Investors’ hunger to turn a quick profit has led to record demand for high-yield Asian debt securities. It is expected that this year will be a record year for issuing such instruments. However, excessive investor activity could lead to a bubble in the bond market.
Borrowers have attracted more than $18 billion in the market this year, beating 2010 record figures of $16.2 billion, according to the research firm Dealogic.
Over the past year, the amount of money in Asia has tripled. The number of junk bonds has grown to a third of total bonds and investors worldwide are buying them up. This trend especially accelerated after central banks reduced yields on treasury bonds in an effort to support economic growth.
“In light of the crisis, many investors have set their sights on the Asia market. The biggest demand for junk securities on the Asian market is coming from private banks which currently own a 30% share,” says Steph Bosworth, a consultant in the Due Diligence department at 2K Audit – Business Consulting/Morison International.
Chief Economist for the CME Group, Blu Putnam, explains that “the policy of zero interest rates being carried out by the Bank of Japan, the U.S. Federal Reserve, the Bank of England, and the European Central Bank has led investors to be less fearful of impending financial disaster. At the same time, the regulators’ policy is causing investors worldwide to invest in risky assets. Buying ‘bad’ Asian debts is just a part of this trend.”
Last year, the market was dominated by Asian developers who made their way into offshore markets to raise funds amid slowing operations at home. But this year the situation is different. Now investors are themselves dealing in the Asian markets. Experts believe this will allow issuers to invest in their businesses more confidently.
“Record low bond yields in markets that are traditionally considered safe have forced investors to look for profits in more unusual places, like in Asian countries. Companies with questionable credit histories can borrow at historically low rates. The U.S. and European markets won’t become alternatives to Asia,” says Hilary Walsh, Finance and Trade Manager for Euromonitor International.
“The slowdown in the Chinese economy in 2012 put a limit on the amount of credit resources available to developers,” Walsh said. “In many cases, the only way to raise money was by issuing bonds. We are seeing higher quality investments in the Asia-Pacific region.”
Buyers Take the Risk
Lanta Bank trader Vitaliy Ledovskiy says that the majority of purchases are from hedge funds and investment banks from the EU and Japan. Among them are financial market leaders like HSBC, UBS, Citigroup, and Deutsche Bank.
There is great interest in the high-yielding Asian bonds from American companies. In March, Chinese developer Kaisa Group met with investors in New York, Boston, and Miami and released $550 million in bonds. The issuer received orders for $10 billion. A quarter of the bond buyers were from the U.S.
Yet investors aren’t just buying Chinese junk bonds. Indian telecommunications giant Bharti Airtel, which has a speculative-grade rating from Standard & Poor’s, issued bonds worth $1 billion in March, but then received orders totaling $9.5 billion. In January, gaming establishment Melco Crown Entertainment released eight-year bonds worth $1 billion. More than two-thirds of buyers were American investors.
For American investors, revisiting the Asian bond market promises high-yield returns, but investors have recently suffered losses. The last time Americans entered this market was 2011, when they bought more than $50 million in Asian bonds.
Prices for high-yield debt securities in the region fell in recent years because Standard & Poor’s lowered the U.S. credit rating. In addition, there were questions about accounting practices in the Chinese forestry goods company Sino-Forest. But this year, bonds have been on the rise. JPMorgan Chase’s Asian corporate debt securities index grew 2.6%.
Chinese solar panel manufacturer Suntech Power turned out to be a real headache for investors. The company announced a default on payment of $541 million in bonds. A group of creditors from the U.S. is preparing for a legal battle, but Chinese creditors have priority in purchasing the company’s shares, if Suntech is liquidated.
This event caused American investment funds to be choosy about Asian bond purchases. They have begun investing in gambling, telecommunications, and utilities companies. Meanwhile, developers don’t trust investor debts.
The news that the Chinese economy has survived the decline brought investors optimism. The country’s economic growth is supported by strong internal demand. “In the fourth quarter of 2012, bond growth rates were 5%,” states a report from the Asian Development Bank. “The bonds market in Eastern Asia reached $6.5 trillion. Government bonds shrunk some, but this decline was offset by increases in the corporate sector.”
