Asia-Pacific Credit Markets Update – 2Q 2020 Xu Han, Associate Director – Credit Markets Research xu.han@spglobal.com Vince Conti , Associate Director – Credit Markets Research vince.conti@spglobal.com Nivritti Mishra , Lead Analyst –Research nivritti.mishra@spglobal.com Lyndon Fernandes , Analyst – Research lyndon.fernandes@spglobal.com Sudeep Kesh , Head of Credit Markets Research sudeep.kesh@spglobal.com
Financing Conditions Highlights
APAC Financing | Risk Aversion Persists U.S. and APAC OAS (for USD-denominated bonds, in bps) • Tightened spreads. After widening 1400 in late-March to the highest since 1,275 the Global Financial Crisis, credit spreads are now tighter and more 1200 stable. Investment-grade spreads 1,078 in APAC are roughly on par with the 1,058 U.S. market, likely helped at least 1000 partially by a confidence boost initiated by a slew of actions by the major central banks globally. 791 781 800 Spreads on speculative-grade APAC bonds have also tightened 646 significantly, by more than 400 basis points (bps) since the high in 600 March, though investors continue 462 448 to demand a premium for riskier 366 debt compared with the beginning 400 319 of 2020. 278 227 • Risk-aversion persists, especially 204 198 200 for speculative-grade issuers. 141 121 Despite significantly easing spreads, levels remain close to 0 double those seen at the start of US IG APAC IG US HY APAC HY the year. Moreover, these are still nearly 200 bps above the APAC 2010-19 High (Sep 30, 2011) Beg. 2020 COVID-19 Worst 17-Jun-20 corresponding overall U.S. spec- grade spreads, from close to parity Note: Data as of June 17, 2020. Source: S&P Global Ratings Research, Bloomberg-Barclays Indices. at the start of 2020. 3
U.S. Credit Composite Spreads Trends U.S. Spreads By Rating Category (bps) AAA AA A BBB BB B CCC 2,000 1,800 1,600 1,400 1,200 1,000 800 600 400 200 0 6 6 6 6 6 6 7 7 7 7 7 7 8 8 8 8 8 8 9 9 9 9 9 9 0 0 0 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 2 2 2 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 / / / / / / / / / / / / / / / / / / / / / / / / / / / 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 / / / / / / / / / / / / / / / / / / / / / / / / / / / 1 3 5 7 9 1 1 3 5 7 9 1 1 3 5 7 9 1 1 3 5 7 9 1 1 3 5 1 1 1 1 * Option-adjusted spreads computed on a pool of over 20,000 U.S.-domiciled bonds with par values of over $100M that are rated by S&P Global Ratings. Data as of June 12, 2020. Source: S&P Ratings Research; Thomson Reuters.
Equity Pricing • When the COVID-19 pandemic was declared around the end of January, markets saw markedly higher volatility, indicating much weaker investor confidence. Subsequently, various central bank actions, such as asset purchase programs, increased liquidity and helped investor confidence recover, leading to reduction in VIX. Index Movement In Last One Year Has Reached Peak In March 2020 VIXCLS SP500 Post-COVID Pre-COVID 70 66.04 3400 3380.16 60 3200 50 3000 40 2800 30 2600 20 2400 10 2200 0 2000 6/7/2019 7/7/2019 8/7/2019 9/7/2019 10/7/2019 11/7/2019 12/7/2019 1/7/2020 2/7/2020 3/7/2020 4/7/2020 5/7/2020 6/7/2020 Data as of June 12, 2020. Source: S&P Ratings Research; FRED.
