* Investors see value in risky credit despite EU turmoil
* Buyers ignore record low yields for junk bonds
* Fixed income still safer than equities
By Christopher Langner
March 22 (IFR) - The combined order book of US$13bn for
US$1.385bn of new bonds from four junk-rated issuers yesterday
showed that the Cyprus bailout crisis has done nothing to dent
investors' appetite for risky Asian credits, even with yields
near record lows.
The four issues came only days after Cyprus rejected the
onerous terms of an international bailout, leaving its banking
system on the brink of collapse and raising the risk of a first
exit from Europe's single currency.
The VIX Volatility Index spiked to around 14 and stock
markets remained under pressure all week as investors waited for
Still, demand for Asian high-yield asset class has grown.
The reason for this is simple: "High-yield is the best place to
invest right now," said a credit analyst in Singapore.
The statement was proven in numbers. Indonesian developer
Alam Sutera, rated B2/B, sold a US$235m seven-year non-call-four
Reg S/144a bond to yield 7.25% on orders of US$4.5bn. Another
developer from the Philippines, unrated Filinvest Development,
priced a US$300m 2020 bond at 4.25% after drawing demand for
Star Energy Geothermal, rated B2/B+, attracted orders of
US$4bn for a US$350m paper sold at a 6.125% yield. Bank Rakyat,
split rated at Baa3/BB+, sold a five-year Reg S at a yield of
3.125% after getting orders of US$2.65bn.
One private banker in Singapore explained the
counterintuitive demand by saying her clients were shunning
low-yielding government securities. As for equities, they still
remember losses incurred during the 2008 crisis and they do not
like the volatility that goes with the asset class.
RISKY BUT STEADY
Indeed, year to date, the JP Morgan non-investment-grade
Asian Credit Index (JACI) has seen a maximum close-to-close
volatility of 3.7% on the 10-day moving average. Meanwhile, the
same measure for the Hang Seng Index has hit 18.5% this year and
has not fallen below 5%. The same reading for the S&P 500 index
recently peaked at 19.25% and the index's lowest volatility in
2013 was 3.88%.
For a graphic of the volatility in the non-IG JACI vs the
Hang Seng Index please click on this link: reut.rs/YqbSLE
The volatility in equities is especially worrisome for
private banking accounts and hedge funds, which, in Asia, have
been making increased use of leverage. For those using borrowed
money to invest, the predictability of return is very important,
since brokers trigger margin calls if the value of the assets
falls a certain amount, usually around 10%.
While such swings are not uncommon in the equity markets,
they occur much less often in high-yield credit. On March 4, for
instance, trading in the shares of most Chinese developers was
halted in Shanghai as the property sub-index dropped 10% in one
day. Meanwhile, the dollar bonds of the same companies, most
rated below investment-grade, dropped less than 1.5%.
Fixed-income investments also offer a better chance of
recovery in case the company gets into financial trouble because
bondholders have precedence over shareholders in liquidation
Investors remain upbeat about the potential for returns from
the sector, in spite of the strong performance logged recently.
The non-IG JACI has returned 14.4% in the past 12 months, and
the average yield on the index dropped to one of its lowest
levels of all time at 5.73% last week, at the same time as the
average maturity on it was extended to 9.7 years.
Yet, a high-yield portfolio manager in Chicago said that,
while yields on US junk bonds were at all-time lows, their
spread over Treasuries - another preferred measure of risk - was
hovering around 500bp, well above the all-time low of near
260bp. Default rates were at recent lows, which added to the
safety of the investment, said the portfolio manager.
Nevertheless, for all the apparent advantages, Asian
investors may be taking a rosy view of the asset class and
piling on more risk than they realise. After a strong run in the
past two years, prices of junk bonds are more likely to drop
than to rise, while default rates may rebound from historical
Being atop the capital structure may bring little advantage,
either. Most high-yield bonds in Asia are from China or
Indonesia, where bankruptcy procedures are unpredictable.
Yet, as one private banker in Singapore said: "If you can
afford to hold these bonds to maturity and you are comfortable
with the credit, they are the best you can get now."
(Reporting By Christopher Langner; Editing by Steve Garton)