Leveraged Asian Investors May Spur Bond Price Slump: Barclays

Leveraged Asian Investors May Spur Bond Price Slump: Barclays

Wealthy Asian investors who’ve borrowed against their houses to buy bonds may find themselves among forced sellers if interest rates rise, spurring a price slump in vulnerable securities, according to Barclays Plc.

U.S. dollar-denominated notes sold by more than 20 companies including Olam International Ltd. and Henderson Land Development Co. are some of those most exposed if private bank clients move money out of the fixed-income market, Barclays said in a research note dated March 14. Private banks hold 15 percent to 20 percent of total corporate bonds in Asia and as much as 30 percent of high-yield, or junk, notes.

Low borrowing costs have been one of the main factors driving the strong demand for Asia credit and many high net worth investors went further into debt to buy the securities, according to the report. In the past six months, equities have generated solid returns while credit has lagged, creating a risk fund flows will rotate out of bonds in a quest for higher returns and compound the price slump.

“U.S. rates are already beginning to rise, albeit gradually, and leveraged lending could be scaled back if risk committees begin to focus on the quality of such lending,” according to analysts led by Krishna Hegde, Barclays’ Singapore- based head of Asia credit research. Furthermore, any sharp or sustained sell-off in Treasuries would impact bond prices and raise borrowing costs. Considering most private bank investors don’t hedge rates, “this is an important risk factor,” they wrote.

Margin Calls

Ten-year Treasury yields have risen 20 basis points this year to 1.95 percent as of March 19. Asian stocks have returned 4.04 percent since Dec. 31 versus 0.83 percent for dollar bonds in the region, Bank of America Merrill Lynch indexes show.

“Based on our discussions with various private banks, we think some private accounts could face margin calls if U.S. Treasuries sold off by 1.5 percent to 2 percent,” Hegde wrote. In such an event, credit committees may turn conservative and scale back on loan-to-value ratios, which could result in margin calls for highly leveraged portfolios, according to the report.

Bonnie Ngan, a Hong Kong-based spokeswoman at Henderson Land, declined to comment on the report when contacted by e-mail today. Hung Hoeng Chow, a Singapore-based spokeswoman at Olam, also declined to comment.

Weak Structures

Other bonds flagged in the report as being potentially vulnerable include Cosco Pacific Ltd.’s $300 million of 4.375 percent notes due January 2023, the $350 million of 6.375 percent September 2017 bonds sold by Sun Hung Kai & Co. and Soho China Ltd. (410)’s securities in the U.S. currency.

“A potential slowdown could affect segments such as Reg S only issues from Hong Kong companies that are unrated or BBB-,” the analysts wrote.

High-yield bonds currently priced below issuance levels with a concentrated buyer base and corporate hybrids that have weak structures could also be hurt, he said.

Bonds sold under Regulation S may not be offered or sold to investors in the U.S.

To contact the reporter on this story: Tanya Angerer in Singapore at tangerer@bloomberg.net

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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