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Monday, 22 April 2019

Flying high

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  • Eagles fly around an eagle-shaped kite at the international kite festival in the western Indian city of Ahmedabad.

Asian high-yield issuance has shown resilience in the face of global volatility, with the support of the region’s private banks and wealth managers and a reduced correlation to the US market.

The Asian high-yield market started the year badly, after Chinese property developer Kaisa Group Holdings lurched from one crisis to another, before eventually defaulting on its offshore bonds. The saga killed appetite for new issues early in the year, but there has been a revival of sentiment with around US$13.8bn of G3 high-yield bonds sold in Asia in the first half, up around 16% on the same period last year.

Kaisa has yet to come to an agreement with its creditors, but there are hopes that a resolution is in sight, even if it means offshore bondholders take a haircut, as seems likely.

“Kaisa is being viewed as an outside, isolated incident, but the reality is that there are a lot of people who still own these bonds,” said Luke Garner, who heads high-yield capital markets for North Asia at JP Morgan. “Some kind of closure in a positive way can only help sentiment.”

Ironically, a side effect of the Kaisa ruckus has been a more robust investor base for Asian issues after US investors bailed out of Chinese high-yield bonds in favour of US high-yield, Latin American credits and other emerging-markets paper.

“On the structural side, we saw issuers opting for Reg S-only offerings (which exclude US investors), as the Asian investor base became large enough to soak up the supply, spearheaded by the regional private wealth businesses and asset managers,” said the Asian fixed-income team at Aberdeen Asset Management.

“So, what this means is that Asian HY investors have become far more sticky, as the ‘tourist investors’ have excluded themselves or have been squeezed out. We see this as a positive for the market and one of the drivers why Asian HY in general has held up better than other HY markets in EM, following the recent spike in volatility.”

Asian high-yield bonds have reduced their correlation to US high-yield paper over the past year, and Aberdeen reckons that Asian junk bonds will still be resilient even as US rates begin to rise and Asian dollar paper offers less of a pick-up over the risk-free US rate. This is due partly to the increasingly long-term investor base, the short duration and high-yield cushion, the low refinancing risk for many issuers, and the fact that many Asian economies, most notably China, are still in an easing mode.

“On a quantitative basis, we see that the correlation of Asia HY to rates volatility has dropped off sharply over the last year,” said Aberdeen.

Prospects for new issuance are harder to judge. High-yield issuance from China is lagging last year, but is expected to remain a strong force driving volumes in Asia.

“Greater China made up US$22bn of high-yield issuance last year, and (so far) this year it’s around US$8bn,” said Royston Quek, who covers Greater China DCM at Barclays. “Part of that is down to volatility in rates, not just interest rates, but currency exchange rates, which has made people more reluctant than last year to come to market.

“In my opinion, if US rates go up 25bp–50bp this year, the maximum impact on the Asian high-yield market is that this will lower potential issuance 10%–20% at most. The Chinese Government has been telling companies to go global and buy overseas, and there will be issuers that respond to the call and need offshore funding. A marginal increase in Treasury rates may not be their major consideration or concern.”

More significant may be the opening of China’s domestic bond market to Hong Kong-listed entities. “The major trend in the second half that’s going to affect offshore issuance is onshore issuance,” said Quek, pointing to Evergrande Real Estate, which, last month, issued an onshore bond at a far lower yield than it paid for US dollar bonds. Last year, the five biggest high-yield issuers from Greater China were all from the real estate sector, and it is property developers that are expected to be keenest to tap the onshore market.

Indian dreams

In terms of potential new issuers, India is one market that holds promise as the Reserve Bank of India is considering easing its current rules, which effectively block the lowest-rated issuers from the offshore market by limiting the maximum yield they can pay.

“The RBI is still trying to come to grips with how they want the external-commercial-borrowing rules to evolve. On the one hand, they want to encourage foreign investment and enable companies to access offshore capital, but, on the other, they are worried about corporation increasing their dollar exposure,” said Haitham Ghattas, head of high-yield capital markets, Asia, at Deutsche Bank.

Currently, issuers cannot pay an initial yield higher than 500bp over Libor, preventing many high-yield issuers from coming to market. “They are chomping at the bit to be able to do it,” said Ghattas.

“In my mind, it’s inevitable that we see the restrictions pulled back at some point. They are restricting viable corporate issuers from accessing capital markets, arguably inhibiting the growth of these companies, and that can’t be good for India. In exchange for relaxing some or all of those restrictions, we expect there is going to be a requirement to hedge.”

Ghattas noted that this might take into account whether companies were naturally hedged by US dollar earnings.

High-yield issuance is notably absent in Korea and Taiwan, both of which have deep, liquid bank loan markets.

“Taiwan and Korea corporations are very heavily-banked, and most potential issuers that need to fund can easily fund onshore at very low rates, compared to the offshore bond markets,” said JP Morgan’s Garner.

“The comparable yield for a BB issuer in US dollars is much higher than what it can fund in the onshore market, and that’s been the case for the past five to 10 years. One area of opportunity in these regions could be driven by M&A abroad, but that’s very situational and difficult to predict.”

Despite rates and other market risks, Deutsche’s Ghattas predicted that Asian high-yield issuance could hit up to US$25bn at the end of 2015.

“The pace we have been seeing in the first half will probably continue into the second half,” said Garner of JP Morgan. “China is looking to be at least half of the supply. India and Indonesia will be opportunistic. The pipeline is not record- breaking, but still very healthy.”

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