It has been a shambolic year for the region’s high yield bond market, which has been dogged by the first Chinese property bond default, free falling commodity prices and China’s economic woes. The concerns took a toll on corporate high yield dollar bond volumes, which stand at $11.6bn year to date, just a little more than half of what was recorded during the same period in 2014, according Dealogic.
But what has unnerved bankers more is the fact that Asia ex-Japan has not seen a single high yield issuance since Philippine’s International Container Terminal Services (ICTSI) raised $450m from a 5.5% perpetual in August — roughly three months ago.
China’s dramatic stock market crash in June was one of the main culprits for the lack of action as it prompted investors to take a risk-off approach, leading to outflows from emerging markets. Asian high yield spreads, for example, spiked by more than 200bp between June and August.
“The sell-off happened during the summer when liquidity was tight, which exacerbated things as well,” said a Singapore-based credit analyst. “When yields spike like that, it’s normal for deals to be shelved.”
Investor sentiment, however, has taken a 180-degree turn since the end of September with spreads tightening to such an extent that it has reversed pretty much all of the ground lost during the summer.
Market watchers are attributing the strong performance to a number of factors. One is the gradual return of emerging market funds back to Asia, particularly China, having realised that the country’s summer rout had been blown out of proportion.
“It shows how much people really know about China,” said one Hong Kong-based market strategist. “It’s the same story all the time. Any negative news and investors will start prophesizing the end of China and flee.”
Property migration
Now that yields have gone back to levels seen before the sell-off, the silence in the Asia ex-Japan high yield bond market is also set to break. Chinese property developer Future Land, opened books for a $250m-capped two year bond at the 7.25% area on November 5.
Future Land’s deal is critical as it signals the return of Chinese real estate companies, the largest issuers of high yield bonds in Asia ex-Japan, according to one head of Greater China DCM. Last year, Chinese property represented nearly half of the region’s total issuance.
Despite being the main driver of volumes, property names have been less active in the offshore debt market this year. Just 21 firms have raised funds offshore worth a collective $7bn so far in 2015, while the numbers stood at 34 trades for $10bn during the same time in 2014, according to Dealogic.
The reason for the subdued activity is because many businesses are turning to China’s onshore bond market for their fundraising, as they can save 200bp-300bp on costs when compared to offshore transactions. (See GlobalCapital Asia view.)
But the DCM head said pricing should never be the only factor when it comes to a firm’s financing plans. The fickle nature of the domestic regulatory regime means that companies should be careful about relying too much on just one financing avenue.
“My advice to my clients is simple. Just look at the IPO market. There is no telling when China will slam the brakes again,” he said. “If you haven’t been engaging with international investors all this time and your only option left is to issue offshore, you’ll be stuck in a very awkward situation.”
Turning back the tide
Nevertheless, one Hong Kong-based high yield fund manager reckons demand will never be a problem for Chinese credits.
One reason why yields have tightened so dramatically since the end of September was down to the lack of supply. As a result many investors, including herself, were forced to buy in the secondary market, pushing prices up.
“Secondary market prices are actually quite expensive right now, but there’s a lot of technicals involved,” she said. “Everyone is trying to find an equilibrium right now, which is only possible if there’s more supply.”
But that’s where the problem lies. While a syndicate banker working on Future Land agreed that the deal will help in injecting some much-needed momentum into the high yield market, the outlook for the asset class is still bleak.
According to him, issuers would probably opt for the onshore market if they need new money since rates are much lower. As a result, volumes for next year would be dependent on refinancing needs, which based on his calculations is actually even lower than 2015 by 10%-20%.
“Before the rally, my view was volumes are going to continue to fall in 2016,” the syndicate banker said. “I still think it is going to fall by quite a bit, but at least Future Land is showing us that there are issuers that won’t simply be calling their bonds back and disappear into China.”
Future Land’s B1/B+ bond is arranged by joint global co-ordinators Bank of America Merrill Lynch, Bank of China International, Guotai Junan International, HSBC and JP Morgan.