THE Asian dragon bond has grown from a financial novelty to a monthly event with issuers covering a broad cross-section of the financial community. High-quality issuers including supranationals, financial institutions such as Rabobank Nederland and the Export Development Corp, and corporates like General Electric Capital Corp (GECC), are flocking to this emerging market with its temptingly high level of accumulated wealth. To diversify their funding bases, these issuers offer dragon bonds to Asian investors, providing the operational convenience of trading in the same time zone. No doubt the investor base is expanding. ''More and more mainland Chinese banks are buying these bonds,'' said Societe Generale Asia bond sales and trading head Hawley Au Ying-lai. Nine dragon bonds have been issued so far, raising a total of US$1.9 billion, 30 billion yen (about HK$2.19 billion) and C$250 million (about HK$1.46 billion). When compared with only one issue in each of the past two years, the growth has been phenomenal. While some market practitioners are tempted to believe the Asian bond market is taking off, unresolved difficulties have left others more conservative. ''The first issues from the ADB [Asian Development Bank] and that from GECC were issued at a relative premium over their equivalents in the Euromarket,'' a Nippon Credit Bank report on the capital market said, explaining investors' initial interest. The premium was presumably a compensation for the relative lack of liquidity in this market, the report said. ''We have clients who have spent a lot of time looking into this market and finally saying 'no' to issuing dragon bonds and wanting to wait longer,'' said JP Morgan associate director Kelvin Yip Ka-kay. Judging whether the bond issues are successful can be difficult. Some were well-received while others, which were aggressively priced, faced a tough time in the market. ''But one thing is sure - most of the bonds are now trading at a price level lower than originally offered, and with a wider spread,'' Mr Yip said. Illiquidity of the secondary market, as reflected in the widening spread, remains the main stumbling block for developing the market. Market liquidity relates both to the investor base and number of market makers. The Asian market, lacking active market makers who are ready to quote two-way prices at any time, is primarily dominated by traditional investors who tend to hold the paper to maturity. Such illiquidity has favoured the American investment houses with global strength such as Lehman Brothers and Goldman Sachs. Borrowers inclined to frequently tap the market tend to choose investment houses which are committed to and capable of market-making in the secondary market. ''These global houses have better back-up from their head office and less capital constraints. As market makers, they are in a better position to absorb possible loss,'' Mr Au said. Issuers do not want to see investors unhappy about the bonds' secondary market performance. ''Though these are the growing pains in this developmental stage, frequent issuers can't afford to displease the investors,'' Mr Yip said. However, some market participants do not consider the market particularly illiquid. ''It is the size of the issue which creates liquidity,'' Wardley capital markets manager James Boice said. While it was impossible to compare with the deep and highly liquid US Treasury and government market, it seemed unfair to describe the dragon bond market as highly illiquid compared with the Eurobond market, he said. ''Eurobonds are supposed to be traded everywhere, while dragon bonds are traded in Asia. Naturally, there is less liquidity,'' he said. He said it was more of a communications exercise. ''It requires getting the message across to issuers that there are a lot of investors, a pool of liquidity, and that the dragon bond market is viable.'' Also, ensuring those whose trade are prepared to find good prices for their clients and provide liquidity to the market is important. Recent issues have raised hopes that the market is taking off, but some consider it still too early to judge. ''Two issues a month, compared to five to seven public issues a day in the Euromarket, still has a long way to go,'' Mr Boice said. With investment houses aggressively pursuing the market, liquidity is expected to enhance with time. ''In the meantime, liquidity enhancement mechanisms such as those pursued by the ADB, and very recently, 'clipper' bonds, which are nothing but bonds listed in both Asia and Europe to combine liquidity in both markets, would help the market evolve,'' theNippon Credit report said.
