FOR YEARS, ASIA’S high-yield debt market has been a nearly market, offering early promise only to fade later in the investment cycle. Last year all that changed. According to JPMorgan, Asian high-yield issues returned 11.45% in 2006, comfortably beating 10-year US treasury bills and investment-grade corporate and emerging market bonds. New issuance from Asia excluding Japan and Australia hit a record $7.7 billion (see chart), fuelled by foreign investment flows into the region and ample local liquidity. The market’s performance was all the more impressive since it withstood some stiff challenges, including a nuclear test by North Korea, a coup in Thailand and the bankruptcy of Chinese high-yield borrower Ocean Grand.
This year is already promising even more than 2006. Credit conditions remain benign and the perceived global credit default risk, which JPMorgan calculates at just 2%, remains low. Add to that the positive outlook for economic growth in Asia and increased allocation to Asian credits among international institutional investors, and it is not surprising that bankers are bullish.
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Asia ex-Japan/Australia high-yield market |
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New issue volume since 2001 |
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Source: JPMorgan |
"There’s too much liquidity out here," says one head of leveraged finance, "all the big guys are out here now – Pimco, Citadel, Carlyle – this market’s not going to blow up."
As Asia’s credit markets tighten, so high-yield deals are becoming demonstrably more aggressive. The market is focused heavily on credits from China and Indonesia, which accounted for more than two-thirds of all Asian high-yield issuance in 2006. Early-stage Chinese property development companies have been a favourite sector for junk bonds, raising more than $1.5 billion alone. Indonesian shipping, utilities and plantation companies have also proved popular with investors.
When Indonesian shipping group PT Arpeni Pratama tapped the high-yield market in May 2006 through Citi, it raised $160 million from some 60 investors and paid a coupon of 8.75% for seven-year money, non-callable for three years. In April this year, PT Berlian Laju Tanker, another Indonesian shipping business, raised $400 million from 225 investors and paid 7.5% for seven-year finance non-callable for five years, a mere 291 basis points over US treasuries. Joint bookrunners Deutsche Bank and JPMorgan generated demand of $4.8 billion for the deal, enabling them to double the size of the transaction.
Demand for Asian high-yield credits is now so strong that so-called covenant-lite deals are starting to be negotiated. The $350 million dual-tranche high-yield bond issue by Road King Infrastructure, a Hong Kong/China property and infrastructure group, is one of the early Asian examples of such packages. Structured as a $200 million seven-year non-call four fixed-rate note and a $150 million five-year non-call one floating-rate note, the covenant package included a restricted payments test fixed at ebitda less 2.5 times interest and was the first non-call one deal ever sold in Asia. Demand for the bonds was so strong that the non-Asian leg of the roadshow was cancelled and replaced by conference calls.
"It’s the first high yield out of Asia I know didn’t even get to London," says Tim Donahue, head of Asia Pacific leveraged finance at JPMorgan, joint book runner for the deal. "We raised $1.2 billion of demand from just Hong Kong and Singapore."
Asia’s public high-yield debt market is growing rapidly but it is the private sector that is creating the most excitement. Increasingly, banks are clubbing together with a select group of large hedge funds to provide highly structured debt-funding solutions for borrowers that normally either cannot find the finance in the public markets or else do not want to. Although by its nature it is difficult to calculate its dimensions accurately, the private high-yield debt market in Asia is already larger than its public counterpart.
"We estimate there had been $10 billion of private issuance by the end of 2006," says Mark Leahy, head of Asian debt syndicate at Deutsche Bank, "and a further $10 billion on top of that this year, either closed or in the market now."
Growth phase demand
There are several complementary factors behind the growth in Asia’s market for privately financed debt. Demand for investment capital among Asian companies has grown significantly over the past few years as the region’s economies have moved from restructuring and the recycling of capital into a genuine growth phase, spawning large numbers of emerging companies seeking growth capital. Traditional sources of funding for such companies are no longer available.
"In the old days, they’d be financed by private equity and, perhaps, some friendly local bank finance," says Leahy. "Private equity is getting crowded out by more flexible, cost-effective financing and now that local bank managers have a higher standard of corporate governance and credit approvals are more centralized, pure relationship lending is becoming a thing of the past."
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"On the private side, everything is negotiated, so you can have more aggressive structures, lighter, customized covenant packages and no disclosure"
Tim Donahue, JPMorgan |
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He offers a specific example of the type of transaction that lends itself to private financing. "Let’s say a client has a mining concession due to commence production in 2009 as long as he can raise the money required to make the facility operational. He isn’t a banker and may have no sense of the right capital structure and has probably gone no further than determining immediate capex needs. That kind of deal is way too early to be put into the public markets, but post capex, with two years’ financials, it may be ready for a takeout."
Other companies are opting for the private markets for other reasons, as JP Morgan’s Donahue explains. "On the private side, everything is negotiated," he says, "so you can have more aggressive structures, lighter, customized covenant packages and no disclosure."
Investors in private high-yield debt also like the lack of public disclosure, say bankers familiar with private debt transactions, particularly since the instruments are unlisted.