Time for Asian HY issuers to ride route 144A
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Time for Asian HY issuers to ride route 144A

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It has barely started, but the new year is already gearing up to be a challenging one for Asian high yield corporates thanks to a high profile default by China’s Kaisa Group Holding and the looming prospect of rate rises. With local markets looking tougher, it’s time for issuers to start broadening their investor base and consider 144A deals.

The year 2015 was always going to be a busy one for the Asia ex-Japan corporate high yield sector, with some $12.4bn of bonds due to mature or available to be called back, according to Dealogic. The need for new money and the arrival of debut issuers will doubtless only add to that total.

In the last few years it would have been easy for the market to absorb this amount of supply, but 2015 will be anything but a smooth ride. With US interest rates predicted to rise, issuers are rushing to get their funding done as soon as possible.

Adding to the headaches is the fact that the Chinese property sector, which accounts for around 40% of the Asia ex-Japan high yield sector, has been hit by the failure of China's Kaisa to repay a HK$400m ($51.6m) loan. With Kaisa also expected to miss the 10.5% coupon of its $500m 2020s that falls due on January 8, issuers are now nervously sitting on the sidelines.

Still, not all is lost for high yield issuers. Ba1/BB+/BB+ rated China Auto Rental (CAR) is in the midst of meeting investors for a dollar bond this week and is looking for a bit of a buffer against the volatile market by targeting a Reg S/144A deal.

If successful, this could well be the template for other high yield issuers in the region, which have so far been rather reluctant to distribute into the US due to the extra cost, effort and time involved.

This is hardly surprising. Asia has been flush with dollar liquidity thanks to US quantitative easing. As long as pricing was not too ambitious, getting a deal done in Reg S-only format to mainly Asian investors was rarely tough. Of the 69 Asia ex-Japan high yield bonds to have priced last year, more than 70% were executed in Reg S-only format, according to Dealogic.

But this year's huge refinancing needs, plus pressure to wrap up that refinancing before rates rise, mean the balance of power has now shifted towards investors. Bankers are already predicting that new issue premiums will need to rise from the recent average of 10bp-20bp.

By targeting 144A investors, Asian borrowers could minimise many of these problems. The bigger investor pool and increased liquidity available could reduce the new issue concession for the right names.

Apart from more competitive pricing, 144A issuers also have the benefit of executing bigger transactions, reducing the number of times they need to come to the market. Some of last year’s biggest high yield transactions from Asia were done in 144A format, such as Country Garden’s $550m 7.875% 2019 and Wynn Macau’s $750m 5.25% 2021.

Of course, not every Asian high yield name can make the jump to 144A. Chinese car rental company CAR, which is roadshowing a dollar bond, is one that looks to be well placed, thanks to its ties with The Hertz Corp and Warburg Pincus.

As things stand, the full benefits of a 144A deal are open only to a few names or sectors that US funds are familiar with, such as automobile or oil and gas firms. Oil rig maker Honghua Group’s $200m 7.45% 2019, for example, recorded an impressive $1.4bn order book last September, with US funds allocated 34% of the deal.

But as the Asian high yield market continues to develop, any lack of familiarity will diminish. In fact, bankers are already seeing a differentiation among US investors when it comes to Chinese property bonds. Leading real estate developers such as Country Garden already have a huge investor following in the US; more leveraged peers continue to be neglected.

On the surface it may look easier to stay at home. But tighter liquidity in Asia and an overcrowded market mean that 144A now looks the safer bet.