The high-yield sector in Asia has made a healthy start to the year, following a strong 2013, with investment banks eager to increase their market share in one of the more profitable areas as cost of credit rises.
With Basel III requirements putting increased pressure on bank capital, this trend has taken on added importance due to the fact that profitability in the investment grade space has declined. One of the main causes is that the number of bookrunners has mushroomed per transaction in recent years, thus reducing the share of the fees.
“We are not a flow house … we don’t necessarily get involved in each and every deal, and we don’t intend to,” said a Hong Kong-based head of debt syndicate for Asia at a global investment bank to FinanceAsia. “We are selective in terms of the fees that some of these borrowers pay. We don’t tend to be selective in terms of high-yield deals, but are more selective on the investment grade side.”
He highlighted that investment banks do not have the luxury that commercial banks do when it comes to extending balance sheet to win investment grade bond deals. And although such a strategy has allowed certain financial institutions to capture large deal flows, some experts believe that it’s not sustainable in terms of profitability in the long-run.
“Investment grade corporate bonds are more balance sheet intensive,” said another Hong Kong-based debt capital market (DCM) syndicate banker at a rival investment bank. “Growth of the bond market primarily came from the high-yield sector in 2013, and that is where the bulk of the money is made in the bond business.”
In 2013, 60% of Asian debt market growth originated from the high-yield sector – where more than 80 deals were priced, estimates the banker, adding that two-thirds of his bank’s profit from the bond business is made from the high-yield sector.
UBS and Deutsche Bank were the top bookrunners in the high-yield space in 2013 in terms of deal numbers, having executed 37 and 36 transactions respectively, followed by HSBC with 35, according to Dealogic data.
In the first week of 2014 alone, the Asia ex-Japan high-yield sector has seen four deals come to market – all from Chinese property companies – generating a volume of around $2 billion, according to Dealogic data. UBS and Citi were on three of the transactions.
Although the volume was 21% lower than last year’s $2.5 billion of five deals during the same period, it is still a good start to the year, having come shortly off the back of significant market volatility witnessed in the last two months before the Federal Reserve (Fed) decided to scale back on its monthly asset purchasing programme to $75 billion from $85 billion late-December.
High-yield 2014 supply
There are numerous sources for high-yield US dollar supply for 2014, highlight credit analysts.
For example, the names that tried and failed in 2013 due to the mismatch of pricing expectations as well as investors being cautious from taking on risk in new sectors could return to the market this year, notes Deutsche Bank in a report released on January 10.
Such issuers could include Indonesian-based corporates such as Metropolis Propertindo, a real estate developer, and Apexindo Pratama Duta, the country’s largest national offshore and onshore oil drilling contractor, as well as Chinese companies such as China XD Plastics, a modified plastics manufacturer.
Some other companies that have expressed interest in tapping the US dollar bond market this year include Antam, an Indonesian mining and metals company; Semen Gresik, Indonesia’s largest cement producing company; Tata Steel, Mumbai-based steel manufacturer; Manila Electric, the Philippines’ largest electrical power distributor; Bumi Armada, a Malaysian-based international offshore oilfield service provider and Doosan Engineering & Construction, a South Korean construction company, says Deutsche Bank.
However, with overcapacity weighing on most Chinese industrial sectors and slowing backdrop in Indonesia, capacity expansions have slowed down for most high yield issuers. Issuance from China’s property sector, which saw quite a large supply last year ($16 billion), could also fall this year.
As a result, Standard Chartered (StanChart) expects lower high-yield corporate issuance in 2014, slowing to $26 billion from $35 billion in 2013.
“2013 was a year of heavy issuance for China’s property sector as companies took advantage of strong demand for high-yield debt, especially in the first quarter,” said Shankar Narayanaswamy, Singapore-based head of credit strategy at StanChart. “This year, the focus of issuance is likely to be refinancing – redemptions and possible calls – and possibly land buying.”
While bond redemptions in 2014 are relatively low at $1.38 billion, close to $7 billion of bonds are callable in 2014. This year is also a big year for redemption in the CNH capital markets and the bank expects some refinancing in local currency markets to spillover to the US dollar capital markets.
