The high yield bond market in Asia is set to recover from a slow start to the year, with a set of Southeast Asian borrowers looking to take advantage of rising investor interest and falling yields.
However once-regular Chinese corporates look set to remain out of favour.
Asia’s junk bond market has notched up just one deal since the beginning of the year in Asia—Royal Capital’s US$150 million perpetual on January 11 —which compares to deals worth US$2.6 billion in Latin America, US$13.8 billion in Europe and US$25.2 billion from the United States.
But bond yields for junk grade borrowers are tightening, indicating that investor sentiment towards Asia’s high yield market is improving.
Southeast Asian corporates in particular are looking to take advantage of these improving conditions to launch new US dollar bonds over the coming months.
This week Singapore’s MMI International started marketing a five non-call three year senior notes. It has hired Credit Suisse, J.P. Morgan and UBS as joint bookrunners for the planned US dollar bond sale.
Meanwhile Indonesian power producer Cikarang Listrindo is coming back to the market for the first time in two years. It is planning to sell a sell a seven year non-call four US dollar deal via Barclays Capital and Credit Suisse.
Bankers note that a combination of stymied supply and good trading levels are helping to spur these deals.
“We didn’t see more Southeast Asian issues in the second half of last year but it was a function of timing. The secondary markets of Singapore and Indonesia have performed much better this year,” said Luke Garner, co-head of high yield debt markets for emerging Asia at J.P. Morgan. “These bonds are all tracking at or well above par. The yields are now at attractive levels in the single digits.”
For example on September 23 2011, Singapore semiconductor testing company STATS ChipPAC’s 5.375% 2016 bond issue was trading at a cash price of 93.00-95.00 and yielding 9.09%. This had changed to a price of 101.25-103.25 and a yield of 5.03% on February 8.
The improving prices have led debt bankers to hope that more companies will seek high yield bond funding over the coming months.
“As bond prices approach par you will start seeing some borrowers getting ready for high yield issuance. I believe we could see a serious resurgence from March,” said Herman van den Wall Bake, head of global risk syndicate for Asia at Deutsche Bank.
The lack of deal flow so far this year largely reflects a mixture of eurozone debt troubles and rise in investor concerns surrounding the corporate governance of China credits in 2011, of which Sino Forest and China Forestry were two of the most high profile cases.
“If you look at last year there was US$11 billion-US$12 billion of [Asia high yield bond] supply, which is a large number while the second half saw quite limited volume,” said Garner. “The eurozone problems affected everybody but on top of that most of the supply was coming from China and there were concerns over corporate governance so there was a real pull back.”
However even the prospects for some Chinese high yield borrowers are now improving. Don’t write off a return of some mainland junk credits to market later this year.
“Property has been a poor performer but we have seen a rapid recovery in value in some of the Chinese high yield names,” said van den Wall Bake. “They have recovered 500 to 600 basis points for example. [The bonds of] Country Garden is now showing a cash price of 95 but it was 10 points lower last year. It’s an impressive recovery.”