IFR Asia High-yield bonds Roundtable 2015: Part 2

IFR ASIA: Is there a danger in looking for diversification that you’ll be swapping one set of risks for another that could be even harder to assess?

Bryan Collins, Fidelity: It’s very possible that you end up swapping risks, and it’s also possible that you swap th ose risks and give up yield. That’s why the market is very discerning, and you don’t just see every deal that comes along actually make it to market – and that’s good. It shows you that capital is still disciplined and you still have some appreciation of these types of risk, but you don’t just diversify for the sake of it. I don’t think anyone around this table would be silly enough to do that.

Jim Veneau, AXA IM: We still have a long way to go in terms of diversification away from Chinese property. It’s still a very large percentage. From the buy-side perspective, it’s absolutely critical that we have new companies and new sectors issuing in this market.

Bryan Collins, Fidelity: The risk premium you get from China property distorts reality to some extent. Yield expectations are high, and it’s self-fulfilling because one of the ways you can get those returns is in Chinese property, whatever the risks may be. There needs to be appropriate management of risk-return expectations.

Haitham Ghattas, Deutsche Bank: Chinese property may be the largest single sector, but it’s actually a minority in terms of outstanding issuance. There’s roughly US$100bn of outstanding Asian high-yield securities today, of which 40%–45% is from China property. We’ve spent an hour and a half talking about China property, but there’s another 60% of the market, and some of the challenges facing the property sector might even present opportunities on the other side. CAR Inc is a great example of a first-time issuer in a difficult market backdrop, being able to move on price and raise US$500m on its debut transaction. That’s not been done for a while. There is true appetite for good quality Double B credits with a business that makes sense. There’s a huge opportunity.

Michel mentioned India – that’s a tremendously interesting story. I would go as far as saying that India can be the next pillar of Asian high-yield. It’s going to have its ups and downs, while the Indian authorities figure out how they want that market to develop, but, without doubt, there is huge, huge demand for offshore capital. I’m very excited about the diversification that is going to come through in these markets in the next few years, whether it’s Chinese industrials, consumer-driven Indonesian companies or Indian corporates.

Michel Lowy, SC Lowy: There’s another aspect that’s interesting about India. When you look at the different buckets of investment outside of China property, Indonesian coal is obviously a large part of the market. Australia mining is the other one we haven’t discussed, and there are a few issuers that have raised a lot of capital in the last couple of years and are now having their own issues. The thing about Indonesian coal or the Aussie miners is the correlation with China property is extremely high, because that’s where the steel and the construction goes. So, you’re not actually achieving your diversification goal. India is a completely different story. You’ve got a billion people, established local industries and local demand. It’s a true diversification that you don’t necessarily achieve with many of the other borrowers that are available.

IFR ASIA: You’ll have seen the Delhi Airport deal recently, which we think is hugely significant for Indian infrastructure financing.

Alex Lloyd, Sidley Austin: This brings me to one point I wanted to make. We talked about diversification of issuers, but we could also expect to see – particularly if there’s more outbound M&A from China – diversification in the use of the high-yield product. It’s largely been used in Asia to finance capital expenditure, but, if you look at other regions in Europe and the US, high yield is very much an acquisition-financing product. I think, as this market matures and you see more M&A activity in Asia, it’s likely that we’ll see the high-yield product being used as more traditional mezzanine funding for acquisitions.

Jim Veneau, AXA IM: That’s a great point and it’s something I’m holding out for. I’m curious what’s holding it back. Why isn’t there more Korean high-yield? Why isn’t there more in Hong Kong? Is it not being pushed by the investment bankers? Is it an inherent conservatism in corporate finance?

Alex Lloyd, Sidley Austin: There are some structural and legal issues, for example, surrounding the use of the traditional subsidiary guarantee out of Korea. It’s similar in India. These are things that can be changed relatively simply, but they haven’t yet been changed.

