Tuesday, 25 June 2019

Risk and reward

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With yields on Asian investment-grade bonds looking increasingly thin, the juicy coupons on junk-rated debt are drawing more investors down the credit curve in search of returns. Issuers, however, are not having everything their own way.

Climbers collect mock buns on a tower during a 'bun-scrambling' event as part of the Bun Festival on the tiny island of Cheung Chau in Hong Kong.

Source: Reuters/Bobby Yip

Climbers collect mock buns on a tower during a ‘bun-scrambling’ event as part of the Bun Festival on the tiny island of Cheung Chau in Hong Kong.

Asia’s high-yield market began the year with a breakneck start, but after 11 high-yield deals came in the first three weeks of the year, signs have already emerged that investors are getting increasingly picky. 

The first US dollar bonds out of Asia this year came not from the usual South-East Asian sovereigns, or from South Korea’s public sector, but from Chinese property developers. With Kaisa and Country Garden leading the way, Asian high-yield bond issues crossed US$4.5bn in the first three weeks of the year – already an absolute record for January.

A whopping private bank bid drove demand and was a cause of concern for some. “The Asia new-issue market has become dangerously dependent on an often-leveraged private bank bid, a distribution pattern we have seen prior to 2008 and that helped shut down the market as many issues traded down to 40 cents on the dollar and lower,” said Florian Schmidt, head of DCM at ING in Singapore.

Despite the concerns, the run of issuance has raised hopes for a bumper year for Asia’s sub-investment grade sector. And, with the high fees on offer, that is good news for underwriting banks with a heavy backlog of mandates.

Yet, it did not take long for the first cracks to appear.

Perpetual notes from China’s Agile Properties tumbled in early trading, while KWG Property was forced to cancel plans for a similar deal after a frosty response to a structure that gave the issuers only minimal incentive to call the notes at the first opportunity. Bankers were quick to question whether buyers had lost their appetite for the Chinese property sector.

“The Asia-ex US dollar primary market is showing some signs of investor fatigue towards China paper and a growing perception among buyers of the rarity value of issuance from South-East Asia,” said Owen Gallimore, head of credit strategy for Asia at ANZ in Singapore.

Investors, however, blamed the underperformance of some of January’s new issues on a simple bit of indigestion. “There is no buyers strike,” said one portfolio manager in Singapore.

Rarity value

As well as Chinese property, still the region’s richest source of high-yield supply, China’s industrial sector and consumer sector issuers are likely to bring overseas deals, and the few South-East Asian companies that ventured out with US dollar trades in January enjoyed a rapturous reception. Indonesian mining contractor Indika Energy drew an orderbook of US$7.6bn for its US$500m 6.375% 10-year non-call five notes, priced on January 17, while Philippines conglomerate JG Summit sold a US$750m 10-year deal that garnered a book of US$6.5bn that same week.

“We don’t see the prevailing market conditions as representing a bubble, and given the low base rate, we see the market as still presenting a decent value proposition. In terms of Asian high-yield, corporate hybrids will get done on the basis of their absolute high return, while we can expect outbound non-sponsored M&A issuance from the region,” said a Hong Kong-based head of high-yield at a bulge-bracket investment bank.

While Asia’s low-grade sovereign issuers have been unusually slow out of the blocks this year, plenty of deals remain on the cards – such as Papua New Guinea, which recently sent out an RFP for a bond issue.

Should Asia’s economic outlook continue to improve, more Asian issuers are likely to look at refinancing their existing bonds through consent-and-tender exercises, taking advantage of surging risk appetite to reduce coupon payments and relax covenants. Indonesian tyre maker Gajah Tunggal got the ball rolling in early January with a tender offer for its 8% bonds due 2014, ahead of a coupon step-up to 10.25% in July, and many more companies seeking to lift restricted covenants are likely to generate new, termed-out issuance.

Balance shifting

Yet, far from dampening the demand for high-yield, investors are saying that the flurry of Hong Kong and Chinese deals has restored some sense of normality to the market. Chinese property companies make up more than a third of the Asian high-yield market, but they issued very little last year. After a sustained rally in prices, this pent-up demand had fuelled the aggressive pricing levels and record oversubscriptions seen on the first high-yield deals of 2013. After that rush to market, however, most funds are over their allocation on Chinese property.

“There is still demand, but on a switch basis,” said the portfolio manager, indicating that high-yield funds would sell their current holdings to buy new bonds instead of just adding exposure to the sector.

With almost US$20bn issued in dollars out of Asia in the first three weeks of January, the balance of power is tilting back to the buy-side.

“In the first two weeks, it was just indiscriminate buying,” said another portfolio manager. “Now there still is room for more deals, but they have to meet certain conditions.”

To see the digital version of this report, please click here.

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