Asian bonds rebound as risk hungry abandon vigilance to chase high yields
Asia's corporate bond markets have staged a remarkable recovery in the past two years, with rapid economic growth and risk-hungry investors helping to wipe away the stain of the late 1990s crash.
Mainland firms are beating a well-worn path to Hong Kong to sell good quality, high-yield bonds to finance their growth. With growing debt supply and demand have come the trappings of a developed market, such as secondary trading and leveraged buyouts which rely on robust credit markets.
The new players arriving for the game are one sign of the market's growth. Pimco, one of the world's largest fixed-income managers, opened an office in Hong Kong in December last year to give it better access to North Asian markets.
'We feel the debt markets are poised to see significant growth,' said Brian Baker, who heads the Pimco office. 'While the debt markets are still small relative to the equity markets, growth is far surpassing the equity markets.'
Yet mainland regulators have not been putting the rules in place to offer market access with transparency and accountability. For mainland firms, this usually means doing debt deals in Hong Kong using overseas companies, which means buyers are further removed from the mainland assets backing the debt than they would like.
'One of the issues is that it's very difficult to secure foreign debt with assets based in [China]. That limits the types of [mainland] firms that can go to the market,' said Alexander Lloyd, a high-yield debt specialist at law firm Clifford Chance.
Bankers say the region is ripe for consolidation as firms must boost efficiency to face global competition. Those deals are seen as a key driver of the bond market's growth, and their more complicated nature raises the market's standards.
'We expect significant leveraged buyout and leverage finance business from Asia in the next few years,' said Max Blandon, a managing director and head of Asia leverage finance at Morgan Stanley.
According to Standard & Poor's, the corporate default rate for Asia excluding Japan was 0.28 per cent at the end of last year, well down on a global long-term average for high-yield debt of 4.65 per cent.
John Bailey, the managing director of S&P's corporate and infrastructure ratings in Asia, said that while corporate takeovers boosted bond deal flow, they were a sign that companies were taking bigger risks, which could eventually translate into lower ratings and more defaults, but that the market looked solid now.
While most debt issued in Asia remains US dollar denominated, it is no longer only foreign investors buying. Many deals are largely sold in Asia, giving foreign investors more confidence in debt offerings.
'Locals are often in the best position to judge the situation, and more importantly, they're prepared to invest in the region,' Mr Blandon said.
Asia's secondary market is also growing, creating an important exit opportunity for buyers. Hedging of corporate debt is also growing.
'The markets in Asia have matured. We are now more mainstream. What you saw in Europe 10 years ago is already happening here,' Mr Blandon said.