Luke Garner, JP Morgan: There’s also just the liquidity too. I mean, I would love to see more high-yield, but, when you look at markets like Korea, Hong Kong and Taiwan, the local bank liquidity means that a lot of the sponsor-backed acquisitions or take-privates are financed through the bank market. The cost of that financing is so much more attractive to a sponsor than going into the bond market and doing it in the US way.

Haitham Ghattas, Deutsche Bank: Even sectors that would struggle to get financing elsewhere often don’t have that problem in Asia. Local banks will support you, and that is certainly an inhibitor to the growth of these markets at this stage. We would love to see more borrowers from Korea and other jurisdictions. LBO funding, too. You can probably count on one hand the amount of sponsor-related high-yield financings there have been in our market in the last five years, which is again a huge area of growth once that part of the market gets to a critical mass. But that’s going to have to grow in tandem with some change in the domestic liquidity that is available in the bank market.

IFR ASIA: I can tell you in Hong Kong there are Japanese banks bidding at 90bp over Libor for US$1bn tickets on the latest Hutchison financing. That’s hard to beat.

Luke Garner, JP Morgan: There are some examples from the more-developed jurisdictions. Hong Kong Broadband refinanced its original take-private loan in the bond market at an attractive rate, as did MMI out of Singapore, but, in a lot of jurisdictions, you have to compete with very, very low-cost bank financing.

Michel Lowy, SC Lowy: And Jim, to your point on Korea. It’s a market we know well; we bought a bank there a couple of years ago. You can borrow at 2.25% locally and the banks get a queue of people sending money through the internet every time they change their interest rate a few basis points. The initial view for us was to buy the institution, so we could borrow cheap and lend to mid-sized corporates, but that’s not really been the opportunity. It’s much more on the consumer side. Another example, we did a DIP financing for a bankrupt shipping company a couple of years ago – it was a first of its kind in Korea. We thought we could do a repeat last year when STX Pan Ocean filed for bankruptcy, but KDB lent them DIP financing at 6%. How do you beat that?

Alex Lloyd, Sidley Austin: One that could be interesting is the Philippines. There’s the same problem there with the deep domestic liquidity, but the number of conglomerates that make up the economy is so small that banks start to run into diversification requirements. It actually pushes the conglomerates to offshore financing just because the banks can no longer lend to that issuer any more.

IFR ASIA: Let’s talk a bit about changes to deal structures. Will Kaisa change people’s perception of investor protection, or should the current templates survive intact?

Alex Lloyd, Sidley Austin: Clearly, people have long recognised that there are weaknesses in the security packages in the PRC, and there have been attempts to add more credit support to transactions. The original Guangzhou R&F Properties deal was done with some SAFE guarantees from onshore assets, and a steel company went out recently with some form of keepwells and equity support for the offshore entity. Not all of them have that option available. The traditional offshore listco, onshore holdco corporate structure in Hong Kong doesn’t really allow companies to provide additional credit support, but the ones which have either an affiliated business or a parent onshore may be able to access that credit, to take that credit to support the bond. The enforceability of the keepwell obviously concerns people.

As long as SAFE regulations remain in place you’re unlikely to see much in terms of new structures. What we have seen, particularly last year when the market was hot, is deals that actually give up some of the window dressing security, such as share charges over different opcos, on the basis that it doesn’t really add to the credit and is difficult to maintain.

IFR ASIA: But you’d expect some pushback from investors on covenants now, wouldn’t you?

Alex Lloyd, Sidley Austin: Well there’s a distinction between covenants and security. The covenant packages are actually pretty good and, if you look at comparisons across other /parts of the world, a lot of Chinese high-yield bonds look pretty tight. They have more stringent FCCR ratios than you would see in Europe, for example. It’s almost a given that Chinese property companies will raise additional funding through PMI or onshore mortgage debt, so those clauses can be quite broad. But, in general, the covenant packages are pretty good. That goes back to Jim’s point around understanding what the company is doing and ensuring that it can live with the package it puts together. As for the security, we’ve had deals where investors will raise a hue and cry, but I think people know where they stand. There was a lot of talk, for example, around Soho China’s original deal and how they calculated Ebitda, but, at the end of the day, investors know there is a market there and this is going to sell.

