It might be time to revisit the Kindleberger-Minsky framework of the anatomy of a bubble in assessing Asia. There are five stages of this anatomy: stage one involves a displacement such as a war, the introduction of new technology or financial deregulation.
Then comes a boom, such as we have seen with Asia’s tiger economies, particularly since the region’s late 1990s financial crisis. While stage two involves real organic growth, stage three involves leveraged growth based on underlying euphoria.
And next the stage is the one we seem to be at in Asia based on the debt issuance we have seen in the region over the past 15 months or so. That involves industry insiders selling, prior to speculators rushing to the exits.
What could have been more like an insider’s rush to the exits ahead of speculators than last year’s China property issuance frenzy? Yes, we are led to believe that the funds would be devoted to landbank acquisition and for capex needs. But the reality is that those funds were in most cases acquired in order to provide a liquidity cushion to see PRC realtors through the down-wave which is now punching through the China property market like there’s no tomorrow.
In other words the insiders knew only too well the state of their industry and decided to leverage up ahead of the downturn.
What if that downturn is vicious and prolonged? Well, they can always take the restructuring route and cane investors with equally vicious haircuts. And for all we know cash leakage on a vast scale is happening across the China property industry in the face of falling prices and rapidly diminishing contract sales.
And what about Asia’s latest issuance fadâ€”issuance from the resources sector? Berau Coal brought a $500 million Global a few days ago (achieving a sensational near 20 times cover in the process) and deals are waiting in the wings from the Philippines’ Carmen Copper and China’s Yanzhou Coal Mining. Both of the proposed deals have some eyebrow raising features.
Carmen is rumored to be eyeing 6.5%-7% guidance, or a good 50bp below where the private banks see optical attractiveness on a five-year and Yanzhou is circling a $1 billion trade, which if completed would be the biggest mining deal yet out of Asia ex-Australia.
To return to bubble anatomy, it was widely assumed that commodities trader Glencore called a top to the resource market with its $10 billion IPO last May. That also looked like the ultimate piece of insider selling.
And there is credence to that view if the fall in Glencore’s stock from its ÂŁ5.40 IPO price to its current level of ÂŁ3.99 is anything to go by, with the stock failing to climb above the initial offering price and having declined since the start of this year, despite decent diluted earnings growth at the company in 2011 of 220%.
Could Carmen and Yanzhou be playing the same game as Glencore? It looks like it.
Let’s remind ourselves of the final stage of Messrs Kindleberger and Minsky’s anatomy of a bubble. That involves revulsion, where prices overshoot fundamental demand and scams and fraud are uncovered.
This is not to suggest anything of the sort with the above companies. Rather, it’s to suggest that they are cashing in while investors and speculators still think the sectorsâ€”in which these issuers are the ultimate insidersâ€”are sexy.
â€” By Jonathan Rogers, chief IFR analyst, credit