Fans of the asset class believe high-yield debt will be more resilient to rising US Treasury yields, but a period of risk aversion is putting that theory to the test.
After record volumes in the first half of the year, hopes for a pick-up in high-yield issuance in the rest of 2013 are quickly fading. Expectations that the US Federal Reserve will begin to withdraw its monetary stimulus have weakened risk appetite among investors, and Asia’s sub-investment-grade issuers are facing far higher funding costs. The second half of the year is shaping up to be very different from the first.
Right from the start of the year, it was high-yield Chinese property developers that kick-started dollar debt sales for Asia ex-Japan, rather than the traditional sovereign and quasi-sovereign names. This was a tell-tale sign of what was about to follow.
The demand for higher-yielding credits was so strong that the market chalked up record volumes of US$20.18bn in high-yield bonds in the first quarter. The next three months were not far behind, raking in US$14.8bn to make the quarter the second-busiest on record.
That momentum paved the way for India’s first high-yield issue from IT firm Rolta, and even allowed Triple C rated bonds from Chinese property issuers Greentown China and Hopson to hit the market. In addition, just before things were about to go downhill, there was a string of perpetual bond issues that many saw as an indication that the market was nearing a top.
Hunt for yield
While the sub-investment-grade borrowers that hit the market at the height of a global hunt for yield were able to lock in low-cost funding, it now seems like those that did not may have missed the boat.
Nevertheless, the breakneck pace of high-yield issuance was expected to be followed with a slowdown in the second half of the year, with many of Asia’s issuers having prefunded expansion plans or already addressed refinancing requirements. However, instead of decelerating, issuance stopped completely as the market struggled to adapt to the new conditions, and few expect a return to the run rate of early 2013.
“I think the first quarter was a very unusual period when we saw a lot of high yield. Will we see that kind of demand from private banks and institutional investors for high yield again? Probably not,” said a Hong Kong-based banker.
This sentiment was evident in a recent offering from a Single B rated debut Indonesian issuer, which made a brave attempt to reopen the market for entities in the category after poor secondary performances thwarted a period of risk aversion.
Multipolar reopened the Asian high-yield market on July 18 after almost two months, becoming the first such bond to come to the market in the second half of the year, but, even though the issuer managed to print US$200m, its paper dropped two points in secondary trade to set a negative precedent for others looking to follow.
Even though critics of the deal argued the arrangers had been too hasty in bringing in an issuer with low ratings to the market when investment-grade deals were just about starting off, it also highlighted the rise in risk aversion among investors.
Discerning private banks
Strong demand from private-banking investors was one of the major factors behind the euphoria in the high-yield universe earlier this year. However, while there is still demand from this section of investors, recent deals show that they have been picky.
For example, yield-hungry private-banking investors in Singapore have recently been targeting subordinated bank capital from higher-rated issuers. Recent deals from Singapore lender UOB and French insurer CNP Assurances have highlighted this demand. The two saw private banks take up as much as 93% and 53% of their bonds, respectively.
“PB demand is very name-specific. The UOB and CNP Assurances deals prove that there is good demand from private banks, but the question is whether you can translate that one-to-one into Chinese corporate high yield,” said another Hong Kong-based syndicate banker.
Bankers say they are not seeing new money being deployed.
“They are buying both in the primary and the secondary markets, but I don’t see any fresh deployment of cash. It’s just churning from one place to another,” said another syndicate banker in Hong Kong.
Even though the future of high yield remains in limbo at present, hopefuls are still queuing up, especially Indonesian high-yield names, which have not yet paid a visit since earlier in the year.
Jababeka is planning a bond exchange in July/August and pre-deal research is out from Modernland Realty, according to a Nomura research note.
Refinancing requirements mean that Chinese names are not too far behind. China Shanshui, Evergrande, Guangzhou R&F, Pacnet and Citic Pacific are likely to tap the market for funds, according to Nomura.
“There could be some more deals after results announcements in August, but it will also depend a lot on market conditions,” said Annisa Lee, a high-yield credit analyst at Nomura.
“Issuers need to pay up to get deals done and it will be easier for repeat issuers. Given that the market is not very strong, the pipeline will not be too congested and bankers will be selective in bringing deals to the market.”
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