Asian high-yield may be closing for the year
* New high-yield deals flounder as sentiment shifts
* Asian investors booking 15% profit ytd
* Accounts moving into more liquid assets
By Christopher Langner
Sept 27 (IFR) - The unsuccessful attempt to issue dollar bonds by Chinese aluminium company China Hongqiao Group looks like a sign that high-yield investors are done for the year after enjoying a strong run this quarter.
On Thursday, the company postponed its US$300m deal indefinitely and became the second high-yield issuer in the region to do so in the past week. The move was unexpected, as some had bet that the optically attractive high 11% area price guidance for a BB-/BB credit would be enough to get it across the finish line.
Some pointed to credit-specific questions about the company. But investors and bankers seemed to agree that Hongqiao's fate was determined by broader issues and may indicate that the high-yield market in Asia is closing shop - at least for weaker credits.
That said, Hongqiao's case was fraught with trouble from the start. Investors were concerned about the company's procuring contracts and China's growth, and there seems as well to have been a mismatch of pricing expectations between the company and the market. The latter was expecting something in the 12% area while the former wanted an 11% handle.
But more than these smaller issues, Hongqiao was also a harbinger of a quick change in the mood of investors. When the company set off on a roadshow last week, Asia had just seen its busiest ever week of Single B issuance.
Sentiment, though, turned around completely, and by the time the company announced its deal officially, several accounts had already started to indicate that they are getting a lot pickier, especially in high-yield.
Bankers and investors say that after a very good run this year, and with uncertainty building in Europe and the US, many fund managers are booking profits and moving in to more liquid bonds or cash.
It makes sense. As they close third quarter books on Friday, accounts that bought the bonds that comprise the high-yield JP Morgan Asian Credit Index (JACI) are booking gains of more than 15%.
"Any sensible investor will take profit," said a portfolio manager in Singapore.
While other investors were cautious about how much to take off the table, most agreed some prudence would be in order.
"You cannot predict the news flow in high-yield and if you decided you were done two months ago you would have missed the best of the run," said another Singapore-based portfolio manager, indicating that he would not move completely into haven assets.
"However, I wouldn't advocate chasing Single B names and I would shorten duration - it's time to be more defensive."
The first portfolio manager also said he was selling Single B names and moving his high-yield allocation into better quality Double B names and even lower Triple B.
"If the market moves all of a sudden, there can be a major sell-off on the Single-B names," he said.
Indeed, if booking a nice profit for the year were not incentive enough for the buyside to start reconsidering positions, this week investors had a fresh reminder of what happens to high-yield Asian bonds when the tide turns against them.
The bonds of Indonesian miner Bumi (B1/B+) dropped some US$15 in the last couple of days amid continuing concerns over corporate governance.
"We were reminded how liquidity quickly disappears on these bonds - the price move was simply because there was nobody on the other side to buy," said the manager.
With so many concerns, it is no surprise that Hongqiao would have struggled to print its deal. The trend had already been flagged by Mongolian lender XacBank (B1/B) earlier in the week, as it had pulled the plug on its own proposed dollar bond for the second time this year.
There was still one other deal which remained officially open, a five-year bond from property developer China South City. But judging by the fate of the other junk-rated deals attempted this week, this one will probably be pulled soon as well.
Investors are now skittish and if they are to buy high-yield, they want quality names. Anything below BB+ has to offer very high returns, otherwise it may end up on the shelf. (Reporting By Christopher Langner; editing by Alex Chambers, Julian Baker)
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