Asia's high-yield bonds swing back to life

High-yield issuers are back in force with new US dollar bonds, indicating that secondary market valuations have finally returned to attractive levels for fixed income investors.
Bond investors are more bullish on Asian high-yield
Bond investors are more bullish on Asian high-yield

Asia’s high-yield corporate bond market showed further signs of recovery on Tuesday after three issuers found success with their deals, extending the primary-market revival seen at the end of last year and getting 2019 off to a strong start.

The largest of the trio was property heavyweight China Evergrande Group, which completed a $3 billion tap of its existing two-year, three-year and four-year bonds.

Another Chinese property developer, Central China Real Estate, raised $200 million from a short-dated bond deal, while Mongolian Mortgage secured $250 million from its debut US dollar bond issue.

Perhaps significantly, these were among the weakest performers during the sharp selloff of high-yield corporate debt seen through much of last year. Chinese real estate developers, in particular, fell out of favour owing to refinancing concerns, while frontier markets like Mongolia faced huge capital outflows as US monetary policy continued to tighten.

However, secondary market valuations are now back at an attractive level after high-yield borrowers saw yields double from an average of 5% to 10% during the course of 2018.

And it appears liquidity is beginning to flow back at current valuation levels, as evidenced by China Evergrande, which was able to raise a hefty $3 billion despite deep concerns over its high leverage and poor corporate governance.

That was in spite of the fact the Shenzhen-headquartered group caught an unflattering spotlight in October after it sold $1.8 billion from a triple-tranche bond offering that was heavily anchored by its own chairman.

Bond traders said the B+/B1/B+ rated developer relied on anchor orders this time too. One bond trader told FinanceAsia the group allocated one-third of the new bonds – about $1 billion – to so-called “friends and family” investors.

The overall market feedback was generally better than in October, even so. Although distribution statistics were not released by the bookrunners, some fund firms contacted by FinanceAsia were of the opinion that the $2 billion worth of demand (excluding friends and family) reflected genuine investor interest in the debt-laden group.

Credit rating agency Standard & Poor's said the retap would slightly lengthen the company’s debt maturity profile and relieve some of the pressure on its short-term debt repayments.

Tuesday’s Reg S deal saw Evergrande raise $1.1 billion from a re-tap of its 7% 2020 bond with an 8.25% reoffer yield, $875 million from its 6.25% 2021s with a 9.5% reoffer yield, and $1.025 billion from its 8.25% 2022s with a 10.5% yield.

Credit Suisse, CEB International, China Citic Bank International and UBS were joint bookrunners.


Meanwhile, Henan-based Central China Real Estate received total demand of $890 million for its 7.325%, $200 million 363-day bonds, showing smaller developers can also get some traction at current valuation levels.

Frontier market credits also appear to be recovering as Mongolian Mortgage, which securitises commercial banks’ mortgage debt and sells it to the central bank, sold $250 million in 9.75% three-year bonds on the back of demand totalling $650 million.

The B3/B rated company managed to price its debut bond 25 basis points tighter than its initial guidance in the 10% area.

Although Mongolian Mortgage is a privately held company since the government holds only a 16.3% stake, its credit rating is on par with the sovereign due to its close business ties with the central bank. The new issue was also credit-enhanced with a letter of credit from the country's ministry of finance and the central bank.

Mongolian Mortgage’s Reg S/144A deal was mostly taken up by fund managers. They accounted for 82% of the final order book, while insurance funds got 7%, private banks got 6% and banks and securities firms got 5%.

By geographical split, Asia accounted for 63% of the final allocation, with Europe getting 19% and US 18%.

Credit Suisse was the sole bookrunner.

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