A $100 Billion Comedown: Soaring Defaults Shrink Asia’s Junk-Bond Market

Once a place for global investors looking to profit, Asia’s junk bond market has shrunk dramatically and new debt issuance has slowed to a trickle.

Less than 18 months ago, the dollar bond market for non-investment companies from China to Indonesia exploded. It is close to $300 billion in size, thanks in large part to multiple bond sales by Chinese property developers like China Evergrande Group..

EGRNF 15.13%

Since then, a series of defaults and massive sell-offs have resulted in massive losses for investors, erasing 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 high-yield bonds in Asia – excluding defaults – is currently around $184 billion.

“This is completely unprecedented, especially for Asian credit markets,” said Avanti Save, managing director, Asia credit strategy at Barclays.

Ms. Save said China’s entire high-yield real estate sector is trading as if it were in financial trouble; 60% of developer bonds that have not defaulted are trading at less than 40 cents against the dollar.

While investors have retreated from all riskier asset classes this year, including fast-growing tech stocks and US junk bonds, problems in the high-yield markets of Asia is different and longer lasting.

The market is bearish after years of rapid growth. Chinese borrowers, including real estate firms such as Evergrande and Kaisa Group, have taken advantage of low interest rates and capital inflows into the region to raise large amounts of dollar-denominated funding. In January 2020, Evergrande and a key subsidiary sold $6 billion in bonds in a matter of days, which shows that the market is deepening.

The markets have been looking increasingly shaky lately: Stocks, bonds, and cryptocurrencies have all fallen in value as investors struggle to manage volatile global financial markets. WSJ’s Caitlin McCabe looks at some of the reasons behind the recent market frenzy. Photo: Spencer Platt / Getty Images

Money manager including BlackRock Inc.,

Pacific Investment Management and UBS Asset Management have also promoted the track record of investing in high-yield bonds in Asia, backing these assets for attractive returns and historically low default rates compared to junk bonds in the US and 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 restrict their borrowing. Home sales also began to dry up, and a financial crisis ensued. Investors dumped the junk bonds of many developers, causing prices to drop and yields to skyrocket.

Evergrande and Kaisa defaulted on their dollar debt in December, the two largest of more than two dozen Asian high-yield issuers have defaulted internationally since the beginning, according to Goldman Sachs data. 2021, according to data from Goldman Sachs.

When companies default, their bonds are removed from the global bond index, reducing the total face value and market value of the benchmark.

Yields on the widely watched ICE BofA index of high-yield Asian dollar bonds were recently 15.1%, compared with 7.8% a year ago. That yield is 23.6% for a similar index for Chinese companies. The broader universe also includes highly rated sovereign bonds from countries like Pakistan and Sri Lanka, as well as bonds issued by Asian energy companies and Macau casino operators. onion.

Chinese corporate debt accounted for more than half of Asia’s junk bond market a year ago. Now, it accounts for a much smaller share of the Asian high-yield market. “It is difficult to duplicate the contributions that Chinese real estate has made,” said Sandra Chow, co-head of research for Asia Pacific at debt research firm CreditSights. She added that more defaults could happen before the bottom of the market is found.

The drop has also affected demand for new bond deals. In the year to May 10, Asian high-yield issuers sold just $2.5 billion in debt, down 90% from $24.2 billion in the same period in 2021, according to Dealogic. That compares with a 73% year-on-year decline in high-yield US issuance, the data showed.

Rishi Jalan, Citigroup Of Inc.

Although there have been some recent bond deals from renewable energy companies in India, overall investor demand in the high-yield market, said the head of Asian debt institutions. still relatively weak.

“Investors are feeling the pain for Chinese property, and it is re-valuing everything,” Jalan said, adding that the troubles could take some time to heal. evaporate.

He said current yields – coupled with US rate hikes – have prompted many corporate borrowers to sell new dollar bonds as uneconomical. As a result, some companies have decided to raise capital in other ways, such as through the private lending market.

Amy Kam, senior portfolio manager at Aviva Investors in London and an Asian credit veteran, said she remains hopeful that conditions in Asia’s high-yield markets will improved.

“There will be survivors,” she said, referring to China’s property sector and its importance to the Chinese economy. “We’re trying to stay with stronger companies that we think can withstand the downturn.”

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https://www.wsj.com/articles/a-100-billion-comedown-soaring-defaults-shrink-asias-junk-bond-market-11652693402?mod=rss_markets_main A $100 Billion Comedown: Soaring Defaults Shrink Asia’s Junk-Bond Market

Edmund DeMarche

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