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Henrik Raber Global Head, Capital Markets, |
Is Asia’s bond market coming of age? It certainly seems so based on issuance levels seen so far this year. Asia’s bond markets in general have had a buyout year so far. Asia ex-Japan (AEJ) issuance is up 61% compared with August last year, to $221 billion, according to financial markets platform Dealogic. While markets in the West slowed during the summer, Asia’s markets continue to buzz, and one segment that has particularly shined is its high-yield market.
High-yield issuance is up 350% August year to date in AEJ, compared with this time last year, totalling $48 billion. European high-yield volumes, by comparison, are up 39% to $75 billion, while US high-yield issuance is up 11% to $145 billion.
Of course, Asia’s capital markets are less mature than those in the West, but the upward trend is nonetheless still impressive. The growth is down to multiple factors, including historically low interest rates and volatility levels coupled with plentiful investor demand and liquidity.
China is leading the way
Regionally, Chinese issuers have contributed the bulk of high-yield volumes, with August year-to-date issuance totalling $38 billion and accounting for 80% of AEJ volumes, with south Asian and southeast Asian issuers accounting for 11% and 9%, respectively.
While the geographical mix in volumes remained relatively unchanged from 2016, we have seen noticeable shifts in the sector mix. Real estate borrowers have continued to tap the high-yield markets, bringing issuance from 29% of total volume last year to 49% this year. This was led largely by jumbo deals from the likes of property developers Kaisa Group and China Evergrande, the latter with $6.3 billion in new issuance this year alone.
And it’s not just the real estate market that’s favouring high-yield bonds. The commodity industry has seen a surge in issuance, with their share of volumes almost doubling from 12% in 2016 to 22% this year. Some companies have tapped the markets twice already this year – the most notable being from India-based Vedanta Resources’ $1 billion offerings.
Can it last?
Given the abundant high-yield supply in Asia, many industry experts have asked how long the party will last. Sceptics have referenced several recently cancelled or postponed trades as an ominous sign of things to come. Undoubtedly, there will be times when deals needed to be adjusted after investor feedback, and these tended to be higher risk (single-B rated) credits and debut issuers. The latter also have the additional challenge of shorter performance track records, adding to investor hesitation about investing in Asian high-yield bonds.
Nevertheless, this market sentiment has not deterred issuers or affected market confidence, as demonstrated by China property developer Agile Group’s highly oversubscribed deals.
Asia’s capital markets are deepening, with the breadth of issuers expanding. On the supply side, we expect the pace of issuance to continue, especially as Asian borrowers have followed a trend seen in the West over the last decade – increasingly favouring bonds as a source of financing rather than the traditional route of funding via banks, particularly as banks face capital constraints in the new Basel era.
On the demand side, we expect the base of investors to grow as Asia’s emerging economies continue to develop, especially as market infrastructure and legal frameworks grow to support bond markets.
Project bonds (typically used to finance infrastructure projects), for example, are a significant high-yield opportunity in Asia, given the region’s massive infrastructure funding needs in the next decade, and with China’s Belt and Road Initiative fuelling more opportunities.
There is certainly room for Asia’s bond markets to deepen, and we expect its high-yield market to continue its upward trend.
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