The resurgence of Asian high-yield bonds
Bond issuance volumes have picked up in the early months of this year, as borrowers have capitalized on low volatility and interest rates. Issuance has reached some $950 billion year to date, 5% up on the same period last year. Of particular interest are bonds from Asian high-yield issuers (with credit ratings below BBB or Baa), which account for over $6.2 billion in offshore debt year to date. This is over four times the total amount issued in 2016 whereas the broader high-yield segment rose 66% year on year.
Global Head, Capital Markets,
Growing volumes and issuer base
As the largest bond market in the Asia ex-Japan region, China’s bond market has traditionally been dominated by high-yield supply from Chinese corporates. Last year, issuers from Greater China accounted for 78% of total volumes and the trend has continued into 2017. Nevertheless, the broadening of issuers continues, with more South and Southeast Asian players having issued or joined the pipeline in recent weeks. In January, for example, the market received a boost from India’s Jain Irrigation when it raised funds from the offshore debt market for the first time.
Deal sizes have also increased, with the average transaction size at $300 million compared with $260 million in 2016. Notably, there was a $1 billion offering by India’s Vedanta Resources in January, which alone accounts for 16% of issuance volumes year to date. The transaction also set a new record as the largest, single US dollar tranche for a high-yield commodities issuer in Asia.
Healthy investor demand
Along with the increased supply, demand for high-yield credit has been robust. In the hunt for yield, investors have had to look at longer-tenor bonds and also consider high-yield bonds that are lower down the credit spectrum. In fact, global high-yield funds have reported net inflows for five of the first seven weeks this year, with year-to-date inflow estimated at $917 million, compared with an outflow of $5.2 billion over the same period last year.
Indeed, Asian high-yield credits have appealed to investors, particularly with positive economic outlook for such countries as Indonesia and India, where healthy growth is forecast over the near term. All-in yields of Asian high-yield credits are trading near 6% currently, which is attractive compared with the investment-grade sector and other high-yield markets. The spread for high-yield bonds, compared with US treasuries and investment-grade bonds, has narrowed to multi-year lows.
With market fundamentals in place and volatility forecast to stay low, we can expect the pace of Asian high-yield issuance to remain elevated over the near term. Since the start of 2017, Chinese regulators have encouraged Chinese corporates to raise funds offshore. The commercial real estate sector (which makes up a substantial proportion of Chinese high-yield debt) has $20 billion of refinancing expected this year, and a further $18 billion of debt maturing in 2018 which, given the current environment, we can expect issuers to prefund in advance. And similar to high-yield borrowers from South and Southeast Asia, the positive macro backdrop provides for business expansion and therefore funding opportunities.
Euromoney and Standard Chartered will be running a series of webinars on debt capital markets. The next will be ‘India states’ finances and borrowings: The other half of the story’ on July 19. Find out more.
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