APAC debt markets hang tough

Economic headwinds proved challenging for leveraged finance markets in Asia-Pacific in 2022, but rising issuance beyond the core Chinese market cushioned the impact of global macro dislocation

Debt issuance across the Asia-Pacific region (APAC) felt the chill of rising interest rates and inflation in Western markets, while disruption in the dominant Chinese real estate market also slowed activity.

High yield issuance in APAC (excl. Japan) plunged from US$86.1 billion in 2021 to US$23.4 billion in 2022, a 73% decline, but leveraged and non-leveraged loans proved more resilient. Leveraged loan issuance was down 29% year-on-year, sliding from US$52.9 billion in 2021 to US$37.4 billion in 2022. The decline in non-leveraged loan activity was smaller again, with issuance down only 15% from US$359.1 billion in 2021 to US$305.5 billion in 2022.

Real estate woes weigh on high yield

High yield activity was directly impacted as China, the primary driver of high yield activity in the region, continued to grapple with the fallout from defaults in the real estate sector and COVID-19 lockdowns.

Chinese real estate, which accounts for close to a quarter of the country’s GDP according to Bloomberg, has been grappling with its debt for more than a year, after regulators began cracking down on excess leverage.

Real estate issuers in the region have missed US dollar bond repayments in increasing numbers (according to Debtwire Par, an additional 33 developers missed payments in 2022, up from 14 in 2021) and well-regarded names have seen their bonds trade at deep discounts to par.

Bloomberg estimates that Chinese real estate companies have another US$292 billion of onshore and offshore debt maturing in 2023, raising the prospect of further distress in the months ahead.

Southeast Asia loan market softens landing

The headwinds facing issuers in China have taken a toll on overall APAC loan and high yield activity, but the maturing loan market in Southeast Asia has helped to cushion the region from the challenges facing the core China market.

Southeast Asia non-leveraged loan issuance dipped marginally, sliding 4% from US$78.1 billion in 2021 to US$74.9 billion in 2022—compared to a 15% decline across APAC. The real story, however, has been the growth of leveraged loan issuance in Southeast Asia, which climbed by 19% in 2022, up from US$6.8 billion in 2021 to US$8.1 billion, drawing a stark contrast to the 29% decline across the broader APAC region.

Loan issuance in Southeast Asia has expanded as key markets in the region, such as India and Vietnam, have welcomed overseas investment and attracted more inbound deal activity. In India, for example, M&A value grew by 47% in 2022, year-on-year, from US$109.6 to US$160.7 billion.

Private equity and corporate dealmakers have been attracted to strong growth rates across the region and pursued more deals, which in turn has deepened the pipeline for lenders.

Traditional commercial banks have historically dominated activity in Southeast Asia, providing a traditional commercial bank offering, holding assets to maturity, and including amortization and covenants in loan structures. These players have remained open for business, benefitting from a more cautious approach to lending as markets in the West have dislocated.

Turning a corner

Looking ahead to 2023, the ongoing growth of the Southeast Asian debt market is set to remain an important spur for leveraged finance activity in APAC, but the market will also be hoping for a big bounce as issuances and borrowings in China begin to build up steam again.

At the end of 2022, China eased COVID-19 lockdown controls, which has already produced a positive impact on Macau gaming issuers who saw debt discounts narrow as markets rallied according to Debtwire Par.

Chinese real estate, while still challenged, has also shown green shoots as the government stepped in with a broad package of support measures to see the sector through market turbulence.  Meanwhile, Chinese developers such as Country Garden have seen equity prices more than triple in the past quarter as a further sign of improving sentiment. Bloomberg further notes that APAC US dollar debt issuance has started the year strongly, pointing to an improving backdrop for financing.

Debt activity across the region is also expected to benefit from the ongoing emergence of private credit in APAC. In December 2022, Hong Kong-based private markets manager PAG closed its fifth pan-Asian direct lending fund. The vehicle secured US$2.6 billion of capital and is believed to be the largest fund of its kind targeting APAC.

As traditional routes for financing in APAC rebound and the more nascent TLB and direct lending markets continue to grow, lenders and borrowers will be hoping for a better year after a testing 2022.

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