High yield bond issuance grows in APAC despite cooling real estate activity

Strong refinancing appetite sustains the high yield bond market in the Asia-Pacific region despite a slowdown in real estate issuance in China

High yield bond markets in the Asia-Pacific region (excl. Japan) (APAC) have performed well in 2021, with non-real estate borrowers and buoyant activity beyond the core Chinese market lifting issuance figures.

APAC high yield bond issuance climbed 29% from US$45.1 billion in H1 2020 to US$58 billion in H1 2021. Refinancing accounted for the lion’s share of activity, with the US$44.8 billion of refinancing recorded in H1 2021 accounting for more than three-quarters of overall issuance.

Issuance up despite cooling real estate market

This rise in overall APAC issuance arrives despite activity tailing off in China’s real estate and construction market—historically the dominant driver of high yield issuance in the region—in 2021. High yield bond issuance in this sector in North East Asia dropped from US$32.4 billion in H1 2020 to US$29.1 billion H1 2021, and from US$17.9 billion in Q1 2021 to US$11.2 billion in Q2 2021.

The drop comes as Chinese regulators deliver a deleveraging program intended to rebalance the economy after a surge in borrowing during the COVID-19 pandemic. The level of indebtedness of large real estate players was of particular concern, with regulators placing restrictions on bank lending to real estate borrowers.

In addition, reported financial troubles facing property developers including China Evergrande Group and Sichuan Languang have seen financing costs for Chinese real estate issuers climb, putting a further brake on activity as borrowers wait for pricing to settle before returning to market.

Despite the slowdown, Chinese real estate still accounted for at least half of overall APAC high yield issuance in the first half of the year and issuers with solid finances have continued to access the market when required.

Tianjin-based Sunac China, for example, secured a US$1.1 billion high yield bond in January 2021, consisting of a US$600 million tranche priced at 5.95% and maturing in 2024, and a US$500 million tranche priced at 6.5%, maturing in 2026. The hope is that prospects for Chinese real estate issuers will steadily improve as leverage levels decline and balance sheets strengthen.

Non-real estate issuance picks up shortfall

The dip in Chinese real estate activity was more than covered by strong high yield bond activity from Chinese issuers in other sectors as well as a surge in activity in other countries in the region.

For commercial sectors in Northeast Asia outside of real estate and construction (excluding government bonds), H1 2021 issuance more than doubled, from US$4.1 billion in H1 2020 to US$10.2 billion, as several non-real estate issuers in China secured successful high yield bond financings.

For example, in Q2 2021, Shanghai-listed ENN Natural Gas raised a US$800 million bond priced at 3.375%, maturing in 2026. Macau gaming and hotel operator SJM Holdings raised US$1 billion at the start of the year across two tranches of US$500 million apiece priced at 4.5% and 4.85%, respectively. In Q2 2021, another Macau gaming and hotel operator, Studio City Finance Limited, closed a US$350 million tap offering of its 5.000% senior notes due in 2029.

Strong performances beyond China

Outside of China, high yield bond deal flow was particularly bullish—albeit with smaller overall deal values—with some regions observing triple digit rises in year-on-year activity.

After recording no high yield bond issuances in H1 2020, Australia secured US$2 billion worth of deals in H1 2021. The issuance of a US$1.5 billion bond maturing in 2031 and priced at 4.38% by Fortescue Metals Group, the fourth largest iron ore producer in the world, accounted for the bulk of Australian issuance. Strong investor demand enabled the miner to raise double the US$750 million it originally sought on launch.

In South Asia, where activity was driven by a busy Indian market, high yield bond issuance climbed more than three-fold to US$10.8 billion in H1 2021 from US$3.1 billion in the first half of 2020.

Indian miner Vedanta Resources, which secured US$1.2 billion in February 2021, due in 2025 and priced at 8.95%, and India’s JSW Hydro Energy, which raised a US$707 million bond in May 2021, priced at 4.125% and maturing in 2031, were among the key contributors to the uplift in South Asia numbers.

The market in Southeast Asia also progressed through the year—high yield issuance in the region reached US$5 billion in H1 2021, up from US$3.13 billion in H1 2020.

Issuance in the region rose even though high-profile issuers missed bond payments. Indonesia’s flag carrier airline Garuda missed a distribution on a US$500 million Islamic finance sukuk instrument and faces a restructuring as air travel continues to lag pre-COVID levels. Serba Dinamik, a Malaysian engineering company, meanwhile, saw ratings on its sukuks downgraded.

Despite these headwinds, the Southeast Asia market has remained open for business, with Singaporean real estate logistics provider GLP Pte Ltd raising a US$850 million green perpetual bond in May 2021 paying 4.5%.

The bond is believed to be the first international dollar-denominated green bond issued by a corporate APAC issuer. It followed GLP’s close of a debut US$658 million sustainability-linked loan supported by 10 banks.

GLP’s green bond and sustainable loan raises reflect the growing momentum behind sustainability and green issuance across the APAC region, which has tracked the global trend of rising investor demand for ESG-linked debt products. According to Debtwire Par, volumes of green and ESG-linked high yield bond deals climbed 11.5% quarter-on-quarter in Q2 2021, rising from US$6.8 billion in Q1 to US$7.6 billion.

Ongoing growth in ESG-linked issuance is set to provide an additional source of deal flow for APAC bond markets, which have demonstrated their diversity through a period characterized by below-average Chinese real estate issuance.

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