Issuance in Asia’s high yield bonds have lagged this year as Europe’s credit crisis took a toll on risk appetite. But a string of stimulus announcements from global central bankers is raising hopes that demand for even the riskiest corporates, which were more or less shunned for most of this year, is here to stay.
Road King Infrastructure set the stage on September 11 with a US$350 million deal yielding 9.875% that had attracted US$2.2 billion in demand, and rated ‘BB-‘ by Standard & Poor’s. Two days later, Kaisa Group launched a US$250 million five-year non-call three deal that Moody’s rated ‘B1.’ Trade and Development Bank of Mongolia also tapped the market with a US$300 million deal maturing in 2015 with 8.5% coupon. The bond was rated ‘B1’ by Moody’s.
Bankers are also working to bring Indonesian corporates to tap the market, according to a Hong Kong-based banker.
“The market for high yield has opened, and we are now seeing very quick appetite from investors going into the single-B area,”according to the debt syndicate banker. “This is happening in one of the worst sectors in Asia, the riskiest. People were freaking out about China credit risk before.”
The rush to issue high yield credit comes after the European Central Bank and the US Federal Reserve pledged to launch bond purchasing programmes to boost growth. Chairman Ben Bernanke said the Fed will launch US$40 billion in mortgage debt a month to improve the labour market, also known as QE3.
Bankers say the wave of stimulus is expected to boost high yield issuance, which has booked US$8.6 billion in deals so far this year according to Dealogic, compared to US$13.2 billion in the same period in 2011.
“It will continue to outshine relative to the last couple of months. We saw a wave of supply in the first quarter and part of the second quarter but after that market conditions slowed down,” said another senior debt banker. “Now with these transactions what it has done is it opened up the market. There is more appetite for riskier names.”
HSBC says Chinese property developers, many which are considered high yield names, are promising investments.
“After the FY12 interim results announcement of Chinese property companies, it can be concluded that the major players do not have much liquidity problem and cash flow remains healthy,” Cecilia Chan, Asia Pacific fixed income CIO at HSBC Global Asset Management, wrote in an email to Asiamoney PLUS. “Their ability to adjust the pace of business expansion is improving, as reflected on the pace of construction and land acquisitions. These will enable them to weather the challenges ahead.”
Before last week, eight out of the 11 deals that have been priced in the Asian high yield space so far this year were completed in the first quarter. FPC Finance priced a US$400 million deal at a 6.0% yield on June 21 and Shui On Development sold US$400 million at an 8.5% yield on July 30, according to Dealogic figures. The last one to tap the market was Guangzhou R&F Properties on August 22.
“The market is starting to get more receptive, risk-on mode,” said another senior debt banker with knowledge of the Mongolia deal. “If we see several test cases of good order books then we will definitely see more. People were first scared that the water would be too cold.”
What’s next?
“We may see more Indonesians as they are hot favourites, especially the coal miners. We could also expect better quality real-estate names from China with outstanding issues,” said the banker.
But supply from Indonesia has been relatively low this year, and their ability to fund domestically through local liquidity or the banks may limit Indonesian issuance for the rest of the year, he added. PT Berau Coal Energy and Tbk Listrindo Capital BV are the only Indonesia high yield deals that tapped the market so far this year in February.
“It also depends on whether the issuer specifically needs US dollars rather than local currency.”
The supply of Chinese property names may also be limited as the companies appear to be well funded.
“The Chinese property developers are quite opportunistic in raising new funding,” wrote HSBC’s Chan. “They have various funding sources and no imminent funding needs. New funding will be for expansion but not for refinancing. As a result, they will tap the capital market at the right timing and at the right price.”
Not all bankers are optimistic that the high yield bond story will stay strong in Asia, as some investors will comb through the deal details to make sure that they are comfortable with the risk they’re taking despite the exuberant market tone.
“I wouldn’t say that the floodgates are open fully,” said another senior debt syndicate banker. “There are still risks associated with high yield jurisdictions such as China, where there is a China premium to pay. Investors may still discern on a case-by-case basis, working through the credit matrixes, making sure the structure of the bond is right. It’s not going to be such an easy seller especially for a first-time issuer.”
Pimco, the world’s largest bond fund manager, is also doubtful that risk sentiment for higher-yielding assets will be held up in the long term, as the flood of stimulus will do little to address the fundamental problems.
“While we think this risk-taking mentality among investors will last over the medium term, we are less certain if this is sustainable for the long term as many of the structural problems in Europe and the US have not been addressed with the massive accommodative policies being introduced by central banks both in the developed and developing worlds,” Brian Baker, CEO of Pimco Asia, wrote in an email to Asiamoney PLUS.