A few years ago, Asian high yield was on the crest of a wave. Junk-rated Chinese property companies could sell US dollar bonds at yields below 5% – hardly high.
There were occasional defaults, with outcomes varying from steep haircuts on some Indonesian paper to an exchange offer for Kaisa Group Holdings’ defaulted bonds that left holders in the money before long.
Kaisa’s default in 2015 was the first by a Chinese property company on offshore bonds, a trend that has gathered pace lately and roiled the broader market.
Since China Evergrande Group, among other developers, ran into trouble servicing its debt, even high-yield issuers from other countries and unrelated industries have struggled to access the US dollar bond market.
The dominance of the Chinese property sector in Asia’s high-yield market has meant that investors are too busy trying to calculate their losses to want to risk picking up any new issues.
These problems are partly a consequence of China’s efforts to rein in developers’ debt and make it harder for them to borrow more.
Rising yields and restricted access to financing led some companies to raise shorter and shorter tenors from the offshore bond market. This vicious cycle has caused a maturity wall in 2022 that will be challenging to refinance, especially if the primary market remains frozen for much longer.
Winter won’t last forever, but before primary issuance can recover investors need to see a floor in the secondary market.
It seemed like an over-reaction when some Chinese property paper was trading at cash prices in the 70s last year, but bonds from some struggling issuers are now bid in the 20s, even before a default.
Some attribute that to a lack of confidence in some issuers’ financial reporting. What use are covenants if the balance sheet is not reliable?
This uncertainty has made it easy for rumours to unsettle the market, and it is easy to forget the progress the Asian high-yield market has made in recent years.
Global money managers have been increasing their presence in Asia, so that even Reg S-only deals might be owned by the biggest US funds, and more issuers have been broadening their investor base with green issues.
When issuance does return, investors are likely to get what they have been demanding – a bond universe that is more diverse and with more focus on transparency.
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