Asian growth drives high-yield debt issuance
The flood of investment dollars entering Asia is fuelling a boom in high-yield debt issuance with defaults kept below the global average, thanks to the region's strong economic growth, rating agency Standard & Poor's said yesterday.
S&P rated about US$7 billion worth of high-yield new issuance in Asia excluding Japan last year, up from US$5 billion in 2004. The share of new debt that rated high yield was 47 per cent last year, up from 28 per cent in 2002.
'We can probably expect to see US$6 billion to US$8 billion of bond issues in Asia ex-Japan this year. We've already seen a good pipeline build-up,' said John Bailey, the managing director of S&P's corporate and infrastructure ratings in Asia.
There were 70 high-yield debt issuers in Asia last year, up from 55 in 2004. And a growing number of those are first-time issuers, particularly if they are businesses based on the mainland. More than 50 per cent of new high-yield ratings made by S&P last year were on first-time issuers.
High-yield bonds, which were once termed junk bonds, are generally those rated 'BB' or lower by the leading rating houses and offer investors higher yields in return for taking on additional risk.
'We forecast another strong year in 2006, with growth in high-yield bond issuance expected to again outpace the investment grade sector. China, Indonesia and India, in particular, could see strong increases in issuance,' Mr Bailey said.
While the new bonds issued in Asia are slowly moving down the ratings scale as investors develop an appetite for more risk in the region, the corporate default rate for Asia excluding Japan was only 0.28 per cent at the end of last year, compared with the global long-term average for high-rate yield debt of 4.65 per cent.
'This is something Asia has always needed, a competitive capital market because it's always been very bank-dominated in the past,' Mr Bailey said. 'Previously these companies would have been getting it from the equity markets or the banks. At the moment, the high-yield market is pretty competitive to the bank market for high yield. For investment grade paper, it's the other way around; they can get a better deal at the bank.'
He said the growing trend of companies taking increased risks could lower ratings and raise default rates.
Asia is seeing an increase in merger and acquisition activity as well as more leveraged buyouts as foreign investors become more active in the market.
