Yield-hungry Asian investors, with a voracious appetite for bonds fuelled by record issuances by companies showing promising balance sheets, have helped push Asian high-yield bonds to a new level. A surge in so-called dim sum bonds, or yuan-denominated bonds offered in Hong Kong, is also driving growth.
According to Morgan Stanley research, during the first quarter of this year United States dollar-denominated bond issues for Asia, excluding Japan, totalled an unprecedented US$20 billion. Companies from Australia, the mainland and South Korea have dominated the issuance space. Analysts expect high-yield bonds to offer returns of between 5 per cent and 10 per cent this year.
Cecilia Chan, chief investment officer of fixed income, Asia-Pacific, at HSBC Global Asset Management, expects abundant global liquidity and strong demand for emerging market assets to continue supporting an increase in the issuance of Asian high-yield bonds. 'Asian high-yield bonds are generally backed by good fundamentals, and their attractive risk-adjusted returns offer selective investment opportunities,' Chan says. She says additional benefits could be gained through active allocation among sovereign, corporate, local currency and non-rated bonds. 'On a risk-adjusted basis, including default and recovery, Asian corporate high-yield bonds compare favourably to treasury-type bonds,' says Chan, who expects new issuance of Asian bonds to reach US$80 billion to US$90 billion this year. She expects high-yield corporate bonds to account for about 58 per cent of the gross supply.
While government bonds are liquid and offer a full yield/credit curve, they are also expensive compared with other bonds, Chan says. She says quasi-sovereign bonds, issued by companies that have strong government investment, often offer better value. Chan, however, sees the most value in the corporate issuance space, such as bonds that provide access to individual businesses and sector growth. This is especially the case with high-yield B- and BB-rated bonds.
With credit ratings usually marked as being either speculative grade or below investment grade, both of which present a greater chance of default, Chan stresses the need for careful selection. Areas that need to be looked at include the corporate balance sheet, management stability, business sector risk and big-picture risks. 'Active security selection supported by comprehensive bottom-up research analysis is the key,' she says.
Since the second half of last year, Asian corporate upgrades have outweighed downgrades. In the prevailing environment, Chan expects default rates to be about 14 per cent.
A first-quarter Fidelity Bond report says the outlook for returns from Asian high-yield bonds remains attractive compared with other asset classes. Companies have taken advantage of more favourable capital market conditions to secure funding and extend debt repayment terms. Asian companies should also continue to benefit from having lower leverage than US and European counterparts, taking into account the solid credit fundamentals for the region and low default rates.
Laura Acres, vice-president and senior credit officer with Moody's Investor Services, says the Asian high-yield portfolio is growing in terms of issuers and numbers. 'In Asia, we have more than 100 high-yield bond issuers, the highest number ever seen. Nevertheless, the market is still young and going through a process of development. We need to put these numbers into context. In the US, Moody's has more than 1,500 rated high-yield bond issuers and 250 in Europe,' Acres says. Like the US and Europe, where high-yield bond issuers cover more than 50 sectors, Asian issuers are expected to be diverse, though dominated by the mainland property sector.
According to data provider Dealogic, despite property investment cooling measures, mainland developers have issued bonds worth more than US$12 billion to international investors so far this year. The figure is more than five times the amount over the same period last year.
Wallace Lam, HSBC's director of debt capital markets, global capital financing, says high-yield bonds should not be confused with junk bonds, which run a higher risk of default or exposure to other risks, but typically pay higher yields.
'Asian companies issuing high-yield bonds are backed by strong fundamentals and [are] experiencing high levels of growth. Intrinsically, because they are growing fast, they fall into the high-yield category,' says Lam, who notes that bond markets tend to be less volatile than equity markets.
He says fast-growing companies issuing high-yield bonds are often raising assets to drive growth or cover capital expenditure instead of settling debt. 'As an asset class, high-yield bonds can provide attractive returns despite current low interest rates,' Lam says.
Addressing the issue of whether to invest in bonds versus equities in the same company, Lam says bond investors enjoy a slightly higher level of protection.
'A bond is covered by defined governance rules set by the underwriter that provide investors with a higher priority right compared to equity investors in the event of a default.'