APAC Markets | Corporate Issuance Asia-Pacific Cumulative Corporate (Financial and NonFinancial) New Bond Issuance (Bil. USD) 2016 2017 2018 2019 2020 1800 • Total APAC bond 1600 issuance so far in 1400 2020 has already 1200 surpassed the level Jun, 885.02 May, 792.74 for the same period 1000 last year. 800 • However, most of this 600 was local bond 400 issuance by Chinese 200 firms. This reflects 0 the extraordinary Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec support by the government, not only Asia-Pacific Corporate (Financial and NonFinancial) New Bond Issuance through easier (Bil. USD) financial conditions 2016 2017 2018 2019 2020 but also fiscal 250.00 support through 200.00 special project bonds. 150.00 • Most of these special 100.00 project bonds were 50.00 issued in March and April, at the height of - the COVID-19 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec disruptions. Data as of June 16, 2020. Source: S&P Ratings Research; Thomson Reuters. 6
APAC Corporate Issuance| By Market Asia-Pacific New Issuance By Market • In contrast to local bond issuance, foreign bond issuance by APAC (Bil. USD) 2016 2017 2018 2019 2020 firms has only recently recovered, bringing it $1,400 back to about the same 1,274 pace as 2019. $1,200 • Very low levels of 1,066 activity in April offset the strong start to the $1,000 946 year, after which 858 issuance activity recovered to the 2018- $800 $697.4 2019 average pace. • Geographically, the $600 recovery has been uneven. China 403 385 388 continues to account $400 302 for most offshore borrowing in the region, 188 $200 followed by the larger developed markets. There has been much $0 thinner activity from Domestic Foreign Emerging Asian entities. Data as of June 16, 2020. Source: S&P Global Ratings Research; Thomson Reuters. 7
Ratings Trends and Outlooks Summary
APAC Upgrade and Downgrade Potential | By Sector • Media & entertainment and automotive sectors show the most downside risk. • Upgrade potential led by healthcare. 9
Downgrade Potential | Regional Negative Bias APAC Downgrade Potential Differentiated Across Region 10-Year Average 5-Year Average 16-Jun-20 – Tiger Economies And Other 30% Developed Asia: 26% Downgrade potential 25% 25% remains elevated due to the pandemic’s damping of economic activities. 20% 19% 20% 18% 17% – Rest of APAC: Downgrade 14% 15% potential remained high as of mid-June, above both 12% 10% five- and 10-year averages. 10% China, on the other hand has seen improvements. 5% 0% Other Developed Tiger Economies APAC excluding OD and Tiger Economies Data as of June 16, 2020 and exclude sovereign. Source : S&P Global Ratings Research. Tiger Economies includes Singapore, South Korea, Taiwan and Hong Kong. Other developed includes Australia, New Zealand, and Japan. 10
Regional Bias Outlooks| By Country (Or SAR) • Asia-Pacific negative bias is led by Indonesia and India, while positive bias is led by Hong Kong, Singapore and Thailand (despite small sample size) Neg/Negative Stable Pos/Positive (Total Issuer Counts) 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Australia (124) Japan (96) New Zealand (26) Hong Kong (18) Singapore (27) Taiwan (36) China (119) India (23) Indonesia (14) Malaysia (9) Pakistan (1) Papua New Guinea (1) Philippines (4) Sri Lanka (1) Thailand (9) Vietnam (3) All (511) SAR – Special Administrative Region. Data as of June 12, 2020. Note: Numbers in parentheses refer to the number of entities included in the calculation; Excludes developing outlook; Includes Financial & Non-Financial Companies. Parents only. Source: S&P Ratings Research. 11
APAC Ratings Distribution | By Sector • About 26% of nonfinancial corporates are rated speculative-grade, compared with 9% of financial services issuers. Transportation has the highest share of speculative-grade, at 7 out of 11 rated companies, followed by Healthcare with 3 out 5. APAC Corporates (Financial and NonFinancial) Ratings Distribution 0 10 20 30 40 50 60 70 80 90 (Number Of Issuers) Automotive Capital Goods Chemicals, Packaging & Environmental Services Consumer Products Diversified Financials (ex. Insurance) Forest Products & Building Materials Health Care High Technology Homebuilders/Real Estate Co. Insurance Media & Entertainment Metals, Mining & Steel Oil & Gas Retail/Restaurants Telecommunications Transportation Utility AAA AA A BBB BB B CCC & Below Data as of June 17, 2020. Source: S&P Global Ratings. 12
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