At what point does a boom become a bubble? The question needs to be asked in Asian high yield, where year-to-date issuance volumes are fast approaching the figure for the whole of 2016 in China and have already long exceeded it in India and Indonesia – after just eight weeks of the year, one of which was a write-off for Chinese New Year.
By February 15, Asian issuers had raised more than $6.6 billion in high-yield bonds, since when further issues have come from Xinyuan Real Estate, Qinghai Investment, Huawei (unrated), Future Land, Road King, Grand China Air (unrated) and the Mongolian sovereign.
International bankers are loving it. You can see relief in their eyes. Shoved indignantly down the league tables by mainland Chinese houses and their Hong Kong subsidiaries in recent years as China’s issuers have focused domestically, the return of high yield – in significant style, and with greater diversity than in years – has brought fees and activity to a previously tight-margin market. All of them talk of considerable pipelines across multiple locations.
But… at what stage do we become alarmed?
For some in the market it has already happened. If you had to pick a moment, it would probably have been when Indonesian coal industry supplier Bukit Makmur Mandiri Utama (Buma) attracted a $2.2 billion book for a $350 million bond paying 7.75% for five year non-call three money on a deal whose coupon tightened by more than half a percentage point along the way – despite the fact that more than half of Buma’s revenues come from Berau Coal, which defaulted on its own bonds in 2015.
Bankers suggest there is a great deal more of this to come, but even they are beginning to see trouble ahead
What’s happening? Did anyone, in their wildest dreams, think this would be the outcome of a Trump presidency and a rising rate cycle? Floods of emerging market (EM) bond issuance where books are routinely 10-times covered even after considerable tightening?
The Buma deal tells us a bit more about the underlying reasons for the surge – 89% of the 144A/Reg S notes went to asset managers. Many long-only funds stayed out of the market to the greatest extent possible in 2016, given geopolitical uncertainty and a bearishness towards EMs, and they have to participate in some of these deals to get to their expected returns and benchmarks.
Inflows just keep coming as more Asian countries develop their pension industries. “I worry that they are buying at the top,” says one banker. “But they don’t really have a choice.”
Indonesia and India capture particular interest because they are not China: many fund managers active in high yield are heavily committed to that one economy, which accounts for more than one third of outstanding high-yield bonds in Asia even without counting in Hong Kong. Indonesia and India are also perceived to have strong economic outlooks, whereas the view on China is very much dependent on what comes out of this year’s National Congress.
Buma, which is rated BB- by Fitch, is by no means the lowest-rated credit to be getting an audience – not even close. Jain Irrigation Systems, rated BB, paid 7.375% for its money; Road King Infrastructure, rated B1 by Moody’s, or four notches below investment grade, removed 70 basis points from its yield guidance during marketing and attracted a $5.5 billion book for a $300 million deal. Mongolia, out in the market now, is rated B- by S&P and Fitch.
Bankers suggest there is a great deal more of this to come, but even they are beginning to see trouble ahead.