After more than a month of no dollar deals, it fell to four Chinese repeat issuers – Greentown, China Auto Rental (CAR), Peking University Founder Group and Oceanwide (see separate story) – to re-open the Asia ex-Japan high yield market.
Given that the last deal before Greentown was almost six weeks ago, when Wuzhou International wrapped up a $100m tap on June 25, market observers were excited to see the return of this asset class. This was especially so given that Asian equities, often seen as an alternative to HY bonds, have been on a volatile run on the back of the stock rout in China.
The Shanghai Composite Index suffered its worst one-day plunge in eight years last week, tumbling 8.5% on July 27. The crash followed disappointing manufacturing data out of China and fears about the government scaling back its market support measures, which had helped rescue A-shares from the brink at the beginning of July.
“The recent meltdown in the Chinese stocks has definitely prompted a stampede of investors from stocks to bonds,” said a Hong Kong based high yield fund manager who focuses on China. “As a yield-hungry investor who usually goes for 10%-plus yields, I know I have to deal with a lot of risk. But looking at trillions of dollars being wiped off in such a short period of time, many high risk investors including myself are turning on their risk-averse mode and switching interest to bonds only at the moment.”
That’s why the investor said he was excited to see a string of new issues finally cropping up earlier this week. And the pent-up demand certainly helped rental company CAR, which got a $3bn order book for its $300m deal this week.
Missing in action
“The Chinese have turned to the domestic market to take advantage of lower onshore funding costs, and to make it worse, Indonesians have also been staying away from the offshore debt market,” the analyst said.
Due to a 15% plunge in the rupiah against the US dollar since September 2014, Indonesian corporates face rising costs when it comes to repaying their foreign currency debt. The country’s HY issuers will be further discouraged from going offshore next year, when corporates with ratings below BB are banned from accessing external debt unless proceeds are used for infrastructure projects.
But the analyst said that despite the big supply and demand mismatch, investors are still discerning.
Borrower eHi Car Services found this out the hard way this week. On August 4, the BB/BB- rated credit had to pull the plug on its 144A/Reg S deal after getting only a lukewarm reception. The blame was put squarely at the door of the company’s weak credit, coupled with unfavourable pricing and timing (see separate story).
“Appetite for HY is coming back, but it’s not open for all issuers,” said a Hong Kong based syndicate official, adding that the CAR and eHi cases were a good indicator that some deals could get done and some could not. “It’s all on a case by case basis – issuers with existing curves and higher rated HY names can pull off deals while it’s touch and go for lower rated, debut credits.”
A DCM director struck a similar tone. “It’s the kind of market now where high yield names whose outstanding bonds are trading well will find it far easier to complete new bonds,” he said. “When investors make money on the first bond, it becomes easier the second time round.”
Sure enough, all the deals that priced this week were either return outings or taps.
Limited impact from eHi
“It’s never good to shelve a deal but it’s not going to shut the market, although it may slow it down a little bit,” said a second syndicate banker. “It’s just reminded us of the basics that we can’t catch two rabbits at the same time. If the credit is weak, we have to give up on pricing and vice versa – it’s as simple as that.”
Some investors thought that as a first time issuer, eHi should have taken more time to educate investors about its credentials.
“Yes, it was a debut issuer who chose bad timing and pricing strategies, but it’s all down to fundamentals,” the first HY fund manager said. “I didn’t understand the company’s business model – whether it’s a vehicle rental company like CAR or a taxi company like Uber. They should have made this clear from the start and spent more time engaging with investors.”
The investor added that he didn't understand why the debutant had opted for 144A format for what was a fairly small deal size (around $300m). By contrast, CAR’s 144A/Reg S debut in January was met with overwhelming demand due to the borrower's link to Hertz.
Another investor said eHi’s struggle sent a positive signal about the market. “I would say, ‘don’t fuss about it’,” said the fund manager. “I view it as the market trying to correct itself and from a buyer’s point of view, I think it’s actually good to have less in quantity and better in quality.”
The investor said that although the usual summer lull had started, he expected to see at least two or three deals per week this month.
“It won’t be a big stream but rather a trickle of deal flow,” the investor said, adding that he would be holding firmly onto his bonds in secondary. “Knowing that there is lots of demand in primary and secondary and not many new issues, I just can’t sell them. What if I can’t buy them back because they become too expensive?”