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Hong Kong. Asian borrowers, seeking to head off the impact of rising interest rates, are increasingly buying back their existing bonds and replacing costly debt maturing over the next two years with longer-dated borrowings.

Asia’s improving economic fundamentals are boosting investor confidence and encouraging them to take a longer-term view on the region, providing issuers with an opportunity to lengthen their debt maturity profiles.

While last year’s rush of bond buybacks was driven by bargain-basement secondary market prices, idle cash and poor returns in companies’ core businesses, the lead in 2010 will be provided by global monetary tightening and the need for longer-term funds.

With about $16 billion to $19 billion of bonds set to mature this year, bankers are exhorting borrowers not to wait until their debt comes due but to enter markets now to arrange re-financing.

“Borrowing costs are near all-time lows, and Asian borrowers that have a year to two years left to maturity of existing bonds will look to refinance them with longer tenor bonds,” said Rohit Chatterji, JPMorgan’s head of debt capital markets in Asia ex-Japan.

Borrowing costs and market yields have plummeted in the last three quarters amid surging liquidity as authorities around the world pumped stimulus money into their ailing economies.

Indonesia sold 10-year bonds last month at a yield of 6 percent, compared to the 11.75 percent for a similar bond in February last year.

In January, Asia ex-Japan absorbed $7.25 billion in debt sales from issues of dollar-, euro- and yen-denominated bonds, following on 2009’s record high $64.7 billion. But liquidity conditions and financing costs are not likely to remain so favorable for much longer, as central banks around the region grow increasingly uncomfortable about inflationary pressures and the possibility of bubbles forming in assets such as property and stocks.

“Rolling over existing debt now to lock in the low rates is the definite thing to do and most of the blue chips are looking very carefully at the market now with interest rates seen up later in the year,” said Brayan Lai, credit analyst at Calyon.

Issuers could look to exercise the call option on their bonds rather than making buybacks, which could be costlier.

But with abundant pressure on policy makers to keep rates low for an extended period of time to ensure recoveries are on track, the rush to extend debt maturity profiles could slow.

“Rates can only go one way from here and that is up but we are not seeing that type of pressure to buy back and we believe there is time to manage things at a normal pace,” said Rodrigo Zorrilla, Citigroup’s joint head of global markets in Asia.



Reuters