As high yield in Asia continues to grow,
industry body Asifma’s Vijay Chander explains the
challenges facing the region
High yield may be traditionally associated with US and Europe,
but the asset class has arrived in Asia. Already in 2014, Asian
companies have been issuing high yield bonds, following last
year's junk-bond boom. From large Chinese property developers
to the Sri Lankan government, deals are getting done. Issuance
in Asia-pacific excluding Japan totalled a record $33.3 billion
for 2013, according to data provider Dealogic.
But the landscape has changed. Deals last year were driven
by investors' thirst for higher yields at a time when global
central banks were keeping interest rates low, but this year
the power has shifted. Bond buyers' risk appetite declined
after the US Federal Reserve began scaling back its monetary
stimulus, and interest rates on US treasuries began to
Instead, 2014's deals are likely to be driven by tighter
liquidity in Asia, as banks provide fewer loans while meeting
tougher capital requirements. High yield issuers will have to
pay more to raise the cash they need.
All these changes could lead to conflicts between issuers
and bondholders, as the nascent market goes through its
inevitable growing pains. It's lucky, then, that the Asia
Securities Industry & Financial Markets Association
(Asifma) has taken an increaed interest in the asset class on
behalf of its members. Here, Asifma's executive director of
fixed income, Vijay Chander, shares his thoughts on the
challenges facing the asset class in the region, and his body's
plans to assist the market.
What needs to change within Asian high yield?
Chinese high-yield, especially from the property sector, is
a key development that has received a lot of attention from our
membership and the market in general.
These are offshore deals that are holdco structures. There's
nothing explicit in terms of access to assets onshore. So to
get around that we saw certain innovations during the second
half of last year. These included having the onshore parent
issuing keepwell deeds or standby letters of credit from banks
are generally stronger than similarly treated products
in Latin America"
So a priority of Asifma's is to come up with a descriptive
– not prescriptive – set of standards that
would outline best practices with regards to these documents.
Because what is a keepwell deed really? Someone undertakes to
maintain certain ratios, but it falls short of a guarantee to
do so. There are legal issues surrounding it. With this in
mind, it's always good to have a set of best practices on how
these should be drafted and documented and, indeed, how due
diligence that is carried out by the underwriter for investors'
We at least want a set of good housekeeping best practices.
That's perhaps our highest priority. Everything else in the
region is relatively standardised. Investors know the risks
inherent in high yield offerings. It's now a fairly major asset
class. But the growth of the Chinese property sector is quite
What stage are you at in these guidelines?
We're just starting the process. The credit committee has
now handed off the project to the working group, and we will
now work with lawyer members to draft the guidelines.
Which jurisdictions are you seeing growth within high
China is by far the most dominant. We have had the odd deal
in Mongolia, and then there's traditional issuance in Indonesia
What do you think will happen in the high yield market in
Asia as the fed tapers its QE programme and as interest rates
Until now, the developed markets have taken it in their
stride, but there has been some volatility, especially in
January. That's a concern insofar as emerging markets are no
longer perceived as hot a destination for investors. To the
extent that those investors re-allocate funds back to the
developed markets, there could be some problems. We're not
expecting huge volatility but if treasuries keep trending up
then, of course, bonds will lose some value. And as long as
equities keep out performing there will always be a desire to
move to the best performing asset class.
In Europe, buyside often voice their opinions en masse to
issuing banks on terms and covenants. How united is the
buy-side for high yield deals in Asia? Is there much
The investor voice is not as unified as it is in Europe. The
region does have some issues that, again, we're trying to work
with members on best practice. But it's often issues such as
rebates for private banks, with individual or retail investors
to whom the deals are sold because the sales team is
incentivised to offer these rebates, which of course
institutional investors don't receive.
And to some extent there is less need for a unified voice.
I'm echoing Moody's here, who have commented as such, that
Asian covenants are generally stronger than similarly treated
products in Latin America. Following the Asian financial
crisis, investors here have always tended to ask for stronger
covenants. And the region also has many family-owned companies,
which can lead to appetite for tighter covenants.
How do you view investor appetite for more extensive
disclosure on high yield deals?
I think there's a huge appetite for that, certainly with
regards to a standby letter of credit. Investors want to know
the details around the guarantee. There is certainly an
appetite for disclosure. Especially when considering that
access to disclosure in the country can often be difficult, and
accountants are careful not to fall foul of the law in terms of
disclosure, that I think it's natural investors are hungry for
it. And that's where we come in. We try to advocate for higher
quality standards and recommend that when parties are
conducting due diligence they at least ask the right
There are also a lot of issues around compliance with
anti-money laundering legislation and anti-bribery provisions
so disclosure around that is something we often get asked
about. But again, the feeling is that best practice standards
have evolved in that area, but perhaps not enough in areas such
"We at least
want a set of good housekeeping best practices"
Asian issuance last year was driven by investor thirst for
higher yields. This year, though, buyers aren't as hungry for
such risk, with issuance reflecting borrowers' need for cash
more than investors' appetite for debt. How has this translated
– if at all – into structures?
We haven't seen anything specific. But in terms of the yield
being paid, some of the issuers would pre-emptively pay at a
higher yield than would be warranted. One or two particular
issuances last year were perhaps higher than you would expect
but there was no huge change in structure. Of course, the bank
guarantee helps at providing a level of credit enhancement so
we are seeing more such deals. In terms of structural
innovations, we have also seen more perpetuals –
although they are not necessarily new. We have seen Basel
III-compliant Tier 2 issues on the part of banks which is an
interesting structure. Although it's not corporate high-yield,
it's bank debt which comes high-yield.
Executive director, fixed income, Asifma
T: +852 2537 3946
In a career largely focused on Asia, Vijay Chander
has over 25 years' experience in fixed income and
credit, covering both buy- and sell-side. Before
joining Asifma he worked at Standard Chartered, where
he was the global head of credit strategy, and has held
senior positions at Citibank in Hong Kong, the US
Prudential Insurance Company, Bear Stearns and BNP
Paribas. Chander has an MBA in Finance from Vanderbilt
University in the US and a B.Commerce degree from the
Vivekananda College, University of Madras in India. He
speaks English, French and Mandarin Chinese.