A $100 Billion Descent: Soaring Defaults Shrink Asia’s Junk Bond Market
Less than 18 months ago, the dollar bond market for lower quality companies from China to Indonesia was booming. It approached $300 billion, thanks in large part to numerous bond sales by Chinese property developers such as China Evergrande Group.
Since then, a series of defaults and a sell-off have resulted in heavy losses for investors, wiping more than $100 billion in value from a widely watched bond index. The total market value of Asian high-yield bonds – excluding defaulted debt – is now around $184 billion, according to data from Bloomberg and Barclays Research.
“This is completely unprecedented, especially for Asian credit markets,” said Avanti Save, managing director of Asia credit strategy at Barclays.
Ms Save said China’s entire high-yield real estate sector was trading as if it were in financial trouble; 60% of developer bonds that haven’t defaulted are trading at less than 40 cents on the dollar.
While investors have balked at all sorts of riskier assets this year, including fast-growing tech stocks and US junk bonds, the problems in the Asian high-yield market are distinct and longer-lived.
The market drop follows years of rapid growth. Chinese corporate borrowers, including real estate companies such as Evergrande and Kaisa Group, have taken advantage of low interest rates and inflows of funds into the region to raise large sums of dollars. In January 2020, Evergrande and a key subsidiary sold $6 billion worth of bonds within days, indicating the growing depth of the market.
Fund managers including BlackRock Inc., Pacific Investment Management Co. and UBS Asset Management had also promoted the merits of investing in Asian high-yield bonds, favoring the assets for their attractive yields and historically low default rates. compared to junk bonds in the United States and other parts of the world.
That all changed after Chinese regulators imposed limits on developer leverage, which forced Evergrande and some of its peers to curb their borrowing activities. Home sales also began to dry up and a financing crisis ensued. Investors dumped junk bonds from many promoters, driving prices down and yields higher.
Evergrande and Kaisa defaulted on their dollar debt in December, the two largest among more than two dozen Asian high-yield issuers that have defaulted on their international debt since the start of 2021, according to Goldman Sachs data. .
When companies default, their bonds are removed from global bond indices, reducing the aggregate face value and market value of benchmark indices.
The return of a widely tracked ICE BofA index of Asian dollar high-yield bonds was 15.1% recently, down from 7.8% a year ago. This return was 23.6% for a similar index for Chinese companies. The broader universe also includes junk-rated sovereign bonds from countries such as Pakistan and Sri Lanka, as well as bonds issued by Asian energy companies and casino operators from Macau.
A year ago, Chinese corporate debt accounted for more than half of Asia’s junk bond market. Today, it represents a much smaller proportion of the Asian high yield market. “It’s hard to replicate the contribution of Chinese real estate,” said Sandra Chow, co-head of Asia-Pacific research at debt research firm CreditSights. She added that more defaults could occur before the market bottom is found.
The fallout also affected demand for new bond transactions. In the year to May 10, Asian high-yield issuers sold just $2.5 billion of debt, down 90% from $24.2 billion in the same period in 2021, according to Dealogic. That compares with a 73% year-over-year decline in US high-yield issuance, the data showed.
Rishi Jalan, head of Asian debt syndicate at Citigroup Inc., said that although there have been recent bond deals from renewable energy companies in India, overall investor demand in the high yield market has was relatively low.
“Investors are feeling the pain in real estate in China, and everything is re-evaluating,” Mr Jalan said, adding that the headwinds may take some time to dissipate.
He said current yields — coupled with rising U.S. interest rates — have made it unprofitable for many corporate borrowers to sell new dollar bonds. Some companies have therefore decided to raise funds by other means, for example via the private loan market.
Amy Kam, senior portfolio manager at Aviva Investors in London and an Asian credit veteran, said she remains hopeful that conditions in the Asian high yield market will improve.
“There will be survivors,” she said, referring to China’s real estate sector and its importance to China’s economy. “We try to stick with the strongest companies that we believe can withstand the downturn.”