Spring 2014

INSIDE VIEW: China heavyweight

Boxing-glovesThe 81 high yield bond issuances completed in the Asia Pacific excluding Japan region made last year the busiest on record. However, Evan Thorpe of Dealogic says taking China out of the equation shows that overall market activity ranged at around the same level seen since a decade ago.

International high yield bond issuance from corporates in Asia excluding Japan has attracted increasing attention over the past several years.

Although issuance remains small compared to that of more developed high yield markets in Europe and the United States, both the volume raised and the share of the global market activity has increased.

The 81 high yield bond issuances deals completed in the region made for the busiest year on record and the 17 bonds that have already been issued until March 10 suggest the market is still on the rise.

When combined with the US and Europe, the region accounts for 10% of the activity so far this year, up from 7% last year.

While the growth in this region is readily visible, it remains unclear whether several consecutive record-breaking years signify a market that is really coming into its own.

Not only is the size of this market changing, but an analysis of its underpinnings suggests that its scope and focus has shifted as well.

The year 2010 signalled a significant jump in headline regional issuance when a raft of Chinese deals hit the market.

The $7.6 billion raised by international high yield bond transactions out of China that year was double the amount issued by corporates from the previous years’ leading country, Indonesia.

In the nine years immediately preceding 2010, six different nationalities led annual regional international high yield bond issuance activity from year to year, and China was not among those leaders.

Issuance from high yield corporates out of Indonesia, the Philippines, South Korea, Singapore, Macau, and India each led for at least one year each during this period.
Since 2010, however, Chinese corporate issuance has led in every single year.

The next-to-highest issuing country for the years of China’s rise has been Indonesia, where corporates combined issued the second highest amount each of the years until 2013.

They recorded annual volume over that period that was roughly on par with or even slightly down from that of previous years.

Taking China out of the equation shows that overall market activity ranged at around the same level seen since 2004, though.

Drilling into the data underlying China’s ascent in driving the region’s growth, it becomes obvious that the issuance is concentrated within the real estate sector.

Low interest rates and dollar investors’ search for yield over recent years has fuelled interest in emerging market investment opportunities in and outside of Asia.

Region-agnostic factors could have had a significant influence on the region’s growth within the high yield bond universe.

However, significant regulatory elements are prevailing on market supply and these factors are extremely region-specific.

Chinese real estate companies facing a policy that restricts onshore credit have begun regularly looking at offshore funding options, for example.

Even amid a backdrop of macro-driven demand, the local twists and turns of the Asian growth plotline are also shaping this market’s trajectory.

Given that the region’s market as a whole is made up greatly by a sector as closely-watched as Chinese real estate, perhaps factors germane to that area will drive (or diminish) market growth to the greatest extent.

In the end, does it matter that the regional market’s growth is built up mostly of one sector?

Or is this immaterial so long as there is real demand and sufficient liquidity?

If a confluence of macro credit trends and regional regulatory changes have been fuelling the expansion of this market, it raises the question of how its growth will continue.

When interest rates rise, will dollar investors turn their focus towards other regions? If pricing in the onshore debt capital markets, or pricing of loans accessible to Chinese
real estate companies shift, will that undermine the size of this market, or will it help build diversity?

How will recent developments in defaulting onshore Chinese corporate debt in any sector influence risk premiums and to what extent could these restrict the variety of names issuing the near future?

The backdrop of these factors could undermine the argument that investing in the region’s high yield corporates is attractive for its own sake.

But, for the first time ever, deals from this market currently represent a double-digit portion of major international high yield market issuance.

The growing number of issuers will therefore need to address their maturing international debt.

Looking forward, these refinancing needs will be a key theme. A great deal of high yield volume issued out of the region during the recent boom is slated to mature between 2015 and 2019.

Regardless of the persistence of questions that remain unanswered, there is a considerable amount of debt outstanding that will have to be addressed, so there is a lot yet still to be played out.

So many deals being done appear to indicate that the market supports the confluence of issuers’ need to go offshore and demand among dollar investors.

As a result, corporates have been able to secure very agreeable offshore options. Not only is the pricing attractive but the terms – covenant packages and arrangements for credit support, for example – appear acceptable for corporates.

Indeed, more and more names have come to the market each year. Such conditions have given cause for certain credits to become frequent borrowers in this market.

The emergence of more names becoming better known in the market bodes well for more established credit curves and more familiarity of dollar investors with Asian corporates.

Evan Thorpe is the global head of market analysis at Dealogic

©2014 funds global asia

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