Singing the blues but seeing green
Challenging market conditions undoubtedly impacted trading levels in 2018, but innovations such as sustainable finance continued to promote capital market activity
To borrow a term made famous by Queen Elizabeth II when bemoaning scandal-hit 1992, following stellar double-digit returns in 2017, last year could be described as many investors' annus horribilis. In fixed income, the JACI (JPMorgan Asia Credit Index) Composite, which tracks Asia dollar bonds, returned -4.49% to 20 December 2018. Spreads on Asia high-grade widened 48bp to 206bp, while Asia high-yield saw spreads move 164bp to 620bp, according to Nikko Asset Management.
The strength of the US dollar was relentless throughout the whole year. The weakness in emerging-market currencies spared no one. In Asia, central banks acted swiftly, raising interest rates multiple times. Hardest-hit currencies included the Indian rupee and the Indonesian rupiah. Interestingly, the Thai baht was the least affected. Even so, the Bank of Thailand moved to raise its policy rate by 25bp in December 2018, the first time such an action had been taken in more than seven years.
Activity in the capital markets reflected the challenges faced during the course of 2018. Total volume of Asia dollar bonds (G3) was US$298.32 billion, according to Refinitiv figures, down 18.8% from US$367.78 billion in the same period a year earlier. Although Chinese issuers continue to account for the lion's share of activity, their volume dipped to US$146.51 billion from US$186.67 billion during the same period in the previous year, representing a decline of 21.51%. The drop was more pronounced in the high-yield bond market – a space dominated by Chinese property companies – as their issuance plunged by 43.6% to US$19.01 billion, from US$33.70 billion as at mid-November 2018.
Local currency bond markets served to buffer the volatility in the offshore market as total issuance picked up by just under 5% to US$1.4 trillion equivalent. This represents a recovery from the decline registered in 2017. The continued healthy performance of the domestic markets illustrates the important role they play today. During a period of considerable volatility, a hallmark of 2018, companies were still able to access markets to meet their financing needs.
The challenging market environment, however, has not dampened efforts to further develop Asia's bond markets. An emerging trend in 2018 has been the rise of bonds linked to sustainable finance. During the past few years, Asia has become a centre for green bonds led by China, meaning the region has added to its diversity.
In Indonesia, innovative models of financing are helping to fight deforestation and improve the working conditions of farmers and rural communities. One example is a unique lending platform by Indonesia's Tropical Landscape Finance Facility (TLFF).
TLFF provides long-term finance to individual projects and companies that focus on green growth and improve rural livelihood. Put together, the loans are securitized and turned into a medium-term note programme, where bonds are sold to investors in a range of tranches, allowing small green projects access to investor pools that typically back large deals only. The projects under the programme have to meet certain criteria on sustainability.
TLFF's first deal in February 2018 was a US$95 million senior secured note. The bonds' proceeds were to finance a sustainable natural rubber plantation on heavily degraded land in Jambi and East Kalimantan in Indonesia. The project incorporates extensive social and environmental objectives and safeguards confirmed by Vigeo Eiris, an ESG research agent. Planted areas will serve as a buffer zone to protect a threatened national park from encroachment.
Indonesia is the world's second largest producer of natural rubber. Supported by an amortizing loan partially guaranteed by the US Agency for International Development (USAID), the deal represented the first sustainability project bond in Asia and the first project bond in a rubber plantation.
In another first deal of its kind in Asia, the Korea Housing Finance Corporation (KHFC) successfully priced in October 2018 the first ever social covered bond offering in Asia and the first ever euro covered bond deal out of Korea and for the KHFC. The net proceeds from the deal will be used exclusively to purchase the company's mortgage loans that were directed to support low- to moderate income individuals. The proceeds also aim to stabilize and improve the structure of Korea's mortgage loan market in accordance with KHFC's social bond framework.
Meanwhile, New World China Land joined the green bandwagon as it printed its inaugural green bond transaction in November 2018, amounting to US$310 million. The company will use the proceeds to finance two certified environmental projects in the so-called Greater Bay Area.
Korea Water Resources Corporation priced in May the first ever water bond out of Asia amounting to US$300 million. The fund raising was designed to finance/refinance projects contributing to climate change adaptation, offer improved accessibility of sustainable water management systems, along with the development of renewable energy sources.
In Singapore, Olam International completed the first sustainability-linked club loan in Asia for US$500 million. The facility links the interest rate on the loan to achieving clear sustainability targets, with Olam committed to meeting improvement targets for a comprehensive range of ESG metrics.
These new bonds in 2018 suggest a broadening out of investment choices in green and sustainable finance in the region. That the capital markets have become the venue of the innovation on sustainable finance reflects a growing focus among local corporates of the importance of not just meeting their funding objectives but also the broader environmental and social needs of the region.
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