Mainland developer ends junk bond drought

Central China Real Estate sells Asia's first junk bond for a month as concerns around the near-collapse of Kaisa recede and as cash-rich investors put money back to work.

Cash-rich emerging market investors are ready to put money back to work in the high-yield space in the second quarter as Chinese property market concerns decline, fixed income experts say.

Recovering risk appetite was on show as the first junk bond in a month hit the market on Tuesday. Rated Ba3/BB-, Central China Real Estate launched a $300 million five-year bond that is callable in year three at a yield of 8.75%, 37.5 basis points tighter than its initial price guidance area, according to a term sheet seen by FinanceAsia

The deal also received overwhelming orders from regional investors, with books nearly touching $4 billion, according to a source close to the deal.

The near-collapse of Kaisa caused a sharp re-pricing of Asian high-yield risk in the first quarter of the year and a dearth in junk bond issuance during the period. 

Asia ex-Japan junk bond issuance accounted for just 10% of $54.8 billion deals in the first quarter of 2014, according to Dealogic data, down from the 17% share of total volumes ($45 billion) seen during the same period last year. 

But credit analysts believe that the decline in high-yield issuance is temporary and that some supply — even from Chinese developers — will return in the second quarter now that earnings results are out of the way.

“The lack of new high-yield supply in the first quarter may mean that the backlog of debut issuers is growing,” said Singapore-based Sandra Chow, analyst at CreditSights, an independent credit research provider. “Refinancing needs are low for the [property] sector, but opportunistic issuance may surface if borrowers are able to reduce their interest costs.”

News that former chairman, Kwok Ying Shing, had returned to his post at Kaisa and progress on the firm's debt restructuring paving the way for Sunac China to buy the embattled developer helped bolster sentiment in secondary trading. 

Additionally, China's new wave of property easing measures has also helped boost demand for the asset class.

On March 30, the People's Bank of China said that commercial banks can lower the minimum down payment requirement for buyers of second homes or clients with outstanding mortgages to 40% from 60% previously.

The pipeline looks realtively healthy for high-yield issuers. Inaugural issuer Yuexiu Transport, a company that principally operates and invests in expressways in Guangdong province is mulling a dollar-denominated bond in the coming days. 

Property company Shimao was the last issuer to raise a high-yield bond, opening a tap — a procedure that allows borrowers to sell bonds from past issues — for its outstanding $300 million notes expiring in 2022 on March 10. 

BNP Paribas, Deutsche Bank, Morgan Stanley and OCBC were the joint bookrunners of the Central China Real Estate transaction. Proceeds of the bond will be used to repay debt and for general corporate purposes. 

Overweight Asia

While there continues to be a flurry of negative news impacting China’s high-yield market — with the latest being Chinese cement company China Shanshui, which made an announcement on Friday regarding the misconduct of two former managers — some investors are still bullish on the asset class.

"There were some interesting selloffs in Chinese property that created buying opportunities for our portfolios,” US-based Peter Marber, head of emerging market investments at Loomis Sayles told FinanceAsia in Hong Kong.

“If  investors form their impression of the entire sector by one or two defaulting names, they're missing the statistical opportunity to earn more spread relative to similar rated bonds in the Europe or US," he added.

Former general manager of a subsidiary at China Shanshui, Wang Yongping, who resigned in November 2013, has been sentenced to imprisonment of six years for misconduct, according to the company's statement.

Also, the property developer announced that the Public Security Bureau has commenced an investigation and issued an arrest warrant for Dong Chengtien, a company director until he fled in May 2013.

As a result, bond buyers will continue to be selective. “We expect investors will remain cautious towards all but the strongest names [in high-yield],” said CreditSights’s Chow.

Loomis Sayles, which had $230.2 billion in assets under management as of December 31, for example is particularly positive on Asian emerging market credits in the double-B to triple-B rating categories. 

Marber says that investment grade emerging corporate bonds, on average, offer about 150bp yield advantage versus US credits, and a hefty 200bp pickup or more in double-B names.

“If you look across the ratings spectrum, emerging markets over-compensate investors at almost every level,” he said, adding that nearly 50% of his portfolio is allocated to Asia credit with the largest being China (11%), India (8%) and Indonesia (7%).

Goldman Sach’s credit analyst Kenneth Ho also maintains a positive view of Asia high-yield, with his most favoured sectors being China property and Indonesia names in general, he said in a report on Friday. 

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