Asset managers calm worries over junk bonds
Jeanny Yu and Paul Soh
The recent debt issues by mainland developers in Hong Kong will not result in excessive supply and investors should still consider these high-yield bonds as an attractive asset class this year, asset management firms say.
Hong Kong's debt market is seeing the busiest month for mainland developers in terms of high-yield bond issues, with sales from at least four firms. Cheung Kong on Wednesday joined in by issuing US$500 million of bonds.
The spate of junk bond sales, however, is raising eyebrows, on speculation market demand could not digest the glut of issues. Cheung Kong priced its bond at the lowest end of an indicative yield range on Wednesday night, while Agile Property's bonds have been traded below their offer price in the secondary market since being priced on January 11.
But Sean Chang, Baring Asset Management's head of Asian debt investment, said he would encourage investors to buy junk bonds, especially in the property sector. These bonds had relatively high returns and low default risks, he said, as the trend of urbanisation on the mainland could boost home demand in the long term.
Yields of most property developers' bonds in the secondary market are much higher than the 3.16 per cent mainland government debt offers.
Agile's 8.875 per cent note sold in 2010 and due in 2017 is now yielding 6.16 per cent, while Country Garden's similar-maturity 11.25 per cent note is yielding 5.26 per cent.
"We expect high-yield bonds, though carrying risks of their own, to be less sensitive to the erosion of capital gains that have been a key component to returns in the investment-grade sector," said Gary Dugan, chief investment officer for Asia and the Middle East at Coutts.
Dugan is more bullish on equities rather than bonds, given the former's likely higher returns. "We believe 2013 could be a significant year, marking the reversal of trends, most notably the comeback of equities," he said.
Yesterday, Guangzhou R&F Properties said it sold US$400 million worth of notes due in 2020, while Yuexiu Property said it sold US$850 million worth of notes in two tranches.
Agile and Fantasia earlier this month sold US$700 million and US$250 million worth of notes respectively.