China Fishery Group, a Singapore-listed company, is hitting the road this week to meet bond investors. It wants to be the first Asian high yield corporation to sell a bond since Lippo Karawaci, an Indonesian property company, sold a $150m deal on May 9.
Despite the nerves of the region’s investor base, China Fishery has a good chance of success.
For one thing, the company is close to the top of the rating scale for high yield issuers, being rated Ba3/BB/BB-. It has sold bonds before, issuing a $225m deal in December 2006. It has also, more importantly, paid back bonds before, redeeming that deal through a call option last September.
These factors mean the company has a good chance of reopening Asia’s high yield bond market, giving nervous investors a decent return, while paving the way for more potential deals from issuers in the region.
But there is unlikely to be a rush of high yield bonds after this deal. Bankers hoping to compensate risk-averse, and yield-hungry, investors should concentrate more on structures than credits. The time of hybrids is far from over.
A regional solution
Asia’s hybrid bond market is, in many ways, a baby. Cheung Kong Infrastructure sold the first deal only two years ago, raising $1bn in September 2010. But there have been a spate of deals from Asia since then and corporate hybrids in the region have quickly matured.
The dollar market is not the only place where corporations can sell hybrid bonds. Singaporean investors have absorbed a spree of deals in their local currency since the start of the year, and Cheung Kong Holdings has now pushed the structure into Hong Kong dollars, albeit with questionable success.
Hong Kong, Singapore, India, China, the Philippines: these countries have all been the source of internationally-marketed hybrid bonds. Investors have, by and large, jumped at the chance to up their returns while taking exposure to a credit they know well. Bankers should push for plenty more of this business by the end of the year.
Investors are nervous, and reluctant to come into risky deals with big orders. But they are also hoarding cash. Sooner or later, that is going to have to be put to work. It cannot only go in low-risk, low-yield bonds. Japanese issuers came to the market en masse last week, and other investment grade credits will give investors somewhere to park their cash in the second half. But these issuers will not pay enough to keep everyone happy.
The subordination of hybrid deals means they are the perfect substitute for high yield bonds in the eyes of yield-hungry investors. They have already showed themselves to be keen to lap up hybrids this year, and while funding officials at China Fishery should be applauded for braving the market, blue-chips will have a much easier time — even when they are offering risky structures.
The high yield market may well be opened next week, after China Fishery finishes its roadshow. But the path of least resistance for DCM bankers hoping to capture private banks and yield-hungry investors will not be high yield for some time. Hybrid issuance makes sense — for issuers, investors and for bankers.