Asian high-yield markets buzz with bond issuances amid the summer lull in the West
Primary bond markets started 2017 on an extremely strong tone, with momentum continuing during the year including throughout the summer.
The volume of bonds issued in Asia excluding Japan, denominated in dollars, euros and yen, totalled US$221 billion year-to-date, up 61 per cent from the same period in 2016, according to Dealogic. The high yield segment of issuances shone, with year-to-date volumes totalling US$48 billion, a threefold increase over the comparable period last year. As it stands, high yield issuance volumes have exceeded the full-year volumes in each of the last five years.
Asia’s markets continued to buzz while Western markets slowed during the summer. The threefold increase in Asian issuances trumped the 39 per cent growth in European high yields at US$75 billion and 11 per cent increase in American high yields at US$145 billion.
A confluence of factors contributed to this growth, including historically low interest rates and volatility levels, coupled with abundant investor demand and liquidity.
Data from Emerging Portfolio Fund Research shows that since May, flows into emerging market debt funds have remained positive for 10 out of the last 13 weeks. Additionally, credit spreads across many sectors, including EM Bond Indices, have tightened over the last 12 months, reflecting investor demand and optimism in the sector.
Regionally, Chinese issuers have contributed the bulk of high yield volumes with year-to-date volumes totalling US$38 billion and accounting for 80 per cent of Asia ex-Japan volumes, while South Asian and Southeast Asian issuers accounted for 11 per cent and 9 per cent respectively.
While the geographical mix in volumes remained relatively unchanged from 2016, we have seen noticeable shifts in the sector mix. Real estate borrowers have continued to tap the high yield markets, increasing their issuance from 29 per cent of 2016 total volume to 49 per cent this year. This was led largely by jumbo deals from the likes of Kaisa Group and China Evergrande’s US$6.3 billion issuances.
Commodity has also been resurgent, where volumes grew from 12 per cent in 2016 to 22 per cent this year, particularly in South Asia and Southeast Asia where several coal-related issuers including Indonesia’s Indika Energy, ABM Investama and Bukit Makmur Mandiri Utama tapped the markets. India’s Vedanta Resource tapped the bond markets twice this year, for separate US$1 billion offerings.
Given Asia’s abundant high yield supply, it’s no surprise that there are questions about how long the party will last. Sceptics have referenced several recently cancelled or postponed trades as an ominous sign of things to come.
Undoubtedly, there will be times when deals need to be adjusted after receiving investors’ feedback and these tended to be single-B rated credits and debut issuers. The latter also have the additional challenge of shorter performance track records, adding to further investor hesitation toward these names.
Nonetheless, this market sentiment has neither deterred issuers nor affected market confidence, as was showed in Agile Group’s highly oversubscribed deals.
As markets deepen, the breadth of issuers naturally expands, which inevitably results in a range of outcomes.
This is the sign of a maturing market and overall volumes demonstrate the continued expansion of the Asian capital markets.
Asian borrowers have followed a trend seen in the West over the past decade – increasingly favouring bonds as a source of financing rather than the traditional route of funding via banks, particularly as banks scale back due to capital constraints in the new Basel era.
On the demand side, we can expect the base of investors to grow as emerging economies in Asia continue to develop, particularly as market infrastructure and legal frameworks grow to support bond markets. Project bonds (typically used to finance project and infrastructure transactions) are a significant high yield opportunity in Asia, given the region’s massive infrastructure funding needs in the next decade, especially with China’s Belt & Road initiative fuelling more such opportunities. Therein lies further room for market deepening and expectation of continued momentum in the Asia high yield market.
Henrik Raber is Global Head of Capital Markets at Standard Chartered Bank.