Strong technicals mean that the surge of Asian high yield deals will continue to find support as supply lags demand. But record low coupon levels point to the top of the market and prices are unlikely to tighten much further, according to commentators.
The Asian bond market continues to receive very strong inflows and, as it stands, supply is unable to match demand, according to Arthur Lau, head of Asia ex-Japan fixed income and co-portfolio manager for emerging markets at PineBridge Investment.
“The subscription multiple is huge. In addition we have a lot of coupon redemptions coming due, around US$50 billion in 2013. This money will need to be recycled into the bond market. The technicals are very strong and secondary market liquidity continues to be quite poor,” he said.
In the near term he believes the rush of primary property bond deals will likely continue, but as the US debt ceiling negotiations approach, he predicts some pullback. For the moment however, as investors remain uncertain about the growth outlook in Asia, yields will continue to attract demand. Furthermore, issuance volume is likely to remain as high as it has been for the first two weeks of this year.
“We will see more and more Chinese companies tapping the offshore market because the onshore market is still not able to offer longer maturities to issuers. For instance we have seen more 10-year paper tapping the market from Chinese entities. In addition, we also expect SOEs [state-owned-enterprises] to come to the market.”
Bond bonanza
In mid-November, China high yield deal flow stalled and Far East Consortium International pulled a five-year debut bond. At the time, investors suggested that oversupply was to blame. But last year seems a distant memory as Chinese property companies flood Asia’s bond markets, greeted with overwhelming demand.
Kaisa Property and Country Garden Holdings opened Asia’s bond markets in 2013, issuing trades on January 3. On January 7, Shimao Property Holdings priced a US$800 million seven year non-call four deal through its secondary curve and tighter than some of its higher-rated competitors.
On January 9, CSI Properties, Hysan Development, and Hopson Development all tapped the market. Hysan generated US$7.5 billion worth of orders from 180 accounts and priced its US$300 million ‘BBB+’ rated 10-year bond at 3.5%.
The execution of CSI Properties’ US$150 million bond was however not quite so smooth. Initial guidance was 6.5% and the books took two days to cover, but the issuer did not shift on pricing and was eventually rewarded. However, commentators argued that the initial lack of interest was not a signal that overall demand was tempering.
“It was a different animal. It’s a relatively small company and an unrated transaction. So it was more of a struggle to generate investor interest particularly because some of the other deals were from known rated names at comparable pricing,” said one head of DCM for North Asia away from the deal.
Hopson Development’s US$300 million five-year bond, rated ‘CCC+’ by Standard & Poor’s and ‘Caa1’ by Moody’s, generated US$6 billion worth of orders and priced at 9.875%, lower than Kaisa’s ‘B+’ rated bond the week before. The bond is callable after three years.
A frothy market?
“[Hopson Development’s bond] is the first ‘CCC’ deal to be done in Asia. So it’s quite a remarkable transaction in that respect, and maybe a bit representative of how frothy the markets are that it priced at 9.875%,” said the North Asia head of DCM.
“In high yield there may be opportunities for spreads to come in, in some of the higher beta names. Country Garden priced in the low sevens, for example, these are record low coupons for Chinese property names. The demand has been overwhelming but I feel like there has to be a little bit of a respite given how fast we’ve come.”
He said that there are more ‘CCC’ names looking to issue bonds, though is unsure whether the market will take them up at such tight pricing.
However, some investors are fairly comfortable with falling yields and argue that until prices reach levels seen in 2005 and 2006, China high yield bonds will remain attractive.
According to J.P. Morgan’s Asian USD Non-Investment Grade Corporate Bond Sub-index, the credit spread of Asian dollar non-investment grade corporate debt is currently 497 basis points (bp) over US Treasuries. This is well above levels of around 300bp seen in 2005 and 2006.
“If you look at the fundamentals the default rate is still very low globally. If you compare like-to-like in Asia high yield and US high yield for the same maturity and the same credit rating, Asian debt still offers a premium,” said Ken Hu, fixed income CIO at BOCHK Asset Management.
“Issuers will continue to get lower pricing because liquidity conditions in China have been improving. People will need to adjust their mindsets, that’s all, we had a very good run last year.
However, he noted that in this kind of cycle where the market is rallying hard, the issuer always has the advantage and there will inevitably be some weaker credits that get picked up by less discerning investors.