The story in the bond markets for the first half of this year was the lack of new high-yield paper. But issuance has since picked up, led by a flurry of Chinese property companies.
Some of these deals attracted massive order books, but recent deals have gone on to trade badly in the secondary markets, which has prompted some investors to suggest that they were priced too aggressively.
“These deals have been mis-priced,” said one Hong Kong-based fund manager. “A lot of the deals were bought by private banks on leverage and orders were inflated,” he added. “The order books have been massive. These deals came too tight and now they have sold off badly. It started with Franshion and then Soho China. It’s a bit of a mini bubble bursting.”
One banker who worked on Soho China’s deal disputed that it was mispriced, and pointed to a shift in market sentiment that has led to widening credit spreads. “The market backdrop has changed, sentiment has turned negative after the US elections, particularly with concerns around the US fiscal cliff,” he said.
Soho China’s bond proved to be a good one for the company but not for investors that bought it. Since it priced two weeks ago, its bonds maturing 2022 have dropped five points and traded at 95 on Wednesday. Another Chinese property developer Gemdale, which priced early this week, saw its bonds maturing 2017 fall to 98.5 at one point, but stabilised at 99.5 on Wednesday. Meanwhile, the Franshion 2017s were down three points at 97 on Wednesday.
Whereas earlier, investors were chasing after bonds, they have since become more selective. Earlier this week, Far East Consortium was forced to pull its deal due to a lack of demand. The company had gone out with final guidance for its unrated deal on Friday and told investors that it was covered for a deal size of $200 million.
As it was unrated, Far East Consortium relied heavily on private banking demand. However, throughout the course of Friday, a number of the private banks pulled their orders. “A lot of these deals are technical and momentum driven,” said one source. “If investors see that you don’t have a multiple subscribed deal, they won’t come in.”
Elsewhere, property developer China Aoyuan, which had gone out with initial whispers at mid to high 14% last Thursday, lurched across the line mid this week, raising $125 million at a yield of 14.5%. The deal was scaled back from the planned $200 million and was heavily allocated to private banks and banks which took up 74%. UBS was the sole bookrunner.
The bonds were quoted at 99.375 in secondary, above the 97.83 reoffer. But investors were sceptical about how liquid the bonds will be in the future.
“We saw China South City, which priced a $125 million bond in October, drop three points on the break and accounts got full fills,” said the fund manager. “There are sellers but no buyers. I expect it will be the same with China Aoyuan. Dealers are approaching it as a private placement in the sense that they do not expect that liquidity will be provided.”
On the sidelines
There has certainly been plenty of supply, but a big part of the reason for the weakness is that investors have reached the tail end of the year. High-yield has had a good run and at this point, and valuations are looking stretched.
“We are moving into the fourth quarter and a lot of the investors are on the sidelines,” said Sean Chang, head of Asian debt investment at Barings Asset Management. “Towards the end of the year, institutional investors are locking in profits. Valuations are not as cheap. Some of the recent deals have been priced too richly.”
Chang notes that with institutional investors sidelined, this leads to exaggerated price movements when private banks take profit or sell bonds, while liquidity is also drying up.
The general consensus is that investors who have made money will hang onto those gains. “People have made money, high-yield has had a strong run and it takes a lot of conviction to get into a high beta name at this point in the year when there is concerns over the US fiscal cliff and the situation in Europe worsening,” said Owen Gallimore, head of credit strategy Asia at ANZ.
“The recent high-yield new issues have performed badly and they just happen to be Chinese property names. However, the October property sales have been quite good so it isn’t a problem with the sector. I think it is because it’s the year end.”