Leveraged finance in APAC (excl. Japan) showed signs of recovery in Q3 2020. The high yield market drove the rebound, which was tempered by a drop in leveraged loan activity.
Leveraged finance issuance in the region climbed from US$22.8 billion in Q2 2020 to US$31.1 billion in Q3 2020. High yield bond issuance rose more than 90% from US$12.5 billion in Q2 to US$23.2 billion in Q3, lifting overall leveraged finance figures despite a drop in leveraged loan value from US$10.2 billion in Q2 2020 to US$7.9 billion in Q3.
Year-on-year issuance for leveraged loans and bonds, however, is still down from 2019 levels. High yield bond issuance for the year through the end of Q3 2020, for example, came in at US$68.7 billion, down from the corresponding period in 2019 when APAC high yield issuance reached US$102.3 billion. Year-on-year activity in the leveraged loan space was down as well, from US$33.7 billion in the first nine months of 2019 to US$25.5 billion through the end of Q3 2020.
Although year-on-year figures are below 2019 levels, the high yield bounce in Q3 and the return of Chinese real estate issuers—among the largest sources of bond supply in the region—offer encouragement after the profound market disruptions following the outbreak of COVID-19.
Building on a real estate foundation
China’s real estate sector was the primary driver for the recovery in high yield bond issuance and in the region’s leveraged finance market overall.
The real estate sector has long been characterized by repeat issuers familiar to investors and their return to market, largely driven by refinancing needs and the availability of foreign debt quota granted by the Chinese regulators, is a comfort during still-volatile times. Real estate high yield bond issuance in APAC (excluding Japan) came in at US$15.2 billion in Q3 2020, representing almost two-thirds of overall high yield activity in the region for the quarter, and close to double the US$7.8 billion real estate high yield figure for Q2.
Highlights in this sector included Sunac China Holdings, which raised US$1.5 billion from three deals in July; Kaisa Group Holdings, which landed US$1.3 billion from four deals; and Country Garden Holdings, which secured US$1 billion.
Other notable, non-real estate high yield deals in the region included Indian natural resources group Vedanta locking in US$1.4 billion of financing in August as well as a flurry of activity in the Macau gaming sector.
The Macau gaming sector, like real estate, also had a number of repeat issuers. In Q2 and Q3, the sector was one of the few that remained able to obtain financing despite the impact of the pandemic on the travel and leisure industry. Of the casino operators that successfully accessed the bond market in Q3, Wynn Macau raised US$1.6 billion in two offerings, Studio City Finance secured US$1 billion, Melco Resorts raised US$850 million and MGM China raised US$500 million.
Loan activity still fragile
While high yield markets in the region bounced back in Q3 2020, leveraged and non-leveraged loan markets continued to stutter, with combined loan issuance dropping from US$89.4 billion in Q2 2020 to US$74.6 billion in Q3.
Despite the dip in overall volumes, some areas of the market did see an uptick in activity. Leveraged and non-leveraged loan issuance for M&A (excluding buyouts), for example, was up from US$8.3 billion to US$14.4 billion from Q2 to Q3—although Q3 M&A figures were inflated by a US$7.24 billion bridge loan raised by Charoen Pokphand for its acquisition of UK grocer Tesco’s operations in Thailand and Malaysia. This deal may have boosted M&A issuance numbers, but the upward trend in deal activity bodes well for deal flow in the coming months.
Drilling into the data
In Q3, a number of Chinese companies delisted from international stock exchanges and moved to private ownership, which partly drove leveraged finance activity in the region. China’s online classifieds business 58.com was delisted in Q3, with a consortium of owners drawing US$2.45 billion from a US$3.5 billion secured loan facility to take the company private. Sogou, a Chinese web search firm that listed on Nasdaq in 2017, meanwhile, is expected to complete a take-private by Tencent valued at US$3.5 billion before the end of 2020. Other deals are in the pipeline, including Sina Corp, the operator of social media platform Weibo, both listed on Nasdaq.
There were also gaps in performance across geography, with some regions and sectors performing better than others. For example, according to Debtwire Par, loan activity in mainland China and Hong Kong showed signs of recovery in Q3, as Shimao Property Holdings landed a US$580 million loan for two hotels in Hong Kong and Beijing Enterprises Clean Energy Group wrapped up a US$150 million loan syndication. Loan issuance in Australia, Singapore, Indonesia and India, on the other hand, was down for the period.
On the sector front, Singapore’s commodities traders continued to tap the market with relative ease. Energy commodities traders Vitol Asia Pte and Trafigura closed annual loan refinancings of US$2.02 billion and US$1.59 billion, respectively. Olam International, a soft commodities trader, raised US$2.56 billion across four deals.
Overall, however, investors remain anxious about credit risk. According to Debtwire Par, 13 companies from across the hospitality, auto, commodity and paper-manufacturing industries in the region have sought covenant waivers and amendments to amortization schedules since the onset of the pandemic in February.
A full recovery of the APAC loan market still looks some way off, but the resilience of the region’s repeat issuers and core sectors, such as Chinese real estate, have kept the market open through a volatile period.