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[HONG KONG] Asia's high-yield debt specialists are facing a tougher time justifying their jobs as investment banks begin to shed product-specific roles in response to a sharp slowdown in activity.
High-yield corporate bond sales in Asia ex-Japan have plunged to US$4.0 billion from 10 deals so far this year, against US$16.8 billion from 43 deals in the same period in 2013, according to Thomson Reuters data. The numbers reflect financings for junk-rated companies, and exclude corporate perpetual and bank capital hybrids.
Plummeting activity is causing a lot of soul-searching in the sector. One senior high-yield banker says he is considering a switch to a more general coverage role, while management has asked another not to cover Indonesian high-yield clients in sectors like coal.
"Our bank wants to do less risky trades that are easy and convenient," said the banker. "We don't want to deal with reputational exposure." Few banks have devoted big teams to high-yield underwriting, but departures are becoming noticeable.
Luke Garner, co-head of high-yield capital markets for emerging Asia, left JP Morgan in April, and a source at the US bank says there are no plans to replace him. Credit Agricole also let go of a few high-yield sales and trading personnel recently, sources have told IFR.
On the buyside, Aviva parted company with Asian high-yield bond fund manager Tim Jagger in March.
The slowdown began last year when Chinese onshore bond yields became tighter than those offshore, making it cheaper and more convenient for issuers to borrow at home. Chinese property developers, the main drivers of high-yield issuance in Asia, have all but vanished from the international markets in the first half of this year.
China Aoyuan Property Group was the only such developer to issue a public deal that was not a tap this year. Evergrande Real Estate privately placed a US$300 million three-year bonds in January, while Oceanwide Holdings tapped its existing 9.625 per cent notes due 2020 last month.
However, expectations are mounting that activity will pick up in the second half, posing a conundrum for arrangers. Volatility in the onshore Chinese bond markets and tighter scrutiny from PRC regulators will prompt issuers to borrow in the more liquid and stable US dollar market, bankers say.
Reverse enquiries for high-yield supply are also forecast to support potential deals from South-east Asia.
"The overall backdrop is positive," said a senior high-yield banker.
"Investors have been placing reverse enquiries and even showed interest in private placements. We've heard of investors willing to single-handedly take US$200 million in private placements, which is something I haven't heard of in years."
South-east Asian high-yield activity is already heading for its most active month since the start of the year. In June alone, Indonesian textile manufacturer Sri Rejeki Isman and Indian car parts maker Samvardhana Motherson Automative Systems issued US dollar bonds for US$350 million and US$300 million, respectively.
Bankers are still hesitant to call a revival to 2013 levels, even though there is hefty refinancing due in 2017 from high-yield issuers. Standard & Poor's said China property high-yield maturities amount to US$4.7 billion next year and to peak at US$8.3 billion in 2019. This excludes onshore bonds, banks borrowings and high-yield bonds it doesn't rate.
This leaves investment banks having to make a delicate choice between maintaining headcount and cutting deeper into their high-yield ranks.
"If the high-yield market continues to struggle, having a dedicated high-yield team will become an issue. Even a dedicated high-yield syndicate is too much," said a senior debt syndicate and origination manager.
"Asia can't have dedicated HY teams because the client base is not wide enough. You need a team that can be flexible and fungible across products and regions."
Some senior bankers are in wait-and-see mode.
"It's a really difficult question to answer because, frankly, there isn't a clear indication of what we could expect in the future," said a Hong Kong-based headhunter. "If you overcut, you'll be in a lot of trouble if the market bounces back; but, if we don't see a turnaround in the next six months, banks could be forced to make more adjustments."