Investors have shown the red flag to Asia’s high yield bond market after rejecting a trio of deals from debut borrowers at the very outer edges of the ratings spectrum over the course of Monday and Tuesday.
The looming summer recess was never going to help the deals’ respective lead managers build demand.
But investors’ thumbs-down suggests there has been a fundamental shift, which will not play to borrowers advantage when the market resumes in earnest again this September.
Dealogic figures show how the market has become swamped. As of last Friday, the region’s G3 bond issuers had sold $181.6 billion of paper, or 93.89%% of the $193.4 billion they sold over the whole of last year, according to Dealogic figures.
Investors hope this means they will finally regain some pricing advantage after years of issuers holding sway.
“Primary market indigestion shows the pendulum is swinging back towards investors being compensated for risk,” one Singapore-based portfolio manager told FinanceAsia. “Some opportunistic issuers have been trying to get better pricing, but investors walked away because there isn’t much value in those deals.”
The three bond issuers in question were all single-B rated credits with little financing track record: B+/B/B2 rated Indonesian coal producer Geo Energy Resources; B+/B+ rated leasing company Lionbridge Capital China and India’s B1/B+ rated Continuum Energy.
Geo Energy was the first to pull out on Monday. In a statement to the Singapore Stock Exchange, the group said it had decided not to launch the Deutsche Bank and JP Morgan led deal after surveying market conditions.
However, this did not deter Continuum Energy and Lionbridge from launching their own deals the very next day.
Continuum Energy went out with initial price guidance for its five non-call three-year note around the 6.375% area. Deutsche Bank was sole global co-ordinator, with Credit Suisse, Investec and Nomura on joint books.
Lionbridge Capital, meanwhile, pitched its three-year debut with a 9.5% yield.
Neither was able to gain much traction.
“The market’s stepping back and investors are taking a little bit of breather,” said a second fund manager. ‘It’s an indication of how the market has become more discerning and differentiating.”
Hitting the right seam
Yet one Indonesian high yield transaction for PT ABM Investama did make it through unscathed on Tuesday and even traded up on Wednesday in a sign that the right credit can still find an audience.
“There’s still heavy supply of high-yield paper in the market, but investors are becoming more proactive about thinking where to put their money,” commented one debt capital markets banker behind the ABM deal.
Bryan Carter, head of emerging markets fixed income at BNP Paribas Asset Management also added that, “There’s been some softening for new issues, but potentially still plenty of liquidity in the Asian market.”
Thus the Ba3/BB- rated Indonesian coal company was able to build a $1.3 billion peak order book for a $300 million deal, which was initially marketed around the 7.625% area.
The Jakarta-listed company achieved final pricing at 98.970% on a coupon of 7.125% to yield 7.375%.
Distribution statistics show a $1.1 billion final order book with 140 accounts, of which 82% came from Asia, 14% from the US and 4% from Europe. By investor type, fund managers took 84%, private banks 9% and banks and insurers the remaining 7%.
One syndicate banker estimated a 4.5bp new issue premium over the group’s closest comparable PT Bukit Makmur. The latter’s $350 million February 2022 bond was trading at a 7% yield-to-call on Tuesday.
When it broke syndicate on Wednesday, ABM Investama’s five non-call three-year note traded up to a bid price of 99.5% to yield 7.25%.
Credit Suisse was the sole global coordinator, with DBS, OCBC and Standard Chartered as joint bookrunners.