Bryan Collins, Fidelity: One of the good things is that the relative strength of covenants in Asia has remained, and that’s paramount. We’re not a developed market. I’d like to think they have stayed relatively robust over the past few years because you have seen pushback from investors, including ourselves. On the value of them, I completely take that point, but, just taking them away and saying they have limited value, is detrimental to the health of the market.

Security is an issue, but it’s clear is that we’re not talking about ways to reduce investor protection, we’re actually looking at ways to enhance it, to reduce the cost of funding and increase the amount of capital that is being deployed to growing companies in China or India. Generally speaking, I think there’s a consensus that we need good investor protection that’s appropriate for companies, as well, and we obviously need to make sure that it’s priced right.

Michel Lowy, SC Lowy: One thing you’ve seen is a significant change in the private loan market over the past 10 years, as a result of defaults and a result of structures that didn’t work. In a few deals that we’ve done on the private side, you’d end up owning a letter of resignation of the company’s legal rep, meaning that you may test the market to try to control the onshore entity very rapidly if the borrower decides not to play ball. It’s a lot more complicated in the public markets, because, in a private loan, you only have a few people at the table and so taking control of a corporate is a lot simpler. It’s still difficult, but it’s a lot simpler.

But, to Bryan’s point, at least the last few months are going to generate conversations, perhaps on a CAMA structure where you keep some funds offshore, or whether you can trigger a covenant breach faster. That’s certainly going to be discussed and it’s certainly going to have an impact on the indentures that are going to be negotiated.

Haitham Ghattas, Deutsche Bank: In this type of market dislocation and, with the series of factors we’ve discussed, that might make funding more challenging for your average Double B corporate, structures and covenants are going to get more time on the table. Clearly, we’ve seen very, very strong high-yield markets over the past 18–24 months with huge levels of issuance and, in some cases, there has been an erosion of covenant protection because markets have been so strong. Companies have been able to flex really quite aggressively. I think in a more challenging market environment where the price of entry for the same corporate is that much higher, there will be a willingness to look at some of these protections that can make a difference to yields.

Bryan Collins, Fidelity: The market does ebb and flow, and the best way to avoid any kind of covenant issues is to have an improving credit profile and a deleveraging story that lifts you out of high yield. That’s the holy grail of covenant removal.

Luke Garner, JP Morgan: To your point on security structures, if you look at keepwells, the majority of those deals are in the high-grade market. It’s been relatively consistent the way that those deals have been structured. I do think that where you are in the credit spectrum determines the structure and the covenants. The market determines that for you.

IFR ASIA: There have been some deals this year that haven’t worked, despite having all the bells and whistles of a high-yield package. We had MAXpower and Century Properties last week. What’s the story there? Is it just price?

Luke Garner, JP Morgan: I think right now, given the dislocation in the market, having issuers that come to market with names that people recognise and are comfortable with, with a use of proceeds that is refinancing and a very tangible pricing reference, that’s a lot easier than forcing investors to do more work on a new name. As in all these cases it’s a question of the issuer’s expectations versus the market, as well.

Jim Veneau, AXA IM: The best covenant package is still not going to change the inherent credit risk, so if you’re not comfortable with the underlying credit story then the covenant package isn’t really going to matter. It’s an enhancement.

Haitham Ghattas, Deutsche Bank: It’s important that the market continues to decide which credits can get financing and which can’t. It’s quite common in Asia to have companies approach the market too early in their development. There were 38 banks that bookran a rated high-yield deal in Asia last year, so there’s a lot of people running around telling companies to access this market. We obviously want to see the market grow, but there is certainly a risk that some of the smaller companies haven’t yet achieved the critical mass to support an offshore high-yield bond financing. That can be a bridge too far for some and we have seen, over the past couple of years, a number of companies that have not been able to get a deal away on their first attempt.

