New names attempting to issue in Asia’s high yield market are being forced overseas to seek support for proposed bonds, as the latest flurry of China high yield deals grinds to a halt amid weak secondary market performance and a shift toward risk-off sentiment among Asian investors.
Following the spate of high yield bonds issued in Asia over the last couple of weeks, the most recent offerings have performed poorly in the secondary market as, according to some commentators, investors have been overwhelmed by supply.
For example, Soho China’s US$1 billion dollar bond issued at the end of October is trading below par at 96.38 at the time of going to press, and the more recent US$350 million offering from Gemdale Corp. on November 12 is currently trading down at 98.75.
This loss in Asian appetite for riskier debt means high yield issuers will either have to scrap planned deals (as property company Far East Consortium has been forced to do this week) or head over to the US in order to find support, according to bankers.
This is exactly what two issuers are doing this week, having postponed deals in Asia. Studio City Finance, the ‘B-’ rated subsidiary of gaming company Melco Crown Entertainment, and ‘B+’ rated Global A&T Electronics, an offshoot of Singaporean engineering company United Test and Assembly Centre (Utac) have headed stateside to market their US$825 million and US$625 million offerings.
“The market has turned choppy over the past week or so, there was a steady series of deals pumped into the market but the last two ran into difficulties, and a couple of deals out there have been open ended since last week,” said the head of fixed income at an Asian bank.
He believes that despite frequent calls for diversification in Asia’s high yield market, in reality, demand remains centered on the more highly rated ‘BB’ names that investors are most familiar with. These are predominantly grouped in the China property sector. Others agree.
“We were expecting Chinese industrial names to come to the market so we started trying to pitch non-property names, but clients came back to me and said they preferred property, as this was one of the sectors still offering high yields, and in volatile markets where they have to mark-to-market it means they can still get a return,” said Patrick Liu, head of international debt capital markets, China at UBS.
As such, while the recent series of high yield deals have predominantly leaned on Asia to generate support (89% of the Gemdale deal, for example, was bought up by Asian investors), Melco and Utac have to take a different tack.
“There was enough similarity to carry [the China property names] through but for Utac and Melco they are trying to go to the US high yield guys to re-engage them. In the recent past most deals have been done in the Reg-S space, whether they are rated high yield or unrated, but these ones have to go further away because of the size and the fact that they are firmly in the ‘B’ level,” said the head of fixed income.
“Any new ‘B’ rated name would have to go to the US to get the high yield guys to go through the covenant package in order to get the deal done. In Asia you have to be more of a familiar name, the fact that they have to travel all the way to the states shows that Asia might not be able to drive the deal by itself.”
In terms of pricing, bankers said that while the cost will likely be higher for companies that need to bring in US investors in order to get the deal done rather than simply issuing to Reg-S investors, the premium is hard to pin down. This is because there have been no deals issued in the ‘B’ space in Asia from comparable industries, and this will be the debut bond for both companies.
Risk off
Bankers are not certain that the deals will get done even with support from the US, as the high yield market in Asia has turned bearish this week, leading some to argue that it has already closed to new issuers for the remainder of the year.
“There have been some knocks over the last couple of sessions due to issues surrounding the so-called US fiscal cliff, and the continuing noise with Greece hasn’t helped. Some of the recent high yield issuances in particular are trading way below par and have been sold off dramatically over the last few sessions. These are generally the first to be sold off during any volatility and as soon as the rest of the market sees any weakness, its like piranhas to bait in water, and they just start attacking,” said Winston Tay, ANZ syndicate banker.
“The sell-off is going to dampen the enthusiasm of all the lesser known high yield issuers wanting to come to the market. The momentum you saw three weeks ago is trailing off and that might well mark the end of the year for these kinds of first time high yield issuances,” added the head of fixed income.
Investors have switched their focus towards higher quality and defensive names in the three to five year space, according to Tay. If this is the case it may raise problems for Melco and Utac.
“We’re having conference calls with the US right now and there is some interest. That’s not to say there’s going to be a slam dunk, so we need a little bit more time on that. We’re still trying for this week but if not then next week,” said a banker on the Melco deal.