SINGAPORE (Mar 28): The overall Asia Pacific (APAC) cross-border issuance is expected to see a moderate drop in 2019, according to a special report by Fitch Rating.

This is mainly due to the slowing economic growth in China, lower capex and mergers and acquisitions (M&As), a weaker yuan, as well as lower onshore and rising offshore funding costs, which continues to weigh on cross-border issuance by Chinese corporates.

“We expect cross-border issuance by Chinese corporates to fall moderately in 2019, but to still be around the US$100 billion ($135.4 billion) level (2018: US$112 billion),” says Fitch.

However, Chinese cross-border issuance should still be supported by refinancing related to offshore maturities of US$67 billion in 2019 and a further US$87 billion in 2020. In particular, the homebuilding sector is expected to continue issuing and refinancing via offshore bonds due to policy curbs on domestic issuance.

Fitch estimates that Chinese corporates will have registered US$30.1 billion in cross-border issuance in 1Q19, which is on a par with quarterly issuance amounts over 2Q18 to 4Q18, albeit below the US$39.0 billion issued in 1Q18.

Total cross-border bonds issued by APAC corporations declined by 9% y-o-y to US$207 billion in 2018 from USS$228 billion in 2017, with China accounting for US$14 billion of the total US$21 billion drop, followed by Hong Kong, Australia, Singapore and India.

Fitch believes that the same factors that led to this decline is likely to remain in place this year, including slowing global economic growth and lower capex, mainly in China, US interest rates remaining well above that of 2017, and a more risk-averse stance by investor, especially for speculative-grade issuers.

On the bright side, the relaxing of some regulatory restrictions in India and capex plans of state-owned enterprises in Indonesia are likely to increase issuance from these countries, mitigating the potential drop in Chinese supply. The pause in US Fed interest-rate hikes should also support issuance, with activity picking up since Jan 2019, particularly by high-yield credits in Asian emerging markets.

The recovery in cross-border issuance for both Indonesia and India should be additionally supported by an improving investment cycle in some sectors and normalising yields, which rose in 2018 due to tighter policy conditions as well as higher emerging-market volatility.

But unexpected outcomes of forthcoming elections in both countries could inhibit investor appetite in 2H19.