IFR ASIA: What about companies coming to the market without the broad-based, mutual fund support? It used to be a feature of the Asian high-yield market that you only needed two or three investors to come in.

Haitham Ghattas, Deutsche Bank: That dynamic has fundamentally shifted. What you’re describing is the way the public market worked in 2005–06. Average deal sizes were US$150m, maybe US$200m. In all honesty that’s a club loan with a public wrapper. We’ve moved a long way on from that. The appetite for funding is bigger, the quality of disclosure and amount of 144A issuance has gone up and, fundamentally, the buy-side has grown. Your average deal size is now US$300m.

US buyers are heavily involved, you have 144A disclosure, 10b-5 opinions, and that’s a very, very different product. So, yes, there’s still a functioning private loan market and, occasionally, there are deals that get done in the way you’ve described, but they are very much in the minority. That’s a good thing.

IFR ASIA: So what can companies do to reduce their costs of funding? If you’re in Kenny’s position, what is the key thing that is going to help?

Bryan Collins, Fidelity: Ultimately, it’s ensuring that the business is moving in the right direction. It’s the nature of the sector they’re in, the product, the leverage, and phase of growth that puts you in high yield in the first place. Aside from that, the biggest thing, from my point of view, especially in light of what’s happened recently with Kaisa, is just to communicate with investors. There are still companies out there with bonds outstanding that basically don’t talk to investors. Well, guess what, they’re not getting any more capital. It’s that simple.

IFR ASIA: Has that improved in recent years?

Bryan Collins, Fidelity: Absolutely. To be fair, the property sector has been the leader in that. There is no other sector in Asia where you get monthly sales data, where you get regular meetings in Hong Kong, Singapore and around the world. That’s because there’s an immense competition for capital. Aside from price, how do you compete for capital? Well, you make sure you have a good management team, a good IR team, make sure you’re doing site visits and sharing information. It works for credit investors, of course, but we would happily say to companies that they should also do it because it’ll help your equity price and your chairman will be happy.

Ying Wang, Fitch Ratings: If you look at a lot of Chinese high-yield credits, the non-property names, many of them are not so highly leveraged, but they’re high yield because they’re so small. They’re running at 1.5x, maybe 2x Ebitda, which is not highly levered, but you’re talking about Ebitda of US$50m, or US$100m at the most. Most of them are operating in a growth phase. So, they’re going to be in consistent need of capital. These types of issuers need to be able to tell a good story and be able to explain their industry and their business model very clearly to investors.

One of the benefits we get as a rating agency is that we’re able to sit down with the chairman and the entire management team to understand the dynamics of the business model. This kind of conversation usually only takes place at the very beginning of the rating exercise and, from then on, it really depends on the issuer. I have to say that not a lot of issuers are proactive after the initial rating. It’s usually we who have to call on them to check on what’s going on.

Bryan Collins, Fidelity: There’s a slight difference there in that they pay for your service, and they don’t always agree with what they get. I can completely understand that some entities at the lower end of the spectrum don’t communicate with rating agencies, and they might not be inclined to do that if it’s not going to be a good review.

From our perspective, it’s relatively straightforward. We have to rely on public information, we don’t have the non-disclosure agreements that rating agencies have to sign because we have to trade on our information, but, if we aren’t getting answers to simple, basic requests, then that’s going to cost. Initially, that’s why you want a premium because you don’t know how management is going to engage with you. Thereafter, of course, any positive effort is going to be rewarded.

Haitham Ghattas, Deutsche Bank: I do think that message is getting through. For the property issuers, it’s very well established now that you have monthly sales data, but we have seen an improvement from the industrial borrowers more proactively organising quarterly earnings calls, and making sure they’re doing two or three NDRs a year. It’s not necessarily as easy for them to show monthly statistics and, of course, they could do more, but communication is improving.

