Asia's high-yield bond market builds beyond China

Fri Jul 18, 2014 2:57am EDT

* Indian, Indonesian companies lining up deals

* China dominated Asian high-yield bonds in first half

* Yield-hungry investors looking to diversify risks

By Lianting Tu

SINGAPORE, July 18 (IFR) - The pipeline for Asian high-yield bonds is building once more after a relatively quiet second quarter. This time, however, non-Chinese borrowers are taking centre stage as investors seek to diversify their portfolios beyond the PRC real-estate sector.

In the past three weeks, at least eight Asian companies have sold, or announced plans to sell, sub-investment-grade US dollar bonds. Indian and South-East Asian borrowers, such as Thai Airways, Modernland Realty and Pakuwon Jati, are among the latest to emerge with new issues.

"My sense is that credit investors will welcome anything outside of China," said Raymond Chia, head of Asian credit research at Schroders.

"The diversification requirement is strong," Chia said. "Anything outside of the conventional Chinese property and Chiense state-owned enterprise space will be likely to attract good interest."

INDIAN INTEREST

A slew of Indian companies, including Rolta India, Greenko Group, Global Cloud Xchange and Tata Steel , announced high-yield bonds in the past few weeks on the heels of the election of pro-business reformer Narenda Modi as prime minster.

No Indian entity sold a high-yield bond in dollars in the first half of this year, while China accounted for US$7.6bn, or 76% of all US dollar corporate high-yield issues out of Asia.

"In terms of new-issue supply, the Indian high-yield market has historically underwhelmed," said Haitham Ghattas, head of high yield capital markets at Deutsche Bank.

"Given the scale of the economy and financing needs of the corporate sector, it's natural that the market should develop," Ghattas said. "Investors are encouraged by the proposed pro-market policy reforms coming out of the new government and they believe India is an attractive destination to put their money to work."

Excluding government-linked entities, Asian companies sold US$9.9bn of high-yield bonds in G3 currencies in the first half of 2014, according to Thomson Reuters data. That figure was down 40% year on year.

More Indian corporations are looking offshore after Modi's government announced a cut in withholding tax on overseas coupon payments in last week's budget, lowering the rate to 5% from 20%.

Indian borrowers, however, still need to issue bonds via offshore subsidiaries as a way to circumvent regulations that restrict overseas interest payments to no higher than 5% over Libor.

STRONG PERFORMANCE

A firm secondary market and the dovish rates outlook from the US Federal Reserve have underpinned a rising risk appetite and investors' continued search for yield. Indeed, investors believe the US market is key to the success of the forthcoming Indian offerings, and all the recent deals announced have adopted the 144A/Reg S format, which allows their purchase by qualified institutional investors in the US.

Rolta and Global Cloud Xchange are in the technology sector and Greenko is in the energy sector - segments that are popular with US buyers. Tata Steel is also a well-known name in the US.

The stellar secondary performance during the second quarter is also reducing the cost of funding for Asian borrowers. The JP Morgan Asia High-Yield Credit Index rallied 5.8% in the first half and 4.4% in the second quarter alone.

"Bond markets have been robust this year and we expect investors to continue to be attracted to high-yield names, especially in the non-Chinese sector for diversification reasons," said Winston Tay, head of debt syndicate, South-East Asia at the Royal Bank of Scotland.

"Investors will, as always, be discerning on both the credit and covenant package, but we expect the pipeline for non-Chinese high yield issuance to remain strong as issuers look to tap the ample liquidity in the system and to diversify away from the bank loan market," he said.

The demand also comes from private-banking clients in Asia seeking high-yielding paper, although Asian institutional investors tend to ask for higher premiums.

"Despite the good appetite for non-Chinese names, investors will still ask for yield as some of these are maiden issuers. Also, I think managing the pipeline is important, as the last thing we want is an exodus of deals like what we saw in China property back in Q1 of each year," said Chia at Schroders. (Reporting by Lianting Tu)

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