Euro 'new base' for Asian bond issuers

Euro 'new base' for Asian bond issuers

HONG KONG (Reuters): The advent of the euro will open a new source of funding for Asian borrowers, but analysts said it could take some time before the region's bond issuers start tapping the market.

"In time, the euro-denominated debt market could become almost as important as the U.S. dollar market, given the sheer size of pension funds...and that will open up a whole new debt market for Asia," said Raja V, head of fixed income research at BA Asia.

"But I don't think anyone (in Asia) wants to do a euro debt issue just yet," he said.

Chris Francis, head of credit research at Merrill Lynch (Asia Pacific), said the creation of the euro was a great opportunity for Asian borrowers in the medium term.

"But in the short term, general sentiment toward emerging market debt by European investors is still weak (in light of the) Russian collapse just six months ago," he said, referring to Russia's debt and economic crisis.

The euro was officially created last Friday to merge the currencies of Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal and Spain.

It made its trading debut in Asia on Monday, opening at US$1.1747 at 05:00 a.m (1800 GMT) in Sydney and rising as high as $1.1913 in early European trading.

The birth of the euro would open to Asian borrowers a new class of European bond buyers that would augment an already well- established investor base for U.S.-dollar denominated deals of Asian issuers.

"Most of the investors in Europe traditionally were currency and government bond investors who were deciding whether, say, the 10-year deutschmark curve was attractive relative to the five- year lira curve," said Francis.

"Now, most of that has disappeared with the euro and fixed income investors are reinventing themselves as credit investors," he said.

Up to now, European-currency denominated bond issues of Asian borrowers typically have performed poorly in the secondary market, said Paul Marshall, credit research analyst at Barclays Capital.

"European currency investors haven't been as Asia- or credit- literate as U.S. dollar investors, so when there have been Asian bonds in individual European currencies, these have lagged in secondary trading," he said.

"The euro might force investors to be more credit-literate and that should ultimately get them looking at the better yields available from Asian issuers."

The Philippine government has been mulling a euro-denominated issue as part of its overseas borrowing plan, while China's ministry of finance said last October it might consider a euro issue.

Analysts said that among Asian issuers, sovereign and quasi- sovereign borrowers certainly would be the first to tap the euro bond market, but even these top-tier names were likely to take a wait-and-see approach.

"It will take six months just for people to get used to quoting in the new currency," said BA Asia's Raja V.

Of the emerging market issuers, "the ones that will benefit right away will probably be from Eastern Europe, with Latin America coming second and then Asia," he said.