China and Indonesia were the fastest growing markets for corporate bonds in the region. In the final quarter of 2012, they grew 9.4% and 9.3%, respectively. The bond market also grew relatively quickly in Thailand and Malaysia.
In the first two weeks of this year, developing countries saw cash inflows from the sale of junk bonds in the amount of $3.2 billion, estimates Dealogic. The biggest demand was for developer securities, which speaks to the decent prospects in the real estate sector.
Moreover, the demand for developer debt securities exceeded the supply by several times. Asian companies have been able to turn good dividends. Hopson Development sold bonds for $300 million, which had a rating of Caa1 from Moody’s Investors Service, and a yield of 9.875%. The rating reflected weak sales from the debt-ridden real estate operator. The 9.875% rate of return was considered by analysts to be too low for securities of that level. Nevertheless, the bonds displayed decent growth and their value grew quicker than other issuers’. Shimao Property Holdings listed $6 billion in debts in the Asian markets, excluding Japan, which peaked last September.
“In Malaysia, investors are most interested in financial sector securities, like, for example: Project Lebuhraya Usahasama, Cagamas, Khazanah, Pengurusan Aset Air Bhd., Malaysian Banking, Prasarana, Binariand GSM, CIMB Bank, Malakoff Corp., and Public Bank,” said Alpari analyst Anna Kokoreva. “In Korea, investors were attracted to insurance company and pension fund bonds. The top ten most popular included corporate bonds from Korea Land & Housing Corp., Korea Housing Finance, Korea Deposit Insurance, Korea Finance, Industrial Bank of Korea, KDB Daewoo Securities, Korea Electric Power, Woori Investment and Securities, Korea Investment and Securities, and Mirae Asset Securities. Singapore is also attractive thanks to financial sector bonds.”
According to the Asian Development Bank, the high demand for bonds eased management of the regional economy and strengthened Asia’s financial stability. This also allowed for an increase in liquidity in the bond market.
“The shares of foreign holdings in the region’s local currency government bond markets have continued their upward trajectory For example, more than 30% of Indonesian bonds are now held by foreigners, while Thailand’s foreign share of bond holdings has reached 16%. Large inflows of foreign funds can complicate policy management. In response, authorities in the region have implemented measures to manage the inflows of funds,” states a bank report.
The favorable situation in the bond market has stimulated share growth for Asian companies. In March, Thai BTS Group held an IPO for their light rail business: the company raised $2.1 billion and set a record for Thailand’s biggest IPO.
An Asian Bubble
Yet some investors are apprehensive of such rapid growth in the Asian junk bonds market. The head of Coutts bank recently announced that some sectors of the junk bonds market are overheated. This could threaten to burst the bubble in the bond market.
Hilary Walsh says this is unlikely: “This year could be a record for issued bonds, and moreover, we are not expecting the market to overheat or a bubble to burst. In time, the demand for Asian debt will cool, especially since developed economies, especially in the U.S., are gradually recovering.”
But actions taken by Chinese authorities are having a negative impact on investors, adds Steph Bosworth. Bond investments with indeterminate maturity have become more risky.
The Chinese government is trying to get the situation under control. Recently, the China Securities Regulatory Commission (CSRC) held a meeting the heads of the country’s largest brokerage houses and told them that it wants to create a market for high-yield bonds. According to the Central Bank, of the 2.2 trillion yuan in corporate debt instruments, bonds of 124.1 billion yuan, or 5.6%, were released under the supervision of the CSRC.
“Asia is a combination of various types of economies and has a number of stabile financial centers which aren’t likely to let the debt market burst,” says Alpari’s Anna Kokoreva. “For example, Hong Kong and Singapore have the highest credit rating, while advanced countries are little by little losing theirs. The Asian bond market has great potential and talk about a bubble is premature.”
Meanwhile, assessing the risks of junk bonds has become more difficult. Blu Putnam says that “investors need to weigh the risk of a default and future price risks which are based on the volatility of the bond market. Many analysts say that low interest rates and quantitative easing policies have lowered the risk of default. But the price risks remain, especially since many bonds are currently undervalued.”
According to him, if the U.S. Federal Reserve cuts its program of buying up assets, the market will be dominated by volatility that will then spread to the Asian bond market. Yet volatility in the bond market would reduce the risk of a default.
Text: Vera Kozubova