Kenny Chan, Times Property: As a matter of fact I’m going to Singapore this afternoon to update investors and I agree with all of you. From an issuer’s perspective, the terms and conditions of the offering circulars are really tough and investors can’t just keep asking for more – unless you are willing to cut the funding cost by at least 50%!

But I will say that, for a company like ours in the Single B range, we are actively looking at fundraising onshore. The government has finally allowed developers to issue corporate bonds onshore and there is no restriction on the usage. They used to restrict the use of proceeds only for refinancing, but now we can raise funds onshore for land acquisition. So, if that continues and we have to pay 10%-plus in Hong Kong, we can just go back to China and raise a three-year corporate bond at 6%–7%. That is tax-deductible, too, while raising money through Hong Kong is not. So, we are actively thinking of doing an onshore financing rather than raising more high-yield in Hong Kong.

The second point is that the property sector is actually very transparent. We have to report sales on a monthly basis. When we acquire through M&A, we have to make an announcement. It’s transparent. I think we all agree that we have to strengthen our investor relationships, and we have to talk to rating agencies. At Times Property, we talk to rating agencies and to investors on a monthly basis, and that’s why we’re one of the top picks for JP Morgan, HSBC and UBS.

Bryan Collins, Fidelity: Opening up the onshore bond markets for property companies might actually mean a decline in the amount of overseas issuance. Ultimately, having a mix of funding sources is entirely appropriate. One should have access to multiple investor bases rather than be completely reliant on offshore financing.

IFR ASIA: It would also be replacing things like trust loans from the shadow banking sector.

Kenny Chan, Times Property: It’s a good thing for our business. The policy came out in mid-January this year and we haven’t seen any issuers yet, but many developers are asking the government for more information. Our chairman told investors yesterday that there may be some issuance in the next three or four months. If there’s a first case, then, perhaps, more developers will go back onshore. I’m happy to see that because we have to mitigate our risk. We can’t just rely on the offshore bond market.

Haitham Ghattas, Deutsche Bank: I’m interested in peoples’ perspectives around this room on the issue of liability management. There are several sectors across the Asian high-yield market – especially commodity and mining related – where we have seen an uptick in liability management exercises. And also how that links with some of the things we have been seeing in recent restructurings, how that might impact the structuring of future financings.

IFR ASIA: That fits into the broader macroeconomic outlook, too, given what’s been going on with energy prices and the outlook for interest rates.

Haitham Ghattas, Deutsche Bank: It’s interesting that Asian companies have been more willing users of liability management products than, say, the US. Probably, that’s down to the fact that we don’t have such a deep market. So, there needs to be a consensual discussion with existing bondholders when there’s a need for an extension or recapitalisation, but I do think it’s an interesting area.

Alex Lloyd, Sidley Austin: I’d be interested whether the cost of liability management is greater in Asia than it would be elsewhere.

Haitham Ghattas, Deutsche Bank: I don’t think there’s a cost differential per se. We don’t have as much precedent for it. In this kind of market it’s getting more difficult to raise money and, perhaps, in two or three years, you’ll see a backlog of bonds that were issued in a hot market that aren’t as easy to refinance. I think you’ll see more of these kinds of extension transactions.

Alex Lloyd, Sidley Austin: It’s all to be encouraged in my mind. There’s always a bit of tension when it comes to a corporate issuer to consider liability management as opposed to restructuring when the time comes. It may be because these are very well banked markets and people aren’t used to the idea. Sometimes, issuers don’t realise that you can’t just go to the arranger and discuss what flexibility you can get; you need a process to access the public bondholders. There is a greater willingness to do this, but the real trick is in the timing. Recognising that you need to be talking to your investors about covenant relief or an extension is the most critical problem that a lot of issuers face.

