Asian high yield on a supercharge
BOND MARKETS in Asia kicked off on a busy note in 2018. The first two weeks of January saw almost three times the issuance volumes versus the same period last year. This feeds off the strong momentum from 2017, which closed on a high note.
In fact, last year was a landmark year for Asian primary bond markets, with Asia minus Japan issuance volumes reaching US$1.3trillion (Bt40.9 trillion) – slightly higher than 2016 and setting a new record as the highest ever for the region. In particular, the High Yield segment (referring to issuers with credit rating below “BBB” or “Baa”) stands out, with Asia ex Japan G3 issuance volumes topping $66 billion in 2017 (a new historical high) and up 175 per cent from the year before. This contrasts with the broader High Yield segment globally which saw a more modest 34 per cent growth from 2016.
Throughout the year, issuers tapped the market repeatedly, their enthusiasm mostly driven by near-record low yields and abundant investor liquidity. High Yield spreads ground to some of their tightest levels at the end of 2017, demonstrating strong investor demand and improving risk appetite for the segment. During this time, the bond fund flows of emerging markets stayed positive and we continued to see heavily oversubscribed issuances throughout the year.
Regionally, greater China accounted for the lion’s share of the market, with $51billion of issuances or 77 per cent of total volumes. This was driven by offshore transactions on the back of regulatory relaxation and tightening liquidity conditions onshore.
South Asia and Asean also registered good growth, with $5.3 billion (138 per cent growth) and $6.1 billion (175 per cent growth) in volumes, respectively. Notably, we saw a greater geographical diversity among the Asean issuers in 2017. While Indonesian issuers traditionally formed the majority, issuers such as Malaysia’s Press Metal Aluminium and Singapore’s Oxley Holdings also tapped the markets last year.
Sectorally, real estate issuers continued to dominate, accounting for $31 billion in volumes last year (46 per cent of total volumes). This was uplifted by jumbo offerings from Chinese issuers like China Evergrande (over $8 billion) and Kaisa Group. Supported by the recovery in coal and oil prices, commodity players from Indonesia such as Indika Energy, ABM Investama, Bukit Makmur Mandiri Utama (BUMA), and oil and gas explorers such as Medco Energi, also re-entered the market.
Interestingly, 2017 also witnessed many High Yield transactions that were pulled or postponed. Despite supportive market conditions, investors were selective in light of abundant supply.
Themes to continue
Strength of the “Asian bid”: Given supportive market conditions, we expect Asian investors to remain a stable source of liquidity, having grown in significance over the past few years. According to Debtwire, 75 per cent of Asia ex Japan High Yield US Dollar bonds were allocated to Asian investors in 2017, up from 53 per cent in 2014. US investors, in contrast, were allocated only 10 per cent last year, compared with 24 per cent in 2014. Clearly, Asian liquidity has lured issuers away from the traditional US investor base these last few years, thereby achieving greater investor diversity. During this time, Asian investors have gained familiarity with domestic Asian issuers, which is helped further by higher yields from Asian bonds on average compared to those issued in the West, given the rates environment.
China will continue to drive volumes: The One Belt One Road initiative will start to bear fruit. We should see more issuances from power and infrastructure sectors entering the market. M&A related funding in the retail, consumer and pharmaceutical sectors may increase as Chinese companies look abroad for growth in 2018. If the onshore rates environment persists, we can expect High Yield issuers (particularly real estate names) to continue refinancing their existing debt offshore. The potential for the Asian High Yield bond market is immense. Whereas China will continue to drive growth, Asean has room for more growth. Vietnam has yet to tap the G3 High Yield market while more could be expected from Singapore, Malaysia and the Philippines. Global investor demand remains exceptionally strong in the meantime. If the January momentum keeps up, 2018 will easily be another record year.
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HENRIK RABER is global head, capital markets at Standard Chartered Bank.
