Less than 18 months ago, the dollar-bond market was booming for non-investment grade companies from China to Indonesia. It was close to $300 billion in size, thanks to several bond sales by Chinese property developers such as China Evergrande Group.
Since then, investors have been hit hard by defaults and massive sell-offs, eroding more than $100 billion in value from a widely watched bond index. According to data from Bloomberg and Barclays Research, the total market value of Asian high-yield bonds — excluding defaulted debt — is now about $184 billion.
“This is absolutely unprecedented, especially for the Asia credit markets,” said Avanti Sev, managing director of Asia Credit Strategy at Barclays.
Ms. Save said the entire high-yield Chinese property sector was doing business as if it was in financial trouble; 60% of bonds from developers who haven’t defaulted are trading at less than 40 cents on the dollar.
While investors have pulled back from all kinds of riskier assets this year, including fast-moving technology stocks and US junk bonds, problems in Asian’s high-yield market are different and longer-lasting.
The market collapses after years of rapid growth. Chinese corporate borrowers, including real-estate companies such as Evergrande and Casa Group, took advantage of low interest rates and funds flowing into the sector to raise large amounts of dollar funding. In January 2020, Evergrande and a major subsidiary sold $6 billion worth of bonds in just a few days, pointing to the increasing depth of the market.
Money managers including BlackRock Inc., Pacific Investment Management Company and UBS Asset Management also promoted the investment merits in Asian high-yield bonds, which backed the asset for their attractive returns and low relative to junk bonds in the US. There were historical default rates. other parts of the world.
That all changed after Chinese regulators imposed limits on developers’ leverage, which forced Evergrande and some of its peers to curb their lending activities. Housing sales also began to dry up and funds began to run out. Investors dumped many developers’ junk bonds, causing prices to drop and yields to rise.
Evergrande and Casa defaulted on their dollar debt in December, according to data from Goldman Sachs, the two largest of more than two dozen Asian high-yield issuers that have defaulted on their international debt since early 2021 .
When companies default, their bonds are removed from the global bond index, reducing the overall face value and market value of the benchmark.
The yield on the widely followed ICE BofA index of Asian high-yield dollar bonds recently stood at 15.1%, up from 7.8% a year ago. The yield was 23.6% for the same index of Chinese companies. The wider universe includes junk-rated sovereign bonds from countries such as Pakistan and Sri Lanka, as well as bonds issued by Asian energy companies and Macau casino operators.
A year ago, Chinese companies accounted for more than half of the debt in Asia’s junk-bond market. Now, it makes up a very small proportion of Asia’s high-yield market. “It’s difficult to replicate the contribution of China’s assets,” said Sandra Chou, co-head of Asia-Pacific Research at debt-research firm CreditSights. She added that there could be more defaults before the market bottom is detected.
The fall has also hit demand for new bond deals. According to Dealogic, through May 10, Asian high-yield issuers sold only $2.5 billion in debt, down 90% from $24.2 billion in the same period in 2021. That compares with a 73% year-over-year decline in US high-yield issues, the data shows.
Rishi Jalan, Asia Debt Syndicate Head, Citigroup Inc., said there have been some recent bond deals from renewable-energy companies in India, but overall investor demand in the high-yield market has been relatively weak.
“Investors are feeling the pain in China’s real estate, and it is reevaluating everything,” Mr Jalan said, adding that the headwinds could take some time to dissipate.
He said the current yield—along with rising US interest rates—made it uneconomical for many corporate borrowers to sell new dollar bonds. Therefore some companies have decided to raise funds in other ways, such as through the private debt market.
Amy Kam, senior portfolio manager at Aviva Investors in London and a veteran at Asian Credit, said she expects conditions to improve in the high-yield markets in Asia.
Referring to China’s wealth sector and its importance to the Chinese economy, he said, “there will be survivors.” “We’re trying to stay with the strong companies that we think can weather the downturn.”