LI, Tao @ Hong Kong

A person walks past a HSBC branch in Hong Kong. The bank said high-yield bonds can provide attractive returns despite the current low interest rate environment. Mike Clarke / AFP

Issuance to top $80b this year, 58% of which is said to be high-yield

Asian high-yield bonds could be promising investments in the next few years, HSBC said Wednesday.

Fast-growing economies, attractive fundamentals, ample global liquidity as well as strong global demand for emerging market assets will all support an increase in the issuance of Asian high-yield bonds, said Cecilia Chan, chief investment officer of fixed income, Asia-Pacific, at HSBC Global Asset Management.

New issuance of Asian bonds is expected at $80 to $90 billion in 2011, among which high-yield corporate bonds will account for 58 percent of the gross supply, according to Chan.

Asian companies have sound financials with leverage lower than their US and European counterparts, the bank said. Strong growth in domestic consumption will help the upgrading of both sovereign and corporate credit rating, according to HSBC.

However, high-yield bonds are also normally considered to be a higher credit risk. Their credit ratings are usually marked as being either speculative-grade or below-investment grade, both of which embed a greater chance of default.

Wallace Lam, managing director of debt capital markets at HSBC, emphasized that high-yield bonds are not junk bonds, and that they can provide attractive returns despite the current low interest rate environment.

In comparison with equities, Lam said bonds provide more certainty of income via coupon payments, as opposed to equity dividends, although the latter also experiences less volatility.

However, Catherine Cheng, an analyst at Imperial Dragon Asset Management, told China Daily that the main reason for the popularity of high-yield bonds is because many companies are encountering trouble in raising capital from the bank.

“Apart from a higher risk, high-yield bonds also take on the liquidity issue – as the holders of these bonds will find it hard to sell them readily,” said Cheng.

The Asian high-yield portfolio is growing in terms of the number of issuers as well as in diversity. In 2010, as much as $13.7 billion of new assurance was seen in the region, in sharp contrast to a total of $3.7 billion in 2008 and 2009.

The strong momentum has continued in 2011. In the first quarter of this year, total new issuance was recorded at $6.9 billion. However, it was predominately driven by mainland corporate issuers, especially property developers. This sector alone issued almost $5.5 billion worth of bonds in the first three months, according to data provided by rating agency Moody’s.

Laura Acres, senior credit officer from Moody’s Investors Service said the wave of high-yield bonds issuance from mainland property developers this year is a result of the central government’s tightening policies in the property market.

Evergrande Real Estate Group Ltd, the second-largest developer by sales on the mainland, in January raised 9.25 billion yuan ($1.40 billion) in a sale of synthetic yuan-denominated bonds, paying a coupon of 7.50 percent on its three-year notes and 9.25 percent on the five-year tranche.

Other mainland developers, including Shimao Property, Shui On Land Ltd and China SCE Property Holdings Ltd, have all sold high-yield bonds to replenish their capital this year.

In February, Standard and Poor’s released a statement which points out that the surge in bond sales by mainland property firms would weaken their credit profiles.

China Daily

(HK Edition 04/14/2011 page3)

http://www.chinadaily.com.cn/hkedition/2011-04/14/content_12322444.htm