IFR-ASIA CREDIT UPDATE:Spread widening limited on small France downgrade

Mon Jan 16, 2012 6:46am GMT

HONG KONG, Jan 16 (IFR) - Asian credit spreads widened after euro zone sovereign downgrades protracted worries about European lenders withdrawing more funds from the region, but the weakness was capped by a smaller than expected cut in France's rating.

Newly sold bonds from Hong Kong property developer Nan Fung International Holdings outperformed the broad market as the debut issuer's USD350m offering was nearly four times subscribed.

The bonds were initially traded as wide as 472bp over US Treasuries before tightening.

The Asia ex-Japan iTraxx investment grade series 16 index widened to 209bp, compared with Friday's 201bp/204bp. Korea Gas saw its bonds widen out to 330bp/325bp after trading as wide as 332bp in New York hours. These 30-year bonds were trading around 325bp on Friday after pricing at 345bp over US Treasuries.

The investment grade sector was 3bp-5bp wider with MSCI's broadest index of Asia Pacific shares outside Japan down 1.3%.

"The downgrades were widely expected but the fact that France was cut by only one notch is positive. There was expectation of two notches," said a Singapore-based trader with an Asian bank.

"It doesn't feel like we are staring off the abyss, like at other times in past couple of months." "That's why we see no big follow through selling. Of course, the US holiday is another factor why equities haven't been dumped as severely as they would be if they were concerned about the downgrades."

Last Friday, Standard & Poor's downgraded the credit ratings of nine euro-zone countries, stripping France and Austria of their coveted triple-A status.

In another potentially more ominous setback, negotiations on a debt swap by private creditors seen as crucial to avert a Greek default broke up without agreement in Athens, although officials said more talks are likely this week.

European banks have already started withdrawing from Asian loan markets which is pushing some of the borrowers to the bond markets.

Hong Kong infrastructure company NWS Holdings is mulling a US dollar Reg S guaranteed bond. Proceeds from the proposed USD bond will be used for general working capital purposes and to refinance borrowings including a 364-day, HKD5bn bridge loan.

Latest fund flow data shows that investors withdrew USD741m from emerging market bond funds in the week to January 11, compared with a gain of USD162m in the week before, according to EPFR Global. The fund tracker also said hard currency funds showed USD558m of investor flight after five weeks of inflows. High yield funds showed inflows of USD1,943m up from the previous week's USD1,147m.

"The withdrawal of European banks has driven up loan spreads. US and Asian banks have taken up some of the slack but they cannot totally replace the gap left by the European banks," said Arthur Lau, Asia ex-Japan head of fixed income for PineBridge Investments which manages USD82bn in assets.

"There is some supply pressure on account of that."

In the high-yield sector, prices were off by a quarter to half a point but expectations of monetary easing in China and lack of supplies from borrowers has reined in losses.

Country Garden 2018 is trading at 92/93.5, Longfor Property 2016 at 94.75/96.25 and Evergrande 2015 at 86.50/87.50. Even coal credits from Indonesia are trading weaker with the Bumi 2017s down at 100.75/101.75.

"Technically high yield has been well bid because of less supply. Bonds may not react that much to negative news and the next signal will be provided by China data," said a Hong Kong based trader with an Asian bank.

China's once turbo-charged economy is on track to slow for a fourth successive quarter as global demand slackened, suggesting the government may unveil fresh policy steps to ward off a hard economic landing. It unveils Q4 GDP and December economic data on Tuesday. For a table showing the pipeline of dollar-,yen- and euro-denominated issues from Asia please click here www.ifrmarkets.com Umesh.desai@thomsonreuters.com