Asia high-yield bonds: battered but not broken

HONG KONG: Asian high-yield bonds took a 3-5 point battering last week and fears of a global recession have left offshore debt markets firmly closed to lower-rated companies.

However, confidence in Asia's strong fundamentals remains high, leaving the region's sub-investment grade issuers better placed to rebound from this month's sudden slump than they were when Lehman Brothers failed in September 2008.

DCM bankers predict Asian sovereigns and high-grade corporates will set the ball rolling again for new issues in September, while a sustained period of issuance will reopen the market for high-yield borrowers.

"If Adaro, Indosat or a strong commodity or utility name were to come to the market, it would get a good reception from investors," said a DCM banker.

"Property, financial sector and first-time borrowers will have difficulty raising funds."

That would be a big change from the aftermath of the Lehman collapse in 2008.

While sovereign and high-grade issuance resumed shortly thereafter, it took over a year before PRC property developer Country Garden reopened the Asian high-yield market in mid-September 2009 - just a few days before the first anniversary of Lehman's demise.

This time around, Asia's economies are in better shape relative to the rest of the world, while the region's debt markets are deeper. That combination, bankers believe, will ensure global investors continue to support Asia's high-growth companies.

"If everyone takes a more bearish view of the US in the next year or so, there will be more flows of funds into emerging markets," said one DCM banker in Hong Kong, alluding to the volatility caused by S&P's downgrade of the US late on August 5.

"A lot of what we have seen in the last day or two is emotionally driven rather than fundamentals. Asian economies should be able to hold up reasonably well."

WEAK TECHNICALS

Global fund managers are equally confident, blaming the poor performance of the high-yield sector on illiquid markets rather than any deterioration in credit fundamentals.

"Under our base case scenario, we see a path of low but positive growth, which is sufficient for high-yield companies to maintain their cash generation at a healthy level," said Hans Stoter, head of credit investments at ING Investment Management. "Given the low liquidity in the market, which is further reduced due to the holiday season, small selling pressure can lead to large price drops in specific bonds."

Indian paper maker Ballarpur Industries (Bilt) suffered that fate on August 4 after it became the latest high-yield issuer from Asia to add to the annual tally with a US$200m perpetual. The bond plummeted 3-4 points just hours after pricing as markets sold off heavily, and the extreme volatility that followed S&P's downgrade of the US's credit rating has plunged the high-yield market into further trouble.

Bilt's deal was the first from an Asian high-yield credit in over two months since London-listed Indian miner Vedanta Resources printed its deal in late May.

Vedanta was also the last Asian high-yield borrower to price a deal before Lehman's collapse slammed the door shut for Asian high-yield issuance.

"There are similarities between the high-yield market of 2008 and 2011. Issuance in the months before Lehman imploded was already dwindling because of the property market in China, which had been depressed for a while. Lehman and the ensuing crisis only exacerbated it further," said a high-yield debt origination banker in Hong Kong.

"The big differentiator this time is that, in general, the high-yield market is much larger and a sustainable one with active secondary trading."

The Asian G3 high-yield bond market is certainly much bigger now - Asian high-yield bond sales in 2008 totalled just US$1.3bn from three offerings, less than a tenth of the US$14.5bn issued so far this year. It has also become a key source of revenue for capital market underwriters, with the fees on offer attracting new DCM competitors such as BNP Paribas, RBS and Standard Chartered, among others.

Copyright Reuters, 2011