Junk bond dealmaking rebounds as Asian yields hit 3-year low

Hong Kong

ASIA'S high-yield bond market jolted back to life last week after a rally in credit spreads triggered a flurry of new issues.

Six Asian companies with sub-investment grade, or junk, credit ratings sold US dollar bonds in just two days, adding to hopes of a recovery after a dismal first half for new issues.

The rebound in dealmaking comes after JP Morgan's Asia credit index showed that spreads over US Treasuries for non-investment grade borrowers tightened 61 basis points in July. The average yield to maturity fell below 6.3 per cent - a three-year low - at the end of the month.

Meanwhile, yields on 10-year US Treasuries hit a four-year low on July 8 and have shrunk around 75 basis points since the start of the year.

Tighter spreads, strong investor demand for yield and a more stable market have created an attractive window for companies to raise additional financing.

Thomson Reuters data show that July was the busiest month of the year for US dollar high-yield issues in Asia with a tally of US$2.82 billion, including hybrid financings but excluding Japan and Australia.

"It's an excellent time for (high-yield borrowers) to print," said a Hong Kong-based investment banker. "A lot of issues have been opportunistic, but it's good to see them coming and we've been encouraging them to go. Even just a few months ago, we thought the market was totally dead."

Asian high-yield bonds from the likes of Indonesian real estate developer Lippo Karawaci and Chinese sporting goods supplier 361 Degrees International have handed investors outsized returns. In February, Lippo attempted to print a US$100 million seven-year bond, callable after four years, at a yield of 9 per cent. After a lacklustre response, and despite the rare step of sweetening price guidance during marketing, the deal was called off. Last week, it reopened its 2022 bonds at a yield to maturity of just 6.203 per cent and raised US$260 million on orders in excess of US$1.25 billion.

361 Degrees, rated BB by Standard & Poor's and Fitch Ratings, printed US$400 million of five-year bonds in May at 7.48 per cent. Those bonds now yield 5.492 per cent, having gained seven points.

Asian investors believe the high-yield rally has further to run as low yields in developed markets drive more investors into the region. "I do think the market can tighten further," said Sean Chang, head of Asian debt investment at Barings Asset Management. "This rally could be sustained for much longer." IFR