturing 2020 on Feb. 4. Evergrande Real Estate issued $750 million of five-year notes on Jan. 22, the largest Chinese real estate high-yield offering ever, according to Bank of America Merrill Lynch, which helped manage the sale. High-yield bonds are rated below Baa3 by Moody’s Investors Service and BBB- by Standard & Poor’s.

The difference between the average cost of borrowing in dollars and in local currencies in Asia has narrowed to 94 basis points from 426 basis points a year ago, when U.S. stock markets bottomed, according to HSBC Holdings Plc indexes.

Asian companies are “switching funding to international markets” as they borrow more and for longer periods and as the cost of borrowing in dollars becomes more competitive, Morgan Stanley credit strategist Viktor Hjort said in a phone interview from Hong Kong.

Borrowing Costs

Money-market rates have fallen in the period. The three- month London interbank offered rate for dollars was last at 0.25425 percent, compared with 1.33125 percent a year ago, Bloomberg data show. Libor is the interest rate at which banks borrow funds from one another and is a financing benchmark.

“The rally in the bond market has meant U.S. dollar funding costs are at least as competitive again,” said Sean Henderson, head of debt syndication at HSBC in Hong Kong. Local- currency sales in Asia still exceed dollar debt as “many Asian companies’ funding needs are too small to justify issuing offshore debt,” he added.

Local Currencies

Local-currency bonds by Asian companies total $112.2 billion this year, compared with $121.4 billion in the same period of 2009, Bloomberg data show.

“We were surprised to see new investors in our latest three global bond offerings, including some big U.S. asset managers who aren’t traditional buyers of our notes,” Yoon Hee Sung, the director of international finance at Export-Import Bank of Korea, the state-run lender known as Kexim, said in an interview in Seoul.

Kexim sold $1 billion of 4.125 percent, 5.5-year notes on March 2, priced to yield 195 basis points more than Treasuries.

U.S. Federal Reserve Chairman Ben S. Bernanke has said the “nascent” U.S. recovery means rates of zero to 0.25 percent will be needed for an “extended period.” That contrasts with growth in Asian nations.

International Monetary Fund projections show developing Asia’s economy will expand 8.4 percent this year, compared with 2.7 percent in the U.S. and 1 percent in the euro area. Analysts boosted 2010 Asian corporate earnings estimates 4 percent, Credit Suisse Group said in a note to clients March 8.

U.S. Investors

“There is significantly more interest from U.S. and European investors as evidenced by new order allocations,” said Richard Chun, a Hong Kong-based money manager for New York hedge fund Claren Road Asset Management LLC, which manages about $3 billion globally. Now, 60 to 75 percent of recent deals are being allocated to U.S. and European investors versus 20 to 30 percent several years ago, he said.

Bank of Baroda and Bank of India have canceled dollar bond sales this year citing market volatility from Europe’s sovereign debt crisis. Total issuance won’t be affected, Morgan Stanley’s Hjort said.

Morgan Stanley predicts new Asian dollar bond sales of at least $17 billion in the coming three months. The New York-based bank also forecasts bond redemptions of $27 billion -- almost half 2009’s total new issuance -- globally this year.

“While there are some risk factors facing credit markets, supply is unlikely to be what spoils the party this time,” Hjort said.