Unrated bonds are here to stay

Asia’s strong private banking demand will continue to drive the supply of unrated bonds as the quest for yield grows.

The market for unrated bonds, or debt instruments that have not been assessed by a credit rating agency, has has been growing at a steady pace and is likely to stay for the foreseeable future as high net worth individuals continue to search for yield.

Based on conventional wisdom, rated credits in Asia are expected to grow as the market continues to develop. While this is true, unrated bonds have surprisingly been growing at a faster pace, according to panellists at FinanceAsia’s Borrowers & Investors conference held in Singapore on October 30.

Clifford Lee, head of fixed-income at DBS in a panel titled "State of the Asian bond market – shortcomings versus innovation" said that Asia’s strong private banking demand has encouraged and will continue to support the growth of unrated issuance.

“You can give [private banks] a triple-B investment grade name that they’ve not heard off but they’re not going to invest in that,” he said.

“You give them an unrated name of a credit quality that they’re familiar with, that comes with a shareholding that they’re more comfortable with, a growth strategy they’re more aware off, [and] they’ll go for it.”

For example, the latest unrated deal to hit markets was New World China Land’s $900 million five-year offering on Thursday, which had a strong private bank bid – more than 50% of demand – and continues to have.

One Singapore-based bond trader at a foreign bank said that demand from private banks for the Chinese subsidiary of the Hong Kong-property based company’s paper exceeded 100 orders in the secondary market on the first day of trading.

The trader is also confident that the paper could trade up from levels of 100.46 on Friday morning to 102 by year-end.

Secondary market stability

The large private banking bid offers unrated credits greater secondary market trading stability as well, panelists add. This is because high net worth individuals do not have to worry about managing their mark-to-market exposures unlike the so-called real money accounts.

The more stable secondary trading appeal, combined with unrated bonds’ higher pick-up in turn encourages institutional investors to hold such credits.

“It’s actually a good source of [yield],” said Charlie Wang, chief investment officer at Sentosa Capital, a fund management company that is run by former Standard Chartered bankers, in the panel. “You can make quite a bit of money on unrated paper.”

According to FinanceAsia’s recent fixed-income poll, 54.3% of 749 Asia-based market participants polled expected their exposure into unrated bonds to stay the same, while 23.3% of them anticipate the exposure to increase.

Total supply Asia ex-Japan international unrated bonds have touched $38.9 billion year-to-date, a 51% increase from last year during the same period, according to Dealogic data.

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