Asian high yield bonds prepare for Q2 rebound
Market volatility and investor uncertainty meant the Asian dollar bond market was heavily skewed towards investment grade deals in the first quarter of 2015. But the next three months could look very different. Many bankers are counting on a recovering Chinese property sector and a surge in bank capital trades to revive the high yield market, writes Narae Kim.
Asia ex-Japan issuers raised $32.6bn from 53 dollar bonds in the first quarter of the year, a result that would have seemed unlikely amid the flood of negative headlines at the start of the year over plunging commodity prices and Kaisa Group Holdings’ offshore bond default. But although the number of deals was slightly down on the 59 executed in the same period in 2014, volumes were up from $25.4bn.
That was not the only change: there was also a marked shift to better credits, with 83% of volume coming from the investment grade bracket, compared to 70% in the first quarter of 2014, according to Dealogic.
A flight to safety amid interest rate worries is the typical explanation, with one Singapore-based fund manager saying that, at the moment, investors like him prefer higher quality names that are less likely to be affected by bouts of volatility.
“There is still so much uncertainty surrounding the timing of the US rate hike, with some saying June, others September, and some even 2016,” the investor said.
Such lurching opinions have been reflected in US Treasury curve movements since the start of the year. The 10 year was spotted at 2.12% on January 2, before plummeting to 1.68% on February 2 and then peaking at 2.24% on March 6. It was at 1.92% on April 8.
“It will continue to fluctuate unless the Federal Open Market Committee meeting in April provides some clarity,” the investor added. “Until then, investors have no choice but to keep their defensive posture and IG names will continue to dominate in Q2 and H2.”
What about HY?
Not everyone agrees with that pessimistic assessment, however, with other market participants offering a rosier outlook for the Asian high yield market.
“Q1 was tough, as it took a while to absorb the shock value [of Kaisa],” said one Hong Kong based syndicate banker, referring to distressed Chinese property developer Kaisa Group Holdings’ offshore debt restructuring. “Now the market has become comfortable with the default, restructuring and investigation, and believe the damage is done and it’s time to move on.”
Initial secondary trading after the Easter break appeared to back up that optimism. Asian HY bonds were trading up by 0.5bp-1.5bp on April 8, while Kaisa’s bonds moved 3bp-5bp higher on market rumours that the company's projects may be unblocked. The company duly confirmed the next day that some of its unsold units in its Shenzhen properties had been released.
Also offering hope to high yield is a bullish equity market. “Historically the equity and HY bond markets are 50%-60% correlated, as they are quite similar in terms of returns and risks — and equity looks set to have a solid performance in Q2,” said a Hong Kong-based investor.
Hong Kong’s Hang Seng has traded up 8% since the start of April, with strong demand for Hong Kong stocks from mainland Chinese buyers on April 9 helping to take the benchmark to its highest level since 2007. Mainland fund houses last week gained regulatory approval to invest in Hong Kong stocks, another factor that has driven record southbound trading volume through the Shanghai-Hong Kong Stock Connect.
The investor added that unless there was a big negative event that caused the equity market to crash — which he considered highly unlikely — money would trickle down and the high yield bond market would be certain to benefit.
Another debt syndicate official in Hong Kong pinpointed Chinese names in general — and the property sector in particular — as likely to lead the charge.
“While most of the Chinese industrials will come to the offshore markets for refinancing purposes, real estate developers need money, a lot of money, as it is a capital intensive sector,” said the banker. “Combined with the government’s effort to prop up the housing market, the overall conditions for Q2 for Chinese property look a lot more constructive than Q1.”
The Chinese government announced a series of supportive measures for the property industry on March 30, including reducing minimum downpayments and extending tax exemptions for homebuyers.
An expected rush of bank capital trades will also help the high yield market gain traction in the months ahead, and recent landmark trades in the sector — such as additional tier one issues from Standard Chartered and HSBC in March — are seen as having given plenty of hope to issuers and investors alike.
“Encouraged by the success of recent Standard Chartered and HSBC AT1 deals, a number of Chinese banks are lining up for tier two and AT1,” noted the Hong Kong-based investor. “I believe this will provide attractive options to high yield buyers and in turn enliven the Asia high yield market.”
China Construction Bank (CCB) and Industrial and Commercial Bank of China (ICBC) are gearing up for tier two trades, while Bank of Communications (BoCom) is also looking to raise AT1 capital in the offshore renminbi market.
For all the potential revival in high yield, however, market participants agree that investment grade activity will be strong in the second quarter. This week showed the first signs of that, with Korean issuers — who were missing in action in Q1 — rushing to the offshore bond market at the end of Easter.
Shinhan Bank successfully returned, pricing a $600m five year on April 8. Korea Resources Corporation (Kores) and Korea Hydro and Nuclear Power (KHNP) met investors, and Doosan Heavy Industries and Construction is planning to hold a roadshow. Nonghyup Bank and Industrial Bank of Korea are also looking to print dollar bonds in Q2.