Asia high-yield to come under pressure

The region’s high-yield market is likely to underperform as Chinese real estate risks mount and supply fatigue resurfaces in coming weeks.

The underperformance of Asia’s high-yield sector in recent weeks is partly due to concerns about the Chinese property industry and worries of more supply in coming weeks, say syndicate bankers.

Asia’s investment grade sector held up last week as spreads grinded around 5bp tighter for Korea, China and Hong Kong. Spreads were overall little changed for India and Southeast Asia, according to Goldman Sachs in a report released on May 5.

The stable investment grade performance was reflective of favourable market sentiment towards this sector as the market well digested one of the heaviest weekly issuance this year, totalling $7.9 billion, adds Goldman. This indicates strong appetite for higher quality credits, said a credit analyst.

The high-yield, on the other hand, underperformed investment grade despite the much lighter weekly supply of $1.2 billion, notes Goldman. China properties remained weak and traded 0.25bp-0.5bp lower than the week before. Sentiment for China industrials was less negative, with the space down by around 0.25bp for the week.

“We expect the pressure on the China real estate sector to increase, as inventory levels will continue to rise in the financial year 2014,” Kenneth Ho, credit analyst at Goldman Sachs, said. “Although policy support could limit the macro downside, we expect to see more micro level stresses.”

The average inventory period of Tier-one to -four cities has risen further to 17.1 months equivalent of sales at end-March 2014, the highest level since February 2012 and above the seven-year average of 11.7, highlights Deutsche Bank in a note on April 24. The increase was driven mainly by lower levels of sales activities in most cities.

Chinese developers account for 58% of total dollar-denominated Asia ex-Japan high-yield bonds of $9.2 billion year-to-date, according to Dealogic data.

Higher supply

Additionally, Asia’s high-yield sector could see more supply in the coming weeks as falling funding costs have prompted some issuers to call back higher-coupon bonds in recent months, highlights another credit analyst.

A number of Asian high-yield bonds were issued under a five-year structure that is callable in the third year, also known as a “five-year non-call three” note. This means that those issued from 2010-2012 are already callable, or close to their call dates.

“To call or not to call? That is the question issuers and investors may be asking now,” said Sandra Chow, credit analyst at CreditSights, an independent research provider. “With funding costs still relatively low for many Asian high-yield corporates, borrowers may take the opportunity to refinance higher-coupon bonds and term out their debt maturity profiles.”

In 2010, the average spread of the JPMorgan Asia ex-Japan (JACI) non-investment grade corporate index was 688bp, according to Credit Sights in a report on April 28. Year-to-date in 2014, the average spread has fallen to around 516bp.

Chinese property companies have been among the first to retire high-yield debt, helped by buoyant primary market in January.

But bankers expect more high-yield supply in the coming weeks, helped by Indonesian energy companies including Berau Coal and Adaro, and Chinese developers such as KWG Property, Road King and Shimao – all of which will tap markets to refinance their existing bonds.

“Few companies have enough cash on hand to repay their bonds, so the availability of fresh bonds or bank funding remains key to whether they exercise their call options,” Chow said. “Berau has already stated plans for a new bond, while others may be more opportunistic in their funding plans.”

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