July 16, 2012 / 9:23 AM / 5 years ago

ASIA CREDIT CLOSE: Gains sustained on inflow hopes, short squeeze

HONG KONG, July 16 (IFR) - Asian credit spreads on Monday resumed last week's tightening trend despite lighter trading volumes on account of a holiday in Tokyo.

A growing new issue pipeline and rising flows into emerging-market fixed income are reflecting the hope that Asian credits will continue to outperform equities for some time yet.

The broad market saw tightening in thin trading, with the benchmark iTraxx IG series 17 about 3bp tighter at 162bp/164bp with newly sold bonds like the Industrial Bank of Korea and the Korea East West 2017s both trading in the 185bp/180bp context. Last week they were at 189bp/185bp and 188bp/184bp.

Philippines and Indonesian cash bonds were active, adding about a quarter to half a point in the longer maturities. Traders said Philippines bonds were buoyed by a short squeeze and expectations of a liability management programme later this year, and this uptick was spilling over into Indonesian bonds.

In June, the Republic of the Philippines met investors as part of a non-deal roadshow arranged by Citigroup, Goldman Sachs, JP Morgan and Morgan Stanley, and there have been expectations of a buyback since officials in Manila talked about issuing new debt to fund a buyback of some of its outstanding sovereign debt in a bid to manage liabilities.

The broad market is also getting a boost from latest data that showed solid inflows for the week to July 11. EPFR Global numbers show new subscriptions into EM bonds rose to USD783m from USD770m a week ago with the high yield inflows rose to USD2.6bn from USD1.7bn.

Bonds from Sun Hung Kai Properties remained trapped in the lower ranges as markets now await the next development in the Hong Kong bribery case, in which charges were brought against the billionaire Kwok brothers, who operate the company.

Its bonds due 2016 are at 250/230bp over US Treasuries and those due in 2022 are at 275/250bp above, quoted in a wide two-way range after moving out 10bp last Friday. The company's shares were down 1% on Monday even as Fitch and S&P said there was no impact on Sun Hung Kai's ratings.

Noble Goup bonds are firmer after the company announced the appointment of a co-chief operating officer. William J. Cronin joins Nicholas Robert Brewer, who was the sole COO prior to this announcement.

The company's succession plans were under a cloud following the abrupt departure of the previous CEO, Ricardo Leiman, last year and with these appointments hopes are rising the company is putting a solid management team in place. Commodity trader Noble's 2015s are quoted at 102.0/103.5.

These 4.875% bonds have rallied a solid 10 points in 2012 and are up about 2 points this month, having benefited from a recent rise in the prices of corn, soybean and wheat with the US midwest reporting its worst drought in a quarter century.

In the high-yield segment, retail bids supported China property bonds, which have already generated equity-like returns this year amid expectations of monetary easing, low supplies and spending cuts by companies.

Agile Property is quoted at 101/102, up from Friday's 100.75/101.75. According to Deutsche Bank, a weighted index of 45 bonds from 32 property companies has produced a return of 26.7% year-todate, including 17.7% from capital gain and about 9% from carry.

This rally has spurred talk of new issues, with Chinese property names starting to eye capital markets anew. China developer Gemdale (Group) and Hong Kong conglomerate New World Development Company are meeting investors this week ahead of possible deals, and benchmark names like Country Garden and Longfor Property are trading 3-4 points above par, sparking hopes they can fund refinancing at lower coupons.

More downside is expected for the beaten-down bonds from Indian paper company Ballarpur Industries. Although the latest shift by S&P to a negative outlook had little impact on its bonds, there are expectations that its revenues will suffer amid the slowdown in Asia's third largest economy.

"Ballarpur is in a GDP-driven industry, so we can expect more downgrades for the company," said a Hong Kong based analyst.

Its unrated USD200m perpetual bonds were sold last year at a yield of 9.75% and are currently yielding around 16% on the bid side, according to Thomson Reuters data. On a price basis they are at 81/84 cents on the dollar, continuing to slide since their debut below par in August.

Elsewhere in the high-yield segment, China Oriental bonds were little moved by the company's announcement that it is yet to receive CNY486m it is owed by Jinxi Wan Tong after the loan agreement expired on June 30.

"They have security and they will probably take over the assets but, given the size of the company, it is credit neutral," said a Hong Kong based analyst.

The company's bonds due in 2015 are steady at 91/92 and those due in 2017 are unchanged at 81.0/82.5.

umesh.desai@thomsonreuters.com

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