Junk bond investors stung by China look to India, South-east Asia
ASIAN junk bond investors are increasingly looking to smaller pockets of the market as a debt crisis among the biggest issuers, Chinese property developers, forces old playbooks to be rewritten.
Chinese real estate notes had long been one of the world's most-profitable trades. But a record string of defaults has ruined appetite and caused the nation's junk notes to tumble almost 27 per cent in 2022. Meanwhile, a worldwide debt rout has created a game of losing less. Money managers point to high-yield securities from India and South-east Asia as alternatives in this new era.
While those bonds carry risks of their own from vulnerability to US rate hikes to depreciation in their home currencies, they've fallen less than regional peers this year. Indian notes have lost nearly 11 per cent and Southeast Asian high-yield securities have shed 7.2 per cent, compared with a 19 per cent drop in the region's junk debt excluding Japan.
"We believe that the shape of the Asia high-yield market will permanently change to be one with a lot less China," said Dhiraj Bajaj, head of Asia fixed income at Lombard Odier in Singapore. Higher quality corporates and bank capital instruments from India, South-east Asia, Australia and parts of North Asia will likely see issuance rise, he said.
Chinese companies still sell a majority of dollar junk bonds in Asia, but their portion has decreased: they made up 61 per cent of issues this year, compared with 76 per cent in 2020 when China Evergrande Group's trouble repaying its massive borrowings triggered the nation's developer debt crisis.
That's prompted overall Asian high-yield dollar corporate note issuance to slide 86 per cent so far this year, an even bigger drop than for global counterparts amid a worldwide debt rout.
BT in your inbox
Start and end each day with the latest news stories and analyses delivered straight to your inbox.
The shrinking menu of options is also sharpening a focus on some of the more appealing prospects of parts of the market, including Indian green debt as the country seeks funding to target 50 per cent generation capacity from non-fossil fuels by 2030.
"I expect growth from the Indian and Indonesian high-yield markets, notably Indian renewables, given the country's ambition to triple capacity by 2030," said Amy Kam, a senior portfolio manager at Aviva Investors Global Services in London.
As for China, authorities there have been unveiling measures to ease stress in the credit market since March, cutting key interest rates, supporting bond sales by builders and taking stakes in some firms. But that hasn't stopped the unprecedented wave of defaults, while some offshore bond investors have suffered more losses than local counterparts.
"The implications of the systemic default wave out of China property are grave," said Bajaj. "The swift changes in policy, significant amounts of hidden debt by swathes of private companies, lack of debt resolution mechanisms when defaults happen, and inherent bias toward subordinating offshore bondholders won't go unnoticed and unforgotten for perhaps a decade or two."
Investors are also considering alternatives like so-called crossover credits with BBB ratings, additional tier-1 subordinated bank capital notes and high-yield credit in emerging markets outside Asia, he said.
AllianceBernstein likes "very solid" BB rated names in Asia excluding China, especially some utility firms, and developers in China's real estate sector that will be able to survive, said Jenny Zeng, co-head for Asia-Pacific fixed income at the firm. "China still needs the sector," she said. BLOOMBERG
Share with us your feedback on BT's products and services
