Chinese companies have become the biggest drivers of global bond sales from Asia, but an uncertain economic outlook and global risk aversion are clouding the picture. Lower-rated borrowers are already struggling to access international capital, and new regulations threaten to throw a spanner in the works.
Source: Reuters/Joe Chan
Soldiers wearing traditional costumes make parachute jump performances during a rehearsal near an airport on the outskirts of Beijing
Issuance from PRC companies in the US-dollar public offshore bond markets has come a long way in the last decade. From just US$872m of bonds in 2002, the country now accounts for the biggest percentage of the US-dollar public offshore Asian market, averaging an annual total of US$14.5bn over the past three years, according to data from Thomson Reuters.
Despite this surge in issuance, the question is whether or not it is sustainable in light of the slowing of China’s economy and growing concerns among offshore investors about corporate governance and the will to repay.
These concerns are primarily directed towards the China high-yield market, where two worrying precedents have been set for investors. The first was related to Asia Aluminum, which defaulted on senior and PIK debt in 2009 and, eventually, went into liquidation, with offshore note-holders suffering a loss of 97% of principal – far more than its onshore banks were forced to write off.
More recently, timber company Sino-Forest defaulted on US$1.8bn of offshore debt and is attempting a restructuring following its bankruptcy filing in March. It remains to be seen if an orderly restructuring is completed and what haircut will be imposed on creditors, but the noise surrounding the company has severely dented offshore investors’ perceptions of China as an investment proposition.
Still, there are hopes that investors might yet be willing to book China high-yield debt, despite a less-than-auspicious economic background in China. Numerous analysts believe GDP fell below the optically significant 7% level in the second quarter, while governance concerns still linger.
This was the hope two weeks ago, when dried noodles maker Tingyi launched a US$500m five-year Reg S trade that attracted a US$3.25bn book via leads Barclays and Deutsche Bank.
The warm response to the deal shows that investors can embrace bonds from untapped industrial sectors, despite the fact that Tingyi presented something of a credit challenge because it operates in the food and beverage segment, where there are no comparable pricing points from which to establish fair value for primary issuance.
Also, those talking up the chance of true China high-yield returning to the market were quick to point out that, as well as pricing against a lack of comps, the fact that Tingyi is a Triple B rated company and that it was a debut issuer imply there is a tailwind that may well reopen the sector.
“There is a pipeline of corporate borrowers in Asia looking to tap the primary markets, and, if the new issuance window reopens and we return to a risk-on scenario post the EU summit, we could potentially see one of the high-yield names cross the line,” said Roland Hinterkoerner, head of corporate advisory at Royal Bank of Scotland in Hong Kong.
“However, I still think it is unlikely that investors are craving for a lower-rated end of the non-investment grade issuer base as yet. There is just too much risk aversion at this point,” Hinterkoerner added.
While issuance from the high-yield industrials sector in China may be around the corner, the big question is whether or not the real-estate sector, the biggest source of China high-yield issuance, will make a return.
“However, I still think it is unlikely that investors are craving for a lower-rated end of the non-investment grade issuer base as yet. There is just too much risk aversion at this point”
So far this year, there has been US$1.6bn of China property issuance, but none of it from the Single B companies. Property issuance from China has accounted for just 10.6% of all offshore China debt issuance so far this year, versus 30% in 2010 and 23% last year.
While in 2010 and 2011, sub-investment grade China property names could come to market with ease, fears of a major refinancing crisis in the sector, alongside plummeting sales, shut the issuance window.
Still, with equity analysts turning bullish on China property companies, and signs of a loosening of onshore liquidity, it is conceivable that issuance from low-grade China property companies may well cross the line.
Certainly with the secondary bond prices of many of the weaker China property names up near par, the market is voting with its feet on the sector’s outlook.
Easy sells
One sector that investors are unlikely to have qualms about with regards to issuance is China’s state-owned enterprises, with recent bonds from investment-grade oil majors CNOOC and Sinopec having been easy sells in primary and putting on impressive spread tightening performances in secondary.
It is likely that, as China’s SOEs embark on an outbound M&A drive, supply from the sector will be abundant, with issuers able to build full liquid curves in the process.
Still, there is one dynamic that may work against the unstoppable secular growth of offshore bond issuance from PRC entities and that is a recent State Administration of Foreign Exchange ruling, which comes into effect on July 1, regarding corporate onshore dollar borrowing.
“The rules recently promulgated by SAFE to allow Chinese domestic companies to on-lend to their offshore subsidiaries have the potential to crimp offshore dollar bond issuance from the country,” said Ronan McCullough, managing director at Morgan Stanley in Hong Kong.
“Along with the more challenging environment for Chinese non-property high yield, total new issuance volumes out of China for 2012 may not meet the expectations of many commentators at the start of the year,” he added.
To see the digital version on this report, please click here.