IFR ASIA: We came up with a restructuring award this year for BUMA out of Indonesia, which actually approached lenders to amend a US$800m syndicated loan before many of the banks had even classified the loan as stressed.

Alex Lloyd, Sidley Austin: That’s the only company I know of in Asia to use a tax call. I think it’s still unique. The management are pretty savvy. They called the bond and refinanced it with that loan.

Michel Lowy, SC Lowy: And you’ve got private equity, foreign shareholders. So, it’s not your usual Indonesian corporate either.

IFR ASIA: But do we think that sort of example will rub off on others?

Bryan Collins, Fidelity: We’d like to think so. In regions like India or Indonesia, or even China, where there is a real need for capital, having a better reputation for dealing with creditors goes hand in hand with that. And one of the big issues for Indonesia is that it has a terrible reputation when it comes to protecting creditors’ rights. Unfortunately, staying away from those names at this point in time is still the best policy.

Luke Garner, JP Morgan: With the growth in this market and as it matures, it’s inevitable that you’re going to see more liability management. It can only be a good thing. It’s an indication of how this market is changing and evolving, both for investors’ benefit as well as for issuers.

Alex Lloyd, Sidley Austin: Interestingly, we’ve also recently seen no action letters from the US Securities and Exchange Commission that could allow non-convertible sub-investment grade debt to be tendered on a shorter timeframe than 21 business days. This is very useful because SEC regulations at the moment require these tenders to be out for an awfully long time. Shorter turnarounds, obviously, make them more attractive for an issuer.

Luke Garner, JP Morgan: Those offers are usually structured with an early-bird option that does that anyway, but it’s certainly a good sign of the evolution of the liability-management product.

Haitham Ghattas, Deutsche Bank: It’s a very good point, because it’s quite a drastic reduction in terms of the timeline. To your point, Alex, we have seen Indonesian borrowers actively use exchange mechanisms and tenders to optimise their costs of capital. They’re able to get ahead of their call dates, get bonds back more cheaply than they would otherwise and, in a way, reward existing investors who want to stay exposed, while, at the same time, take advantage of low interest rates to extend maturities. To me, it’s surprising that we haven’t seen more of those in the Chinese real-estate sector. Perhaps, that’s because there’s been very strong demand for Chinese property over the past few years. So, why not just go out and raise a new US$400m bond. But, as risk premiums go up, that kind of liability management becomes more interesting.

Bryan Collins, Fidelity: The kind of liability-management exercises you’re talking about there, and I’d use the words forced or even coercive exchanges, are not desirable. To be honest, a shorter consent period for tenders is not a universal positive; there are some risks associated with that. It’s important to allow sufficient time for negotiation in certain situations.

Haitham Ghattas, Deutsche Bank: I’d counter that, Bryan, slightly. If a borrower comes to you and says “my call is coming up shortly, but rather than call you I’ll give you the first option to roll into my new security”, is that not attractive for you as an investor, when you’ve got a lot of capital to put to work and primary markets are fiercely competitive? There’s no certainty you’d get that allocation on a new bond.

Bryan Collins, Fidelity: On balance I think it’s better to keep an existing and a new issue separate.

Michel Lowy, SC Lowy: You often see those situations in Asia where the first step was to put the investor in a corner and put a gun to his head before proposing an exchange. You see that on Hidili, on Winsway, a couple of exchanges in Australia or Indonesia. Yes, sure, the bondholders did consent, but not with a smile on their face.

Haitham Ghattas, Deutsche Bank: I would differentiate between the two though. There’s a big difference between a distressed exchange and a perfectly healthy operating company that’s looking to manage its liabilities.

Jim Veneau, AXA IM: There is a grey area. If you have bonds trading at distressed levels, say between the 50s and the 70s, and the company is liquid, it then becomes in the interest of the equity holders and the management to buy bonds back. When is it liability management and when is it a coercive exchange? They’re just going into the open market and buying bonds back. There’s a level, and the rating agencies have a precise point in time when that becomes a distressed exchange.

