Friday, July 31, 2009
Liquidity woe for high-yield Asian bonds
--fewer issuance, lack of liquidity, increasing defaults increase the risk of Asian HY bonds. Liquidity woe for high-yield Asian bonds By Lindsay Whipp in Tokyo Published: July 31 2009 03:00 Last updated: July 31 2009 03:00 Returns on Asian high-yielding corporate bonds have significantly outperformed their peers in developed markets so far this year, with non-financial companies showing returns of 53 per cent, according to the Bank of America Merrill Lynch indices. That compares with 28 per cent for the US and 34 per cent in Europe. Markit's iTraxx Asia ex-Japan high-yield credit default swap index has also narrowed significantly from its October peak of 1,500 basis points, to 600 basis points on July 28, indicating improving demand for such bonds. However, the high-yield market is a long way from its pre-crisis heyday of abundant liquidity when investors had a huge appetite for risk. Significant hurdles to regaining this point remain, analysts say. First, the dollar-denominated non-investment grade market for Asia-Pacific borrowers, an important gauge of international investor sentiment, remains moribund. The only issuance this year has been from Power Sector Assets & Liabilities Management (Psalm), which raised $1bn in May, and which Moody's rated B1, four notches below investment grade. However, Psalm is a quasi-Philippine government entity - a status that may provide investors with a level of reassurance they may not get from independent companies. By contrast, US high-yield debt sales have reached $55.4bn so far this year, an increase of more than half from 2008, according to Dealogic. Instead of raising money in dollars, companies in Asia are selling debt in local currency. There have been $16.3bn worth of such local currency high-yield bond issues this year in the Asia-Pacific region excluding Japan, the data shows. Second, the Asia ex-Japan high-yield dollar bond secondary market is severely lacking liquidity as hedge funds and investment bank proprietary trading desks reduce their participation. Brayan Lai, a credit analyst at Calyon Corporate & Investment Bank in Hong Kong, estimates that liquidity is probably still less than a quarter of what it was two years ago. This means much sharper price moves compared with more normal market conditions. "Bid-offer spreads are still pretty wide," Mr Lai said. "There are a certain number of distressed players and hedge funds who remain in Asia but it's still quite thin compared with the market four or five years ago." Mr Lai continued: "If you've invested in these issues, you have to take a much longer term view. Liquidity is very thin, so you have to treat it very much like a bank treats a loan it gives to a company, you're basically locked in for that period of time." The third hurdle relates to the upward trend in defaults that is putting off investors. According to Standard & Poor's, defaults on bonds in the Asia-Pacific region have increased to 12 cases since the beginning of the year, including subsidiaries of companies based outside the region. There were seven defaults in the whole of 2008, S&P says. Ian Thompson, chief credit officer at S&P, estimates that defaults are likely to peak this year to about 10 per cent of the speculative grade debt. That's similar to the levels seen during the Asian financial crisis in 1998. The sectors that appear to have suffered the most defaults are in the property, export-related and construction industries. Mr Thompson said: "Credit is a lagging indicator. For some [companies] they've got pressures now and maybe [there is pressure] in sectors that won't recover as quickly. By and large, there should be a spike in defaults and a spike in negative outlooks followed by improvement." Included in these default numbers is what S&P characterises as "distressed buying back" of bonds, with investors agreeing to the distressed terms as they feel they will get a better deal than going through the bankruptcy process. "It's apparent there's a loss of economic value and loss on the part of the investors, we view that as a distressed exchange and view distressed exchanges as akin to default," Mr Thompson said. Calyon's Mr Lai remains cautious about the outlook for high-yield debt in Asia. He says the economic situation remains difficult and this can have repercussions on the growth companies that largely make up the high-yield sector, as they are usually relatively leveraged and are dependent on a benign macro environment for profits. "The economic situation looks tough with no clear certainty when the tide will turn, which means high-yield credits could come under more distress," Mr Lai said. "I wholly recommend staying in Asian investment-grade credit because of above reasons, better risk/reward dynamics and also for much better liquidity, given that the market composes fewer players today."