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Several big global themes are at play going into next year and are likely to weigh on Asian high-yield credit markets.
Monetary policy is expected to diverge between some key developed markets and emerging Asia. That combined with weaker valuations in the high-yield sector, lack of clarity towards certain regulations in the region and potential credit problems could shed an unwelcome light on higher risk, indebted Asian companies.
“We expect corporate fundamentals to come under scrutiny in 2015,” Krishna Hegde, head of Asia credit research at Barclays, said. “Many corporates have raised debt levels amid the low interest rate environment and as the wall of maturities grows in coming years we expect a gradual uptick in event risk, especially in the high-yield segments.”
With the US economy improving, global markets are betting that the Federal Reserve will hike US interest rates in the second half of next year, leading to a continued upward adjustment in long-term rates. Economists at Deutsche Bank expect US Treasury 10-year bond yields to rise to 2.8% in a year's time from a little over 2.2% currently.
That does not bode well for Asian credit — which has long benefited from a low interest rate environment — because it will translate into higher costs. And with valuations in the high-yield sector already inflated, investors might be unwilling to add on positions.
What this essentially means is that some high-yield borrowers could find it challenging to raise funds in the coming year.
According to a Morgan Stanley report, high-yield bond valuations in Asia are more expensive on an absolute basis as well as in comparison with investment grade or global high-yield credit. In 2008, in the wake of the global financial crisis, Asian high-yield debt traded at a cash-price average of 65 cents. That has since risen to 85 cents in 2012 and is close to par today.
"This does raise refinance risk to some degree," Viktor Hjort, a credit analyst at Morgan Stanley, said. "This illustrates why risks to high-yield can increase even in a relatively stable growth environment, and, in our view, it supports a defensive, up-in-quality stance, favouring investment grade over high-yield."
Unresolved regulatory issues
The other bedbug that’s bothering market participants — bankers, issuers and investors alike — is the recently announced circular from the Reserve Bank of India that effectively outlawed a new structure, pioneered by Greenko Group, which promised to open up the offshore bond market to a far wider number of Indian issuers, namely high-yield names.
The RBI sent out a reminder to banks on November 25 warning them that issuers are not allowed to provide guarantees or create contingent liabilities for borrowing by offshore units, or use funds onshore that have been raised offshore in such structures, unless explicitly permitted under existing regulations. It said that any issuers or banks that do so could be penalised under the Foreign Exchange Management Act.
Implications on Indian issuance — expected to be the third pillar of the Asian high-yield market — and on Greenko’s outstanding bonds are not yet known, but debt capital market bankers say there has been a temporary hiatus in issuance.
“Because of the uncertainty from the RBI, that has put a little pause on investor appetite in the near term for high-yield risk,” one DCM banker said. “Investors would get more clarity as time goes on but I believe that the weakness in Indian high-yield will be short-lived.”
As a result of the new RBI circular, Indian property company Lodha Developers postponed its dollar bond sale on December 4, while Reliance Communications opted to do a loan after having initially launched a bond on December 1.
Credit problems
A few big cracks have also emerged in parts of the market, putting pressure on some lower-rated Chinese real estate names such as Agile and more recently Kaisa, as well as some industrial names, bankers note.
On December 4, Kaisa announced it could not file sale and purchase agreements relating to three property projects in Shenzhen with the Land and Resources authority of Shenzhen Municipality. The company is still investigating the incident.
Meanwhile, Berau Coal in Indonesia is likely to restructure its offshore bonds after a prolonged slowdown in coal prices depleted its cash position, though no action has yet been taken.
Asian high-yield bonds have recently underperformed as a result of weakening commodity prices as well as potential credit default risks, reminding investors how crucial it is to differentiate between the various sectors and names.
“Although our broad view towards Asia credit remains positive, with a bias for high-yield over investment-grade, selecting credits and/or sectors will likely be a more important alpha [return] generator,” Kenneth Ho, credit analyst at Goldman Sachs, said.
“Investors have seen some shocks and that means that new issue premiums will go up,” a Singapore-based syndicate banker added. “Investors will be more discerning towards good double-B names and repeat borrowers, but inaugural issuers that are highly levered from more speculative industries will find it harder to raise bonds.”
Asian high-yield credit experienced a very weak session on Tuesday with a general 0.5 to 1 point shift downwards. Oil names such as Anton Oil, Honghua and MIE Holdings were all down by 3-5 points. Chinese property names also came under pressure, with Agile and KWG Property falling by 1-2 points, according to Bloomberg bond data.
Still bullish
Despite the head winds high-yield DCM bankers remain bullish, anticipating continued issuance on an opportunistic basis. Firms are more likely to become new issuers when onshore liquidity is tight, yields are low and the market is receptive.
“There are a group of companies that have callable bonds next year,” Haitham Ghattas, head of high-yield syndicate for Asia at Deutsche Bank, said. “We expect issuance to be skewed more towards the first half with the anticipation of rate hikes later in the year.”
China-based B+ rated iron ore company Hengshi Mining and Indonesian real estate company Duta Anggada Realty could come next year, according to sources familiar with the matter.
According to Dealogic data, as much as $12.4 billion and $20.6 billion of Asia ex-Japan high-yield bonds are due in 2015 and 2016, respectively, assuming notes containing call options are exercised on the first call date.
The Chinese property market has also taken a turn for the better, prompted by last month's cut in interest rates by the People’s Bank of China. The credit rating agencies called it credit-positive because the rate cut will likely support real estate sales and reduce developers’ borrowing costs.
Some Chinese high-yield property names could come to market in the new year. “[The] outlook is more constructive on the sector, so it’s ripe for refinancing,” said the DCM banker.
This year will be a record year in terms of gross issuance for the dollar-, euro- and yen-denominated bonds in Asia ex-Japan. Year-to-date gross issuance reached $193 billion on November 28, representing a 40% pick-up from the previous record in 2013, according to Goldman Sachs.
Assuming investment grade net issuance increases by a further 20% in 2015 and high-yield net issuance remains the same, Goldman predicts $167 billion of net issuance next year. Adding the $60 billion of refinancing needs, this could lead to a gross issuance of around $230 billion in 2015.