That makes it interesting to call this liability management as opposed to a coercive exchange. You can say this is about the company staying in the market and keeping a good relationship with investors, but if the jury comes back and says this is a coercive exchange then that’s bad for the company.

Bryan Collins, Fidelity: The issue around some of these exchanges is about liquidity. We run daily liquidity portfolios and we need to be able to provide that to investors and those sorts of situations – coercive at the margin – I think inhibits secondary liquidity. We need more of that in our market, not less.

Luke Garner, JP Morgan: Exchanges, typically, happen in situations that are more distressed, rather than a new issue-tender-refinancing. We’ve seen that in the US market and Europe, as well.

Haitham Ghattas, Deutsche Bank: I think it’s interesting to see a large number of very healthy companies have done it for good corporate reasons. There are considerable accounting benefits from an exchange transaction versus a new issue and tender, for example. You can pay exactly the same premium to the market so investors are no worse off, but from a corporate standpoint there are benefits from the ability to amortise costs over the life of the new bond. Clearly there are corporates who are facing financial challenges or liquidity challenges, and they can choose to deal with their liabilities in a more or less coercive fashion. But, for healthy corporates, I do think they can work with investors in a positive fashion.

Bryan Collins, Fidelity: Not to labour the point, but healthy corporates shouldn’t have to do that. Also, it’s a bit like an Indian company saying I can’t pay you more than X percent because of the RBI ceiling, but can I borrow some money from you? Basically, you’re putting a capped offer on the table and I have no means of negotiations. That’s not a comfortable situation.

Michel Lowy, SC Lowy: To go back to Jim’s point, you never want to give an incentive for someone to want their bond price to be low. There’s a danger that someone will want to communicate less and provide less information. Now there is the par or 90 cents exchange, and you could argue that Barminco, which did an exchange recently, was acting in the interests of the bondholders because the bonds traded up 20 points as a result of the exchange. But most often if you stop providing information and the bonds trade in the 50s that is only good news for shareholders, and I don’t think we want to be in that position.

Jim Veneau, AXA IM: You get the sense that might have been occurring in the Berau situation. Kaisa, again the jury’s out and there needs to be a full post mortem there, but clearly it becomes self-fulfilling. If the bonds trade in the 50s and 60s then at some point you’ve had a capitulation and it’s a completely new set of owners. The irony of a distressed exchange, of course, is that it’s credit-positive.

Luke Garner, JP Morgan: To your point, Haitham, I agree there is definitely an accounting benefit for an issuer, but I would question the pricing benefit to an issuer of an exchange versus doing a new issue as well. That’s the debate in deciding which option to take.

Haitham Ghattas, Deutsche Bank: That’s a fair debate, but it can also be influenced by different market conditions. If you have a wide open primary market then fine, just go and place the new bonds. In slightly more dislocated markets where there is a consensus between the company and investors that extending their profile is positive from a credit standpoint, I think there is a place in the market for an exchange.

I completely agree around the distressed situations you’re talking about, and you have to look at those on a case-by-case basis. In many cases you have a company coming forward and trying to deliver some liquidity for the bondholders, and while it’s a tough choice, maybe that liquidity won’t be there in 18 months when that bond is due to mature. Ultimately as an investor you have the choice of whether you want to take that liquidity and accept the premium to the market price, or not.

And the last point is on open market purchases. I often hear investors ask why the company isn’t buying back its bonds. It seems investors do want to see some active liability management because you do want to see the commitment of the company in setting a floor on their bond price. There are two sides to this argument, but if it’s used in an appropriate manner it’s a win-win for issuer and investor because ultimately it should mean a better credit profile and a better price for the bonds.

Kenny Chan, Times Property: Actually you raise a very good point. Right after the Kaisa episode, when the secondary drop was terrible, we talked to some CFOs and there was a lot of interest in actually buying back bonds. But the timing didn’t work. We were in a black-out period before reporting our results and we were not allowed to buy. We saw some bonds drop to 80/70, which was heartbreaking. However the timing is just too bad.

