Guiding a growing market

Author: | Published: 1 Mar 2014
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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 rise.

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.

"Asian covenants are generally stronger than similarly treated products in Latin America"

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 onshore.

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' protection.

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 spectacular.

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 yield?

China is by far the most dominant. We have had the odd deal in Mongolia, and then there's traditional issuance in Indonesia and Philippines.

What do you think will happen in the high yield market in Asia as the fed tapers its QE programme and as interest rates go up?

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 communication?

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 questions.

"We at least want a set of good housekeeping best practices"

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 as keepwells.

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.


Vijay Chandler
Executive director, fixed income, Asifma

Hong Kong
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.