KE Favors Kexim, Listrik Debt in Best Start in Decade

Feb. 2 (Bloomberg) -- Debt sold by Asian state-owned companies now offer “better value” than sovereign bonds after an easing global credit crunch helped revive investor demand, KE Capital Partners said.

Bonds with implicit state guarantees yielded as much as 4.95 percentage points above Treasuries last week, according to an index compiled by JPMorgan Chase & Co., three times the average spread in the two years before the collapse of Lehman Brothers Holdings Inc. in September. Rachana Mehta, head of fixed-income at Singapore-based KE Capital, recommends dollar- denominated debt of Export-Import Bank of Korea, or Kexim, and Indonesian power utility Perusahaan Listrik Negara.

“Asian credits will do well over a six- to 12-month horizon, where you are getting attractive yields to compensate for the risks,” she said in a Jan. 28 interview. “Some of the new issues have been well received and credit spreads are still wide compared with historical levels.”

Overseas bond sales by companies and governments in the Asia-Pacific region reached $56.2 billion in January, the best start to the year in at least a decade, according to data compiled by Bloomberg.

A rally in global bond markets last month, fueled by interest-rate cuts, has helped narrow the spread on so-called “quasi-sovereign” debt from as high as 5.8 percentage points, compared with an average 1.45 percentage points in the two years before Lehman.

Note Spreads

KE Capital is a joint venture between Singapore’s Kim Eng Holdings Ltd. and Tokyo-based Mitsubishi UFJ Securities Ltd., a unit of Japan’s largest bank by assets. It acts as investment adviser to Kokusai Asset Management Ltd., the manager of the 20.8 billion yen ($231 million) Kokusai Asia Pacific Sovereign and Quasi Fund. Kokusai also manages the world’s second-biggest bond fund that has $51 billion of investment.

Kexim’s 8.125 percent note maturing in 2014 yielded 8 percent, or 6.2 percentage points more than like-maturity Treasuries on Jan. 30, according to data compiled by Bloomberg News, versus 6.8 percentage points when the bonds were sold on Jan. 13. Investors get as little as 4 percent on benchmark five- year local-currency Korean government bonds, and 5 percent on the nation’s 2014 dollar bonds, according to Bloomberg data.

Listrik Negara

Indonesia’s Perusahaan Listrik Negara’s 7.25 percent note due in October 2011 yielded about 16 percent, Mehta said on Jan. 28. The spread has widened to more than 14 percentage points over Treasuries, from 2.7 percentage points when they were sold in 2006. Investors get about 10 percent on Indonesia’s dollar- denominated 7.25 percent note due April 2015.

Kexim bonds are ranked Aa3 by Moody’s Investors Service, the fourth-highest investment grade and two levels above South Korea’s sovereign rating. Standard & Poor’s Ratings Services put them both A, or the fifth-lowest investment grade.

Listrik securities are rated Ba3 by Moody’s and BB- by S&P, both on par with the country’s sovereign rating and three levels below investment grade.

Investors have demanded a lower premium to own dollar- denominated emerging-market sovereign bonds this year after central banks worldwide pumped cash into financial markets. The average spread narrowed to 6.3 percentage points above Treasuries on Jan. 29, from as high as 8.65 points in 2008, according to the JPMorgan EMBI+ Index.

Bond Rally

In Asia, dollar-denominated bonds posted a third month of gains in January, according to the JPMorgan Asia Credit Index that tracks government, quasi-government and corporate debt. The index rose 12 percent in the longest rally since 2006.

The Philippine government sold $1.5 billion of 10-year global bonds on Jan. 7, drawing bids for four times the amount of debt offered. Indonesia will meet investors from this week on a proposed $4 billion debt offering. Korea Development Bank, the nation’s largest issuer of overseas debt, sold $2 billion of five-year notes last month to yield 6.75 percentage points more than Treasuries.

Indian, Philippine and South Korean local-currency government debt remain attractive as slowing inflation will allow central banks to keep cutting borrowing costs, said Mehta, who has traded Asian bonds for more than 10 years, including as head of Asian and emerging-market debt at DBS Asset Management Ltd. in Singapore.

Currency gains may also increase the appeal of the debt as a slide in commodity prices and slower global growth lower import costs, she said.

“Yields on Indian, Philippine and Korean bonds appeal to me on a total return approach with currency gains,” Mehta said. “Falling oil prices will also have a positive impact for countries with current-account deficits.”