Next time – if there is another case – I think issuers will definitely consider coming out to buying back their bonds. We saw such a severe impact on the market. Bonds can drop from par to 30 in just two weeks, but it takes months to get confidence back.

Michel Lowy, SC Lowy: Kenny, you seem to be pretty convinced there is a next time! Is there anything you can tell us?

Kenny Chan, Times Property: Well I did joke that all the big developers should get together to pay the Kaisa coupon and save the market!

IFR ASIA: I’m afraid our time here is running out, but before we go I’d like to ask everyone for a quick prediction. To use Haitham’s number, we had about US$27bn of corporate high-yield bonds from Asia last year, so where do we think we’ll end up for 2015?

Haitham Ghattas, Deutsche Bank: Notwithstanding some of the challenges this market has faced, it’s an asset class that people want to buy. It’s a functioning market, and you’re going to see it grow. Will we see US$25bn-plus this year? Yes, absolutely.

Kenny Chan, Times Property: I’m a little bit pessimistic because it’s too expensive. I won’t do a new bond this year if it’s still priced at 12% or 13%. I really do not have a crystal ball, but I would say about the same as last year.

Alex Lloyd, Sidley Austin: If I look at our pipeline my guess is you’ll see a return of the established issuers but life will be a little harder for the debut issuers.

Michel Lowy, SC Lowy: I’m not going to put a number on it, but I think it’s going to be broadly flat with the flavour of the market changing. Less China property and more of the rest, with the question mark that could change that being interest rates. That’s one factor that could make it much more expensive for the likes of Kenny, and it’s hard to predict.

Luke Garner, JP Morgan: I agree with Michel. To the extent that issuers can wait I think they probably will, so that you may see a shift away from China property and into other sectors. That’s a healthy thing. I think you’ll see another US$20bn–$30bn this year.

Ying Wang, Fitch Ratings: Well I’m not going to speculate on the number, but from our perspective we’d rather see new companies and new sectors requesting ratings. Whether they will come to the market to issue is going to depend on interest rates.

Bryan Collins, Fidelity: Give or take it’ll be probably about the same, and we’re a growing market so we should probably see net year-on-year increases. But if it’s too expensive for Kenny to issue and it’s going to be difficult for some of the smaller, weaker names to come to market then I’m happy. That means valuations are good.

As long as we get some stability through the first half, things can come back strongly in the second half. The level of issuance and demand is going to depend on where returns go from here. The market deserves a reasonable year, given the lack of new issuance, the meaningful weakness in the latter part of last year, and attractive valuations from a lender’s perspective.

Jim Veneau, AXA IM: The credit market deserves that, yes. Last year the bond markets did well because of what happened with rates. If you look at the market as a whole, we expect defaults to stay below historical averages, perhaps with a slight uptick. It’s been that way for quite some time, and that’s allowed for massive spread compression since 2010. Recently we’ve had a little bit of a back up, but my feeling is, as long as we avoid a significant rise in defaults or high profile headline grabbing scandals, you’re going to see a resumption of spreads grinding tighter.

Let’s just say that rates stay stable and you have this central bank liquidity coming in from Japan and from Europe. That makes risk cheap, and I think the quest for yield will resume. Given the widening we’ve had, if you’re positioned well in high-yield and we don’t have any more Kaisa-type surprises or short-selling reports and things like that, then funding costs will come down in the latter part of the year.

To tie that all together, hopefully that results in some new issuers testing the market. What we want as investors is that 9% issuer. What’s going to happen if the market keeps getting cheaper is that 9% issuer becomes lower quality, but again that’s a good thing if you’re an active manager. That allows you to put your research process to work and be selective, and I think that’s one of the hallmarks of a healthy market.

IFR ASIA: Thank you all very much for your comments.