Investors gobble up dollar debt sold by companies in developing nations
Companies in developing nations sold a record $118 billion of high-yield dollar bonds this year, and are likely to keep up a fast pace in 2020.
The total has more than doubled from five years earlier, according to Dealogic data. The figures cover debt in dollars with subinvestment grade credit ratings, or no rating, and run to Dec. 18. They don’t include bonds sold by governments.
With yields on U.S. Treasury bonds and other ultrasafe instruments low, debt investors are seeking higher-yielding alternatives, buying securities issued by Chinese developers, Latin American oil producers, Israeli drugmakers and others.
On average, Asian high-yield credit in dollars was yielding about 7.6% as of Dec. 17, over 2 percentage points more than equivalent U.S. high-yield debt, according to ICE BofAML indexes. That gap is despite the Asian bonds tending to have shorter maturities and higher credit ratings on average.
Chen Yi, head of global capital markets at Haitong International Securities Co. , said he expected Asian borrowers to keep up a robust pace of bond sales next year, with international investors keen for emerging-market assets.
“The global liquidity is still there, and given the difficulties in Latin American economies, one of the few places where that money can go is Asia,” said Mr. Chen. “So we’re bullish on dollar high-yield debt in Asia. Plus, demand for Chinese property is still hot.”
About half of the $118.4 billion issued this year came from China, which topped Latin America as the biggest source of this debt for the second year running. Mainland Chinese real-estate companies were among the largest issuers. China’s Evergrande Group sold dollar bonds with a face value of $7.2 billion, according to a company earnings report.
In Latin America, major issuers included Brazilian state-owned oil firm Petrobras, which sold a $3 billion bond in March. This was the year’s largest high-yield dollar bond from an emerging-market issuer, according to Dealogic.
With the Federal Reserve indicating on Dec. 11 its comfort with leaving interest rates on hold through next year, investor appetite for higher-yielding assets is likely to remain high.
Jean-Charles Sambor, deputy head of emerging-market fixed income at BNP Paribas Asset Management, said he thought debt from emerging market issuers was “still very cheap,” highlighting the relatively high yields available on Chinese property bonds.
Mr. Sambor said he expected European and U.S. funds would invest more in Asian high-yield debt next year to capture higher returns.
Derek Armstrong, head of Asia-Pacific debt capital markets at Credit Suisse, said a growing number of Chinese companies were considering bond sales in formats that would allow them to sell to U.S. institutional investors.
This is known as a 144a deal and complements issuance under Regulation S rules to investors outside the U.S. However, he said this would work best for larger companies with stronger credit ratings.
Some worry that bond prices are too rich, given the risks.
In its October report on global financial stability, the International Monetary Fund warned of elevated financial vulnerabilities among nonfinancial firms in emerging markets, and especially those in China.
J.P. Morgan Asset Management has trimmed holdings of emerging-market high-yield debt in places like China, Colombia and Chile. Zsolt Papp, a London-based senior investment specialist at the group, said for emerging markets, “we think prices of weak credits are probably not reflecting the underlying risks.”
In China, a record 4.5% of privately owned enterprises defaulted on yuan bonds in the first 10 months of this year, according to Fitch Ratings. The equivalent rate for state-owned enterprises remains steady at just 0.2%, but defaults are starting to occur in corners of the market previously considered safe.
Mr. Papp at J.P. Morgan Asset Management said the increase in Chinese defaults was a “double-edged sword.” It meant the government recognized the need to eliminate zombie companies, but it could also make it harder for Chinese companies to borrow offshore, he said.
Ed Tsui, head of the Asia-Pacific debt syndicate for Deutsche Bank, said investors were favoring borrowers who would be less affected by trade tensions or weaker global growth. He said that could include companies with an established track record in the bond market, longer-term borrowings and double-B credit ratings, at the top of the junk scale.
Source: The Wall Street Journal