The Asia ex-Japan high yield bond market has certainly seen better days. Year to date volumes are down around 40% on the back of a never-ending series of negative headlines.
At the time of writing, poor manufacturing data out of China is wreaking havoc in the markets. The Caixin/Markit Manufacturing PMI Index fell to 47.1 in August from 47.8 in July, adding weight to concerns that China’s economy is weaker than expected. The poor data created a domino effect, with August 24 now being dubbed by many observers as Black Monday following a spectacular crash in global equities.
It’s an understatement to say that this has not been helpful to high yield bonds which have widened about around 130bp in August.
This certainly does not bode well for high yield issuers — particularly those that still have offshore financing needs. Unless companies are prepared to pay well over the odds, the market is effectively shut for them.
That has made it all the more important for DCM bankers to start thinking of better ways for these companies to tap the bond market than offering a pricing concession.
The $400m 9.625% notes from B-rated Chinese property developer Oceanwide Holdings from earlier this month is good example. The leads took a leaf out of the onshore Chinese bond market and included a put option at year three for the five year bond.
Asian high yield offshore bonds normally have a call rather than a put but the addition proved to be the difference for Oceanwide, which attracted a $780m book. The last high yield property company to tap the dollar bond market – Wuzhou International Holdings — only managed to attract a $180m book for its $100m tap of its existing 13.75% 2018s in June.
Not that put options are the only item in the toolbox. Bankers can also turn to credit enhancements in the form of standby letters of credit (SBLCs). Everbright Securities did exactly that recently with the backing of China Merchants Bank and its $450m 2.875% 2018 sailed through with orders of more than $1.9bn.
And even within credit enhancements bankers can design solutions to better fit their clients’ needs.
The 7% perp from Ezion Holdings at the end of July is a classic example. The notes included a committed funding facility, meaning Ezion’s existing credit facilities with DBS were used to back the bonds. Investors were effectively taking on the Singaporean bank’s risk instead and loved it as Ezion attained an order book in excess of S$1.5bn. Not a bad result considering Ezion only opted to raise S$120m.
It certainly isn’t a coincidence that these deals appeared when market conditions are volatile. If markets were stable, a conventional bond would suffice. But now that markets are looking more risky than ever, cookie cutter deals from high yield issuers are no longer enough. It’s time for bankers to break out of the mould.