Immaturity in Asia’s high yield market is
prompting some international banks to walk away from deals.
Bankers in the region told IFLR naivety among south-east
Asian banks over structuring high yield deals was particularly
Local banks often start deals before seeking legal advice or
establishing inter-creditor agreements with other lenders in
the transaction, one acquisition finance banker at an
international bank explained.
"In one transaction we only became aware that inter-creditor
arrangements had not been put forward some way into
proceedings," he said. "We had to walk away or risk signing up
for un-market friendly agreements which could pose a major
problem in the near future."
HSBC’s managing director and Asia-Pacific
leveraged and acquisition finance head, Lyndon Hsu said there
was still a long way to go before the Asia region became
homogenized on structured lending and senior debt. "The market
lacks sufficient uniformity on terms and therefore insufficient
investor liquidity," he said.
It would be some time before the market accepted the more
advanced structures seen in the US and European markets, he
Allen & Overy’s
international capital markets partner, James Grandolfo agreed
the Asian market was still very much in its infancy. But he was
optimistic about its future.
The market is currently around
10 years behind that of Europe and further behind the US, he
But there had also been a
very large amount of corporate high yield deals in the region
since the end of the financial crisis. And signs that a
financial sponsor-driven high yield market are
"Involvement of hedge funds and large financial institutions
depends on how acquisitive companies become," he said. 'It
could be some years off but the signs are positive."
Low interest rates globally had
prompted a flurry of recent deals. This has enabled corporates,
who wouldn’t normally have had the opportunity, to
enter into debt capital markets at affordable
transactions, in which large institutions buy a large
percentage of the deal and dictate inter-creditor arrangements
and covenant packages are rare, according to
Large private equity funds would help drive the process, he
said. He added that it was more likely in more developed
markets with a greater degree of certainty in cases of default,
such as Japan, Australia, Hong Kong and Sinagpore.
In the meantime, it was
important to be aware of the risks and challenges that
participation in a comparatively unsophisticated high yield
"Bankers in Asia face helping
companies to understand what they are signing up to when
entering into a high yield deal," he said.
Many issuers still
don’t understand what is expected from high yield
covenant packages. "It can be very difficult for those who
don’t work with this product regularly, to
understand the full extent of the restrictions involved over
the life of a bond," said Grandolfo.
Educating less sophisticated
companies on the covenant package on offer was therefore
critical to the deal’s success.
A proper understanding of a
corporate’s business plans was imperative. This
would help to ensure the covenant package drafted worked not
only for investors but also for the issuer.
"When acting for issuers, making
sure the structure works requires a lot of discussion with the
issuer as well as the banks underwriting the deal to ensure the
covenant package is right for all parties involved," he
"Given the volume of deals in
the market, bankers face the challenge of educating a
wide-spectrum of companies varying in sophistication and
familiarity with the product," said Grandolfo.
In a sponsor-driven market, the
sponsors lead development of covenant packages. But in the
Asian market, these are led by the banks underwriting the deal.
They put together what they think the broader investor base
want to see in terms of covenants.
But according to Grandolfo
understanding the issuers’ medium-term
goals over the life of a deal was important. The covenant
package could then be structured to take these into
unfamiliarity with the region had help to promote concerns
regarding the efficiency of local insolvency regimes. Often
such concerns were exaggerated or unfounded, he
"People assume there is
more certainty around US and European deals because you can
rely more on the bankruptcy law and governance regimes," he
said. But Asia has actually seen fewer defaults than the US or
Europe in recent years.
"The problem is in a lot of jurisdictions, insolvency
regimes are unclear, under-developed and frequently
unenforceable so the likelihood of getting any significant
returns if there is a default is limited," he said.
But he was optimistic corporate
governance would increase as the market matured, and
participants became more sophisticated and familiar with the
products. "Asian high-yield